JF1604: How to Qualify an Apartment Deal Part 1 of 2 | Syndication School with Theo Hicks

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When it’s almost time to search for a deal, it’s important to have your criteria set for what kind of property you are searching for. But how exactly do you figure that out? Well tune into this episode where Theo walks us through exactly that! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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JF1597: How to Structure GP & LP Compensation Part 1 of 2 | Syndication School with Theo Hicks

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One slightly important part your apartment syndication career is how you will be getting paid, as well as how you will be paying your investors. Today Theo will cover how to pay the General Partners in your apartment syndication deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRASNCRIPTION

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 a podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of this series we’ll be offering free documents or spreadsheets for you to download. All of these free documents and previous Syndication School series can be found at syndicationschool.com.

We just finished up an eight-part series about raising capital from passive investors, so I highly recommend that you listen to that episode. It moves us one step closer to you launching your apartment syndication empire. In this episode – this will be part one of a two-part series entitled “How to structure the GP and LP compensation.”

As a refresher, the GP (general partnership) will be you and anyone else that you bring on as a team member – a partner, a loan guarantor, a sponsor, people like that. And the LP are going to be your passive investors. So GP is general partnership, LP is limited partners.

By the end of this episode you will learn how to structure the general partnership. We’re gonna go over the five parts of the general partnership, as well as the responsibilities and ownership percentages of each of those rules. Then tomorrow – or if you’re listening to this way in the future, the next episode (part two), we will go over the limited partner compensation.

If you remember back when you were forming a team, you discussed the reasons why you would bring on a partner, as well as we talked a little bit about the loan guarantor/sponsor/key principal. Those are going to be two people that are potentially on the general partnership, including yourself, so there’s a total of three people.

Most likely when you’re first starting off it’s not just going to be you on the general partnership, because you haven’t done a deal before – we’ve talked about this before, but you’re gonna have a credibility challenge with your investors, because they’re gonna say to themselves “Hey, you haven’t done a deal before, so why should I trust you with my money?” And one of the ways to address that objection is to bring on partners and team members who have done apartment syndications in the past.

So starting out, the GP will likely be a group, but it is possibly, technically, starting out, and more likely in the future for you to be the general partner yourself. So it’s possible, but most likely it’s gonna be a group.

For example, Joe and Frank are partners on the general partnership, as well as for my business it’s going to be me and Matt, are the main general partners. I know for Joe and Frank they bring on other general partners to help them raise capital, and me and Matt will do the same, as well as having to bring on a loan guarantor to help us qualify for financing.

So the general partnership can be structured in any way, and all the ownership percentages are completely negotiable between the two partners, so what I’m gonna go over in this episode is going to be kind of a generic overview of how the general partnership can be structured… But there are always gonna be exceptions.

For example, if I don’t really know anything at all about apartment syndications, but I’ve got access to maybe 200k in capital, I could partner with someone, raise part of the capital for that deal, but I’m likely not going to get a percentage of the GP that’s in proportion to the amount of money I raise, because I’m not necessarily bringing a lot of value. This is just one example, but again, it’s completely negotiable, and I just want to give you an idea of how general partnerships are commonly structured.

Overall, there are going to be five different parts of the GP, and for each of these parts there’s a specific responsibility, as well as a specific ownership percentage. The first part is going to be the person(s) who front the due diligence costs. We haven’t discussed the  due diligence on this Syndication School series yet, but overall, the due diligence is going to be the period between the time you sign the purchase and sale agreement, so once you get the property under contract –  from then until you close on the deal. Between then there’s a variety of different tasks that need to be completed in order to close on the deal – having the property inspected, getting the appraisal, getting the environmental, doing lease audits, getting the operating agreements and all the different agreements between you and your investors signed, securing the financing, things like that. That’s going to cost you some money, and since you haven’t closed on the deal yet, you’re not going to have access to your investors’ capital to cover this, so someone’s going to have to come out of pocket and front these costs. Of course, you can raise extra capital to reimburse these costs at closing, but you still  need the money.

Here’s a list of some of the upfront due diligence costs to expect, as well as the range of costs associated with each of those. You’re gonna have the lender and due diligence fees – those are the fees you pay to the lender for them to do their due diligence; expect to spend about 2k up to 10k on those, depending on how large the project is.

You’re also going to have to perform a property condition assessment (PSA), which is a very detailed inspection of the apartment, and expect to pay anywhere $50 and $250/unit for that.

You’re also going to need to get an environmental survey called a Phase One Environmental. That will cost about 2k.

You’re gonna have to do a unit walk inspection, so each of the individual units is walked and inspected. That’ll be about $25/unit.

You have the lease audit, where your property management company will sit down, or a consultant will sit down and go through all the leases, to make sure that they’re written legally by the book, as well as to make sure all the terms are accurate based on the rent roll and the financials that they provide. So that’ll be about $25/unit as well.

Then there’s the property survey, where they map out the property, check out boundaries, things like that. That’ll be about 5k.

Then you’re gonna have your earnest deposit. That’s something that is going to be negotiable, but expect that to be between 1%-2% the purchase price. That’s just that small down payment that you put into escrow to show your intentions to purchase the property. [unintelligible [00:08:51].18]

You’re also gonna have the lender application deposit. That’s you paying the lender to do the application process for you to qualify for the loan, so credit checks, things like that. That will be about 25k.

Then if you apply for agency debt, which I know we haven’t discussed debt on the podcast yet, but we’ll get into that… Agency debt will be Freddie or Fannie Mae debt, and you have the ability to pay the lender to lock in a rate. Let’s say your due diligence period is 90 days, and the interest rate is 5% right now, but you think that it might be going up to 5.2% or 5.25% by the end of 90 days; you can pay money in order to lock in that interest rate, because a 5% interest loan will have a lot lower debt service than a 5.25% interest loan, and that adds up over multiple years. So that’ll be approximately 2% of the loan balance.

Then you have the legal fees. You’re gonna have to pay an attorney to create the operating agreements, which could be anywhere between $350 all the way up to $15,000, depending on, again, how complicated the partnership structure is.

You’re also gonna need a private placement memorandum, which essentially goes through all of the risks associated with a deal, and describes the deal and the partnership in great detail. That could be anywhere between 5k and 15k.

You will have your subscription agreement with your investors, where they promise to buy shares at a set price, and you promise to sell those shares at a set price, of the LLC that owns the property. That could be anywhere between $350 to $5,000.

You’re also likely going to put the property in an LLC, so you’ll have to pay to have that LLC formed. That could be anywhere between $200 if you’re doing it yourself online, up to $2,000 if you’re having an attorney help you out with that.

Then of course there’s going to be fees associated with your attorney negotiating on the loan documents, and that is most likely going to be some sort of hourly rate.

I went over all the numbers, and that adds up to five figures, and possibly up to six figures, although that’s on a very, very large deal. Someone’s gonna have to front that money, so a couple of strategies for this part of the general partnership – one, you could cover those costs yourself, if you have that money sitting in an account, or if you wanna put it on credit cards. Or you and your business partner can split those costs, and then of course reimburse yourselves at closing.

Another way is to borrow money from a family or a friend, and then sign a personal guarantee promising to pay them back at closing, and I believe this is what Joe actually did for his first deal, to cover those due diligence costs. Or you could ask one of your passive investors to front the cost, and then promise to pay them back at closing with some sort of interest rate, or without an interest rate; it depends on your relationship with that person.

If you cover the costs yourself, or if you and your partner do it, then that’s not really gonna have any sort of impact on the share of the general partnership, unless one partner covers it and the other one doesn’t cover it. But if you have a passive investor front those costs, or if you’ve got some sort of family member that’s fronting those costs, and you don’t wanna pay them an interest rate, you can give them a percentage of the GP, and that could be a low percentage – about 5%. But make sure you consult with your attorney first, because people on the GP have to have an active role in the deal, so just make sure you’re going by the book when offering ownership percentages for fronting those due diligence costs. So that’s kind of task number one of the general partnership.

Number two is going to be the acquisition management. This will be the person or people who are responsible for finding deals. They’re gonna be generating off-market leads, as well as focusing on building relationships with commercial real estate brokers to find on-market deals, and cultivate that relationship, so they increase the probability of being awarded the deal.

Once a deal is identified, they’re responsible for evaluating the deal, so performing the underwriting, visiting the property in person, driving the market, things like that. If the deal makes sense and the result of the underwriting are returns that meet the investors’ goals, then they’re also responsible for submitting offers on those deals.

Then if the offer is accepted, they’ll be the ones that go through the best and final seller call, if that’s what they do, or are responsible for making sure that the PSA is signed, and all the terms are correct.

Once the deal is under contract, they’re gonna be responsible for managing that due diligence process – inspections, appraisals, working with the lender, working with the property management company to make sure that all the due diligence is covered.

They’re also going to work with the lender or mortgage broker to secure financing on the deal, and then they’ll be the one who also oversees the closing process. Essentially, they’re responsible for, as the name implies, the acquisition task. So going from finding the deals, all the way to closing on the deals. This person should be given approximately 20% of the general partnership. Now we’re up to 25% between those first two tasks.

Number three is going to be the sponsor. This is going to be the individual or group of individuals who sign on the loan. The sponsor is also referred to as the key principal, or I like to call them just the loan guarantor.

For a first-time syndicator, you likely will not have the liquidity, net worth or experience requirements to qualify for the loan, so you’re gonna need someone else that has experience with a similar sized deal. The experience requirements are kind of vague, but when talking to lenders that’s what they’re gonna look at, “Does this person signing on the loan have experience taking a similar sized deal and a similar investment strategy full-cycle?”

You’re also gonna need to find someone with the net worth requirements, so that’s gonna be a net worth equal to the loan amount.

Then you’re also gonna need liquidity requirements. These also kind of vary, but a good rule of thumb is 10% of the principal loan amount in liquidity.

Ideally, you can find a sponsor that covers all three of these requirements, that way you don’t have to worry about having too many people on the GP and having to split this role between many people. But again, it’s better to get a deal done and have a ton of loan guarantors than not getting a deal done at all.

The compensation for the sponsor/loan guarantor is gonna vary from deal to deal. It can be a one-time fee that’s paid to them at closing, or it can be an ongoing percentage of the general partnership, or it can be a combination of the two.

For a one-time fee, it can be as low as 0.5% to 1% of the loan balance, or as high as 3.5% to 5% of the loan balance paid at closing, depending mostly on the risk of the loan. If it’s a bridge loan that’s recourse, you’re going to have to pay a larger guarantee fee or a larger one-time fee to that person, as opposed to a 12-year Fannie/Freddie loan that’s non-recourse. That’s also gonna depend on your relationship with that person. If you know them really well, you can probably get away with offering them a lower fee, but if you don’t know the person, then you’re gonna have to attract them with a higher fee.

It also depends on the investment strategy. If you have a distressed deal, you’re probably gonna have to pay more than you would for a value-add deal, than you would for a turnkey deal.

Now, again, you can also offer them an ongoing percentage of the general partnership, and this can be as low as 5%, and the highest I’ve seen is actually 20% for this. 20% obviously seems very high, but again, it’s better to give away 20% of the GP in order to close than to not give away 20% and not have the ability to close on the deal… But more likely you’ll be able to find someone closer to the 10%-15% range.

Again, that range is gonna be based on your relationship with the person, the risks associated with the loan and the risks associated with the investment strategy. Now we’re up to between 30% and 45% of the GP.

The next part, part number four, is going to be the person who is responsible for investor relations. This is a person who is responsible for finding the passive investor, so they’ve spent time on the thought leadership platform and reaching out to different people they know on LinkedIn, or on Bigger Pockets, posting a ton in order to generate interest from passive investors before a deal is found.

Once a deal is actually found, they’re gonna be responsible for presenting that deal to the investors, as well as securing commitments from those investors in order to fund the equity investment for the deal.

Then once the deal is closed, they’re responsible for notifying the investors, setting expectations for communication and distributions moving forward, and then execute on those expectations of sending out monthly updates, sending out financials quarterly, and making sure that the person responsible for sending out the distributions is doing so on time, and those distributions are accurate.

This person should be/could be given about 35% of the general partnership. This could be one single person raising all the capital, or a combination of people raising capital. I guess the most fair way would be to allocate that 35% in proportion to the amount of money that the individual raised… But again, that’s going to be completely negotiable between you and those people raising the capital. 35% is what Joe does. For me, we actually do 40%; just because we’re so new, we’re likely not going to be able to raise all the capital ourselves, so we wanted to allocate a large chunk of the GP to the person responsible for raising capital, so that we could attract people to fund our deals, as opposed to someone else’s deal, who maybe only has 20% allocated to the person responsible for raising money.

So that’s number four, and now we’re up to 65% to 80%. That remaining 20% to 35% will go to the person who is responsible for task number five, which is going to be the asset management. This is the person who ensures that the property management company is implementing the business plan after the property is closed on. This includes things like conducting weekly performance reviews with the site manager, frequently visiting the property in person, analyzing the market and the competition on a consistent basis, and addressing really any issue that arises during the hold period. And again, this person will be given 20% to 35%, depending on the previous four tasks.

So those are the five different tasks. There’s asset management, investor relations, the sponsor, acquisition management and due diligence costs.

Now, those are five tasks, but they don’t necessarily need to be assigned to five different people. For example, you and your business partner could both go 50/50 on the due diligence costs, and then maybe one of the partners is responsible for acquisition management and asset management, so they do essentially all of the operational tasks, and then the other partner could be responsible for the investor relations, and then they both could find someone to sponsor the deal, and that person is given an ownership percentage in the deal. Then ideally, eventually, they could be the people who are able to sponsor the deal, so there’s only two people on the general partnership.

Or it could be something like one person is responsible for acquisition management executive, who just does acquisitional tasks, and then once they’re done, they hand it off to the asset manager, and then they go back to finding more deals. So you’ve got an acquisition person, an asset management person, and then maybe you’ve got five people who are focused on raising money; or maybe you’ve got two people who are focused on raising money and then one person does the ongoing communications. Then maybe you’ve got three different people sponsoring the deal, and those people who are sponsoring the deal are also helping you cover the due diligence costs.

So really, everything is possible. The general partnership could be a few people, to 10-20 people. It really varies from deal to deal and group to group, but most likely on your first few deals there’s gonna be multiple people on the GP, because again, you’re likely not going to be able to sponsor the deal yourself, you might also not be able to cover the due diligence costs, and then you might also need to have someone with experience do the asset management or the acquisition management while you focus on just raising money, for example.

Again, just to summarize, the five main parts of the general partnership are the due diligence costs, which could receive 5% of the GP, then there’s the acquisition manager, who could get 20% of the GP, there’s the sponsor/loan guarantor/the person who signs on the loan with 5%-20%, there’s the person responsible for investor relations, around 35%, and then there’s an asset manager with 20% to 35%. Again, these are just very high-level percentages, and kind of breaking apart the tasks. It’s all negotiable and it’s definitely gonna vary from deal to deal and syndicator to syndicator.

That concludes the GP compensation. In part two we’re gonna discuss the other side of the coin, which is how to structure the limited partner or the passive investor compensation.

To listen to other Syndication School series about the how-to’s of apartment syndications, and make sure you download those free documents that we offer – those are all available at SyndicationSchool.com.

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

 

JF1590: How To Raise Capital From Private Investors Part 7 of 8 | Syndication School with Theo Hicks

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Now that we’re actually talking to investors, we’ll be answering a lot of questions. You’ll really want to know some common questions that come up, and how to answer them. That’s what Theo will be going over today in this episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome 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.

This is the first episode of the new year, 2019, so to everyone listening, happy new year! Each week in 2019 we will continue to air two-part podcast series about a specific aspect of the apartment syndication investment strategy. Those will air Wednesday and Thursday. For the majority of this series we will be offering the document or spreadsheet for you to download for free.

All these free documents, as well as the 2018 Syndication School series and the future Syndication School series can be found at SyndicationSchool.com. This episode is actually a continuation of an eight-part series that we’re doing; this is part seven. That eight-part series is about how to raise capital from passive investors. If you haven’t already, I highly recommend listening to parts one through six.

In part one, if you’ve listened to it or are planning on listening to it, what you will learn is your current mindset towards raising money, as well as how to overcome any fears or limiting beliefs you have about raising money, and you also learn the main reason why someone will invest with you, which comes down to trust.

Part two is more educational, and you will learn the differences between the joint venture and the syndication strategy, as well as the differences between the two main apartment syndication offering types, which is the 506(b) and the 506(c). In part three and part four combined you will have a total of 12 ways to find passive investors. In part three I believe I went over three of the main strategies, which was your thought leadership platform, leveraging Bigger Pockets, as well as meetup groups. And then nine more secondary strategies that are longer-term in nature, but are also great ways to find passive investors. And with those two episodes, part three and part four, you were able to download a free document, a free money-raising tracker. So you can find that in the show notes of part three and four, or at SyndicationSchool.com.

In part five we discussed the next steps for when you actually find a passive investor, and that would be to set up the introductory call, as well as execute the intro call, so we went over how to do that. Then in part six we began to discuss how to overcome the objections your investors will have, which is you lack apartment experience or you lack business experience, so we went over a few strategies of how to overcome that objection.

In this episode, part seven (and in part eight) we are going to discuss how to prepare and respond to some of the most common questions passive investors will ask you. These aren’t necessarily objections; they’re not the same as “You don’t have real estate experience” or “You don’t have business experience. Why should I invest with you?” These are more questions that they will ask or want to know about your team and about the business plan you want to execute. So these are things that you want to ideally proactively address before they come up in conversation, that way you’re not spending the entire conversation answering a list of questions that they have; this is where your company presentation comes in handy, which we discussed on a previous Syndication School series, and in fact offered a free template for you to download to create your company presentation. So a lot of those team and business plan questions will be addressed in that.

Then also during your introductory call as well as ongoing conversations before you actually have a deal, some of these questions might come up or you might address these proactively during the conversation if you’re leading it. But whether you have a deal or you don’t have a deal, these questions that we’re gonna go over will definitely come up at some point in the process. I’ve broken them down, as I said, into the team-related questions, as well as business plan related questions.

Keep in mind, and always remembering when you are listening to these episodes and you’re trying to figure out how to apply these lessons to your business when raising money, you have to remember that the passive investors invest based off of who they trust. So when you are formulating your responses to any questions that your passive investors have, or when you’re preparing for potential questions that may be asked, keep that in mind and try to respond based off of the fact that investors will invest with you because they trust you. So you want to cultivate trust by essentially everything that you say during the conversation.

Again, I’m gonna go over a list of these questions. There’s actually 49 questions, so I’m gonna cover as many as I can in this episode, and then in tomorrow’s episode I will cover the remaining questions. What you’re going to want to do is you’re going to want to either pause after each question and write it down, or — the free document this week will be the list of all these questions, so you can just download that list, and then what you’re gonna wanna do is actually write out how you would respond to each of those questions before you actually do a new deal call or start to go in-depth about your investment strategy with your investors.

But when you actually reply to these questions, you don’t want to just read your answers. The reason why you want to formulate responses beforehand is so that you have in your mind an idea of what you’re going to say… Just because 1) you don’t wanna just read a script when you’re talking to investors, and 2) your reply is going to be unique based off of the individual’s circumstances. I think we’ve talked about this in previous episodes, but what’s gonna be important to an engineer is gonna be different to what’s important to a sales professional, it’s different than what’s important to a doctor… So you have to keep all that in mind when you are writing out your answers.

So here they are – there’s actually gonna be nine questions related to your team, that you should expect to receive, as well as 40 questions related to your business plan. Let’s just right into those questions. We’ll start with the team-based questions, and we’ll definitely go through those in this episode, and probably get through a decent amount of the business plan related questions.

One last thing before I get into these questions – if you don’t have a lot of apartment experience or syndication knowledge, this could also help you with your education, because a lot of the responses to these questions you might not know the answer to, or it might be new information. So this episode will help you, 1) obviously, the main purpose is to help you know the types of questions investors are going to ask, as well as the thought process around the answer, but 2) these might be questions that you actually have, and so this could be kind of like a syndication FAQ as well. Let’s get into it.

  1. How much money will you have in the deal?

Your investors are gonna want to know if you are personally investing your own capital in the deal or not. Of course, if you are, then that results in an extra level of alignment of interest. But if you don’t have your money in the deal, then you are not exposed to the same level of risk as your passive investors, and if you don’t have your own skin in the game, the passive investors are gonna perceive you differently than if you actually have your money in the deal… Because if you invest in the deal, “Oh, this person is investing their own personal money in the deal, so I’m gonna trust them to manage the deal better than if they had no money in the deal at all… Because if they had no money in the deal at all, then whether the deal is good or bad doesn’t impact them as much.”

Now, of course, starting out you might not have enough money of your own to invest in the deal, and that’s where you’re going to want to go back and listen to part six (I believe), where we discussed how to create alignment of interests in other ways. For this particular question, that would be having a different team member invest money in the deal – the broker invest their commission in the deal, the property management company invest money in the deal, or someone else on your team brings investors into the deal.

Essentially, the investors are gonna want to know “Are we the only ones putting money into this deal, or are you or someone else putting money in the deal?” And the more people that are putting money into the deal, the more alignment of interest there is.

  1. How many of your investors have invested in multiple deals?

This is pretty obvious, but if you have investors that continue to come back, to invest in future deals, that signals to new potential investors that you have a proven track record of meeting and/or exceeding your projected returns… Because if you didn’t make money for your investors, they probably wouldn’t be coming back; they’d probably find someone else. So that just signals to potential investors the strength of your previous deals.

Now, even if you’ve only done one deal in the past, I would definitely mention how many investors came back. Obviously, if zero investors came back, you might not wanna mention that… And then if you haven’t done a single deal yet, then you won’t be able to leverage this to your advantage, so instead you’re gonna want to focus on other benefits and factors to attract these potential investors.

  1. Do you have family/friends that invest in your deals?

Some people, especially starting off, will have a high concentration of family and friends investing in their deals. Again, this question implies that you’ve done a deal before. So if you have done a deal before and you’ve had family and friends invest, you’d say yes and maybe share a little bit about your relationship with them… Because as far as friends go, if you have a relationship with someone, even if you don’t necessarily know them for a long time, you might still consider them to be a friend… So instead of just saying you’ve got friends investing in your deals, talk about your relationship with that person; how long did you know them, how did you meet, how has your relationship evolved over time… Questions like that. And it may not seem super-relevant, but maintaining relationships with people over a long period of time, and they trust you enough to invest in your deals, speaks volumes to your character. If you’ve got a friend for 15 years and were able to maintain that relationship for 15 straights years and then they’re investing in your deals, that shows a lot about your character compared to someone who doesn’t have any friends.

Essentially, a knowledge [unintelligible [00:13:30].11] trust factor in the eyes of prospective investors. “Well, if his friends invest, his family invests, he won’t lose his friends and family’s money – will he?” That’s the thought process they’ll have.

Now, of course, this will depend on whether you’ve done a deal or not, so if you have done a deal, you can mention what  the average investment is; what’s the average investment for a new person, and what’s the average investment for someone on an ongoing basis. Investors will usually invest more if you had an investor who invested $100,000, and then it jumped to four million, six million and six million on deals three, five and [unintelligible [00:14:03].17] but it is possible to see an investor go from a very small to a large amount after investing in a successful deal. That’s going to come with that immediate trust factor – “Wow, he must know what he’s doing.” That’s question number four.

  1. What is your experience?

Again, this is one of those very vague questions, and you can kind of respond with 1,000 words, or you can quickly pull it off your experience… But again, they’re asking this question because they want to know that they can trust you. You know that before becoming an apartment syndicator you need to have a proven track record in real estate or business, ideally both… As well as you need to have that education covered and you need to have your experienced team. So when you are responding to this question “What is your experience?” and you’re just starting off, you probably want to obviously bring up your relevant experiences, but you’re gonna have to lean more on your team and their experiences operating similar deals.

Then once you’ve got a few deals under your belt, that’s when you can start focusing more on your past success, and bring up case studies. That’s question number five.

  1. There are a number of apartment syndicators in your market. Why should I invest with your company?

I’m not sure if we’ve discussed this yet on the Syndication School series, but the three main ways that you can differentiate yourself from other syndicators is through alignment of interests, which we discussed the four different alignment of interest tiers in part six of this eight-part series. Also, it’s transparency, and it’s also trust. I’ve given a good amount of examples in the Syndication School series on how to gain trust and alignment of interest and transparencies, but another way to also separate yourself from other investors is to focus on your unique skillsets.

For example, Joe has a client who has 33 years of engineering experience, so his company’s tagline is “Engineering conservative deals.” Then when he speaks with investors, he talks about all the ways he uses his engineering background to offer conservative deals. That’s very unique to his specific situation, so you’re going to want to identify what is unique about you, and how that makes you a better apartment syndicator, and then focus on that.

Don’t just talk about returns, because at the end of the day really any syndicator can say what types of returns they’re gonna get. What they wanna know is what’s unique about you that can make them trust you with their money.

  1. How do you know your business partner?

Of course, this implies you have a business partner, but at the end of the day, your property management company, your real estate broker – they’re also technically partners in the deal as well… But they don’t really care how you met your business partner; what they really wanna know is are they in good hands? So they know you, but what about your business partner?

So explain how you met your business partner, but more importantly, explain why you actually selected that person. Elaborate on your partner’s skillsets, as well as how they complement your skillsets, which we’ll set the deal up for success.

For example for me, I have a business partner who focuses on raising capital. The reason why I selected him is because he has experience raising capital for syndication deals in the past. So I would explain to them that he’s raised well over six figures for multiple syndication deals in the past, whereas I have the operational experience.

Essentially, you wanna just explain why you selected that person, and not just say “Oh yeah, he’s my really good friend, and we look forward to doing great deals together.” That’s probably not going to let them know they’re in good hands if you just tell them that they’re your friend. That’s kind of how to answer that question.

  1. Where did your business partner work before?

Again, same logic as the previous question – they wanna know if they’re in good hands, and a good way to know if they are in good hands is to see how the business partner performed in the past at previous jobs. Ideally, your business partner should have success in apartment syndication already, or else why would you select them. So you want to, again, focus on what their syndication or apartment experience is, and how that will help you complete a deal.

Then the last team-related question is:

  1. Have you ever taken a deal full-cycle?

If you have, you can kind of leave it at that. If you haven’t, you don’t wanna just say no and leave it at that. Instead – and again, this is a theme for if you haven’t done a deal yet, if you don’t have the experience… You want to rely on your team. So you will say “Well, I haven’t personally taken an apartment deal full-cycle, but I have a property management company and a business partner, as well as a consultant/mentor who has taken a deal full cycle and who will be heavily involved in the deal. They’re people who I can call upon with any questions that I have, so you are in good hands.”

Those are the nine team-related questions. We’ve got about ten minutes left, so let’s hop into the business plan related questions. And again, these are questions that you should be prepared to answer when speaking with passive investors.

  1. Is the investment in a fund or in an individual asset?

Tell the investor that they will always know what they’re investing in beforehand, which for our case standalone, individual apartment assets. The differences between a fund and an individual asset – for a fund you invest before a deal is found, and the syndicator or the general partnership will use that money to buy deals. On the other hand, the individual asset, which is what Joe does, which is what I do, is you identify an asset, you present that asset to your investors, and then they decide whether or not they want to invest in it.

So you’re most likely doing the individual asset route, so you can tell them that, but if you’re not, then obviously you explain to them that you’re doing a fund.

  1. Do you currently have any deals under contract?

If you’ve just put a deal under contract, you can mention that to them and invite them to the new investment offering call. If you have a deal under contract and you are well into the due diligence phase, mention how much money you already have raised; ideally, a total dollar amount, as well as the amount you still need to raise, in a percentage form.

For example, for a 10 million dollar raise, if you’ve already raised 5 million dollars, mention that you’ve already raised 5 million dollars, and you have 50% remaining, and see if they’re interested in looking at that deal package. And of course, if you don’t have a deal under contract, then the response to that is no, and you can move on… Or you can discuss any deals that you’re currently underwriting, maybe something about the deal flow that you’re receiving, when you expect to have a deal  under contract, but not making any promises. Because again, it’s all about trust; if you tell them “I’m underwriting a deal right now and we’re gonna have it under contract in 60 days” and then that deal falls through, you kind of lost a little bit of trust… Whereas if you just say “I’m underwriting a few deals right now. The second we get a deal under contract you’ll be notified, because you’re on our e-mail list.”

  1. How do taxes work with this investment?

Typically – or I guess all the time – the passive investors will receive a schedule K-1 tax form at the beginning of each year, and you’ll wanna let them know when they should expect to receive that by. We send ours out by March 31st, but I do know that a common complaint from passive investors is not getting the schedule K-1 in time, or the K-1 having errors on it… But in regards to tax benefits, you’ll always want to tell your passive investors to consult with their accountant for actual specifics based off of their personal situation… But you can give them some general information, and that is that investors are usually attracted to real estate because of the depreciation benefits. And as a passive investor, as long as you are passing on the depreciation to your passive investors, the depreciation should be greater than the distributions paid out on an ongoing basis. If that’s the case, then the investors won’t have to pay taxes on their ongoing distributions, but they will have to pay taxes on the proceeds from the sale on the property, which is the capital gains.

Some groups don’t pass on the depreciation to the LP, so if you do decide to do that, that could be a selling point for your company and can be added to the list of things that differentiate you from other syndicators in the area. But again, this is just very general, high-level tax information, and you are definitely going to want to talk to your accountant, as well as recommend that your investors talk to their accountants.

  1. What type of financing do you typically do for your deals?

They’re going to want to know things like what are the interest rates to expect, the actual terms; are there pre-payment penalties, is it interest-only? They’re gonna want to know what the loan-to-value is, is the loan recourse or non-recourse?

Typically, the type of financing that you are going to get is going to be determined on a case-by-case basis. Sometimes you might just go straight agency debt, sometimes you might do a bridge loan, sometimes you might put down a larger down payment, sometimes it might be a smaller down payment… So it’s going to vary, and you’re gonna want to let them know that there is no standard debt. You will always select the debt that is best for the specific deal, and that maximizes the investor’s returns while also minimizing risks.

We’re gonna have an episode in the future that focuses a lot on financing, and the differences between permanent debt and bridge loans, and things like that, so I’m not gonna focus too much on debt now… But generally, you’ve gotta let them know that the type of financing will be selected based on the option that will maximize investor returns while minimizing the risks.

  1. How frequently will I get paid?

This is something that you’re going to want to decide pretty early on. Not necessarily before you start looking for deals, but it wouldn’t hurt to know exactly how frequently you plan on paying your investors right now in the process.

The three main ways are monthly, quarterly or annually. Joe, and what I will also do, is the monthly distribution, just because when people set their goals, typically it’s “I wanna make this much money per month.” Not many people set goals saying “I wanna make this much money per quarter.” I believe monthly is much more attractive than the quarterly, and the quarterly is obviously more attractive than the annually.

Before you actually make the decision, talk to your property management company to see — because they’re most likely gonna be responsible for the distributions, and see what they’re capable of delivering. Because if you promise monthly distributions and then you talk to your property management company and they say “Well, we can’t really do monthly distributions; we usually do quarterly, and we’re only set up to do quarterly”, then again you’re losing some of that trust with your passive investors.

The last question that we will go over in this episode is:

  1. Can you walk me through the typical investment from an investor’s point of view?

If you remember all the way back at Syndication School series about how to create the company presentation, and if you downloaded that template there was a section where it was “The seven steps to a typical investment”, and it walked through exactly how that works.

Again, this is one of those things that you’re gonna be proactively addressing by sending the company presentation to your investors… And this is likely something that’s gonna be brought up early on in your career when you’ve got family and friends investing, and sophisticated investors… But once you grow and start bringing accredited investors, they likely know about the investment from their point of view, because they’ve done it before… So this is more of a question that you should receive early on.

You also wanna tell them specifically about the return structure to them. Let them know about the preferred return, if that’s what you’re gonna do, the profit splits, let them know about your target total return and IRR when you’re underwriting deals, tell them about the expected hold period, how you calculate the distributions at sale, and things like that.

Then maybe give them a timeline of like “I find a deal, then I underwrite the deal, and I put the deal under contract. Once it’s under contract, this many days after you should receive an e-mail from me inviting you to an investment offering call. We’ll do the call, we’ll send you a recording, and then we’ll start following up for commitments. We’ll have you send the legal documents, then we’ll close and send you a closing e-mail, and then on an ongoing basis we will communicate about the deal and you’ll receive your monthly or quarterly distributions, and then at this point we plan on refinacing after 2-3 years, and then we plan on selling after 5 years.”

That’s essentially the investment from the investor’s point of view, and what steps they’re involved in. I guess you could just technically say what I said, but also, again, based it off of who you’re talking to and your unique business plan.

So those are the first 15 questions out of 49. That will conclude this episode. In part eight we will run through the remaining questions of the total of 49 questions to expect to receive from interested passive investors. In the meantime, I definitely recommend listening to part one through six of how to find passive investors or how to raise money from passive investors. Also check out other Syndication School series episodes, and download your free documents. Take advantage of that at SyndicationSchool.com.

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

JF1582: Scaling A Single Family Investing Biz To 7,000 Deals In 14 Years with Lee Kearney

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Lee has been a real estate investor for well over a decade. He prefers to invest in single family homes, and has bought and sold over 7,000 properties since 2004. As he says, he’s done everything you can do in the single family space. If you want to learn how to scale to a huge investing business, listen to this episode and take notes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

Lee Kearney: Doing great. How about yourself?

Joe Fairless: I am doing well, and nice to have you on the show. A little bit about Lee – he has since 2004 bought and sold over 7,000 properties. He has focused on single-family homes. He’s based in Tampa, Florida, and his company is Spin Companies. You can go to the website, SpinCompanies.com. With that being said, Lee, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Lee Kearney: Absolutely. I’ve been doing this, as you’ve mentioned, almost 15 years. I have done absolutely everything in the single-family space – I’ve dabbled in commercial, I’ve dabbled in multifamily, but I really focused and honed my skills in single-family. At my high point I owned about 30 million dollars worth of rentals, over 300 doors, and I bought and sold about 7,500 units, over half a billion.

I started off in 2003, actually, by accident, and flipped my first condo. I bought it, it got broken into, I hated it, stole it, and ended up making 35k. That’s when the light bulb went off that “Okay, there’s something here. I made more money flipping this property by mistake than what I did in my job.” I moved to California, did a couple flips out there… Again, found a mentor right at the beginning, and really tried to understand what the business was, how to fix up the house, where to buy, what to buy, and really on those first two houses I would say I made every mistake known to man on those two properties… And I still made money, because I was in an upward market.

I moved to Florida in 2005, and began buying foreclosures. I didn’t have a clue what a foreclosure was; I had to ask a lot of questions, I found some people that really were knowledgeable in the space, in my circle… Just asking lots and lots of questions. And that’s what I tell everybody out there – ask lots of questions, even if they seem stupid. They’re not stupid if you don’t know.

So I bought and sold foreclosures for a couple years, and about midway through 2007 I realized I was starting to lose money. Then I started to lose money on every single property. What had happened – in a two-year period I had made and lost two million bucks. I was back to square one.

In 2008 I had to reinvent myself, learning a couple big lessons. One, there’s always money in real estate, and two, you’ve gotta figure out what side of the trade to be one, which is the right side. Once I learned that that was the rules in engagement, I started wholesaling, because that was the right side of the trade with a lot of market risk; I made almost a million bucks my first year, just wholesaling houses, and I’ve never looked back since then.

Again, we’re talking thousands of assets flipped since then, done several thousand fix and flips… Really, I’ve done everything. I’ve come across every scenario that you can see in real estate, bought and sold notes, too; I’ve been on both sides of the transaction as far as being the borrower, being the lender, and I’ve really got a good understanding of how to make money in real estate in any cycle, which is what you need to do; if you wanna stay in the business, you don’t need to sit on the sidelines… You need to constantly be analyzing where the opportunity is, and moving your business in that direction.

Joe Fairless: Tell us a story of one of the most challenging transactions that you’ve done.

Lee Kearney: I can tell you one that actually is just getting settled this week. It is a two-year court battle on a property that I bought two years ago. Specifically, the gentleman who’s going to a tax deed sale –  we’d purchased the property the day before the tax deed sale, didn’t hear anything for about two weeks. Then that particular gentleman, who had come in with his friend by the way, who had witnessed the deed and was notarized in person with a driver’s license with one of my processors here who is a notary, and claimed that he didn’t know he was signing a deed to the property, and sued me for what’s called fraudulent inducement.

Joe Fairless: [laughs]

Lee Kearney: He basically said I tricked him into signing a deed. Now, I have never done that, I never will do that. I fought that gentleman in court for two years and we’ve just won.

Joe Fairless: Congratulations.

Lee Kearney: It was a two-year court battle just to prove that I was right. I did not want my name dragged through court records as fraudulently inducing anybody into selling their home.

Joe Fairless: Yeah, congrats on that… How much did it cost you in legal fees?

Lee Kearney: Oh, geez – an honest answer? About $20,000.

Joe Fairless: And how much did the property make you?

Lee Kearney: I think when we flip this asset — it’s got a tax-assessed value double what our basis is right now… So we’ll double our money on the property, even with all the extra legal. What’s really interesting is there was an extra payout that I was going to be paying this owner as part of our agreement, and what we ended up settling on in court after we won was that I end up taking out my attorney’s fees… So my global amount two years later was the exact same as I would have paid two years ago, except my attorney got half the money instead of him.

From their vantage point it was a pointless exercise, and I think that really for everybody out there – don’t just get in lawsuits. Ultimately, the attorneys win if you’re just getting in a lawsuit to get in a lawsuit. But if you’re right and it makes business sense, go for it. This is where each case is different, the facts are different, and the amount of potential profit is different in each deal… So you really wanna make a business decision before you just start getting in court. It’s my least favorite thing to do, besides filing tax returns. I hate fighting people in court.

Joe Fairless: Yeah, you and I are similar in that regard. Two things that are not enjoyable, and at the bottom of my fun list. You said you started wholesaling and you haven’t looked back since… Does that mean that you currently focus primarily on wholesaling?

Lee Kearney: No, what I meant specifically by that is that I began building a base in real estate and didn’t go back to square one again.

Joe Fairless: Oh, okay.

Lee Kearney: So we moved forward as the market started rapidly appreciating after 2011. We jumped right into the fix and flip space. Now that we can see that we’re coming to the end of that cycle, we’re dialing down fix and flip and dialing back up wholesale again, to take risk off the table.

Joe Fairless: Okay, got it. So over the last 12 months, what percent would you estimate you’ve done wholesale versus fix and flip versus whatever other category there is? We’ll call it miscellaneous category.

Lee Kearney: It’s been about somewhere between 60% and 70% to 30% – 40% wholesale. So we have done more fix and flip than wholesale. However, we’re ratcheting down rehabs and dialing up wholesales, so I suspect that number to be completely flipped next year, and be more two thirds wholesale, one third retail.

Joe Fairless: And in order to dial-up wholesaling, what do you do from a staffing standpoint to make that happen?

Lee Kearney: Well, in our particular case what we did was we subbed out the marketing to a joint venture partner, so I didn’t have to dial-up staff. When it comes to processing a wholesale asset, you actually need less staff, because the asset move through your production line so quickly compared to a rehab… You could literally hold the asset anywhere from hours, to days, to possibly a couple weeks, versus typically several months with a rehab, and there’s a lot of touch with the rehab. You’ve got processors touching that asset almost every day if you’re fix and flipping it.

Joe Fairless: How does that work when you partner up via a joint venture to do wholesaling?

Lee Kearney: Sure. That was actually fairly straightforward. We paid a small marketing fee on the front-end, which helped pay their sales for, and on the back-end we split the profits 50/50, so once they do the marketing, we’ve got a property in the door. We process the asset, whether it’s a rehab, a wholesale trash-out, we sell the property, and then when the proceeds are concluded, what we’ll do at that point is escrow 10% back into our joint venture for new marketing, and then we split the other 90% 50/50.

Joe Fairless: Beautiful. Thank you for very succinctly walking through that; that’s very straightforward. How did you find your joint venture partner who — basically, they find the deal and then you take it from there, right?

Lee Kearney: Absolutely. That’s [unintelligible [00:10:31].18] and that’s the joint venture who’s actually my partner in the educational space through Advisors Education, my Flip Your Income platform. So there was a natural fit already there in the info side of the business, and they said they were dialing up the seller-direct campaign; I said, “You guys already have [unintelligible [00:10:53].09] you already have that infrastructure, I already have an entire floor of processors, and a construction team and vendors, and we have an entire team of lenders, so let’s just partner up. I’ll do what I’m good at, I’ll do more of it, you do what you’re good at and you do more of it, and then it’s a win/win for everybody.”

And I will say this to everybody out there – if you’re getting in a joint venture, make sure both parties bring something to the table. Otherwise you’re gonna have a disgruntled partnership from the standpoint that one partner is gonna be doing a lot more than the other partner, you’re splitting the proceeds, and then you end up with a very short-term partnership because it just doesn’t make sense in the long-term to do something where both parties are not bringing value to the table.

Joe Fairless: You said at one time you had 30 million dollars in property and 300 doors, that was your portfolio high point… What are some things, knowing what you know now — if you were presented a similar position, what would you do differently to maintain that?

Lee Kearney: I would say initially we didn’t do our tenant screening correctly. That’s probably — when it comes to maintaining high occupancy and high payment rate, the biggest place we screwed up early on is that we were just trying to get warm bodies in our properties. Then we realized later if we’d spent a few more moments on screening a tenant correctly, our net income would go way up. That’s when I really went from hating rental properties to loving rental properties, when they stopped being a liability and became an asset from a cashflow standpoint.

Joe Fairless: So you had a lot of turnovers, I guess…

Lee Kearney: Yeah, yeah. At our low point, early on, when I was building that rental portfolio, I had about 20 evictions going on, and I said to my team “This is not going the right direction.” Rental properties, which are supposed to really pay you in three ways – through appreciation, through being able to depreciate that asset on your tax return, and also create cashflow… It wasn’t hitting the cashflow button, it was just costing us money every month, so I wanted to turn that around because we’d built a sizeable rental portfolio, so the outgoing cashflow was at a point that really was making a dent in the company’s finances, and I knew I needed to turn that situation around if I wanted to hang on to these rental properties long-term.

That situation forced us to really look at what kind of tenants were defaulting, what was broken in our screening process, and we needed to make some changes as far as the qualifications for our tenants coming into our properties.

Joe Fairless: And what were the results of those changes?

Lee Kearney: For several years, until I started winding down — I would say realistically four to five years we’d been maintaining at the worst time 95%, but averaging more around 97%-98% rent collection, 97%-98% occupancy on C, C- assets, which I think is pretty incredible when I talk to people out there.

Joe Fairless: It is, yeah. Do you have your own property management company?

Lee Kearney: That’s one thing I got right, right out of the gate. I manage property management in-house, and just to give you a quick explanation why — when you’re dealing with an external property management company, their interests are completely misaligned with you as the owner. Let’s talk about that…

As an owner, you want people to stay in your property and you want people to pay. A property management company makes money when stuff breaks and when people move out, and when new people move in. So at a very base level, the industry is broken, because property managers actually make a lot more money when the owner makes a lot less money. I didn’t like that setup, I knew I couldn’t fix it, so rather than try to fix an industry, I brought those best practices in-house from day one, and really rewarded my staff through bonuses and incentives to make sure that they brought in people that paid and people that stayed, and kept them in there so that our occupancy and our payment was at that 97%-98% range.

Joe Fairless: What’s been some of the challenge of building out a property management company?

Lee Kearney: Just building out your SOPs… Realizing that on the payment side – you just have to be consistent with that, as far as rent collection goes. What I mean specifically about that – because you mentioned at the beginning of the show we’re cutting out the fluff here… Everybody gets a three-day notice, everybody gets sent to the attorney after the three-day notice has expired. Everybody must pay half their balance, including the attorney’s fees, and also they stay in eviction until they’ve completed a written stipulation payment. So we actually don’t even stop the eviction until they’re brought current again; we make them sign it, it’s a stipulated payment agreement, and they must be caught up by the end of the following month… Because what you don’t want is when you finally go to evict someone that they’re three months in arrears, because you’ve put them on a payment plan that will never actually get them caught up.

For instance, if you’ve got $1,000 rent and someone’s $1,000 in the hole, if they’re just paying their $250, they’re never paying down that $1,000 balance. Realistically, they’ve gotta be paying $300-$400 a week to get that payment down, where they’re paying their current rent and they’re paying down what they’re delinquent on.

So that’s some of the lessons we learned early on that really affected how well we did property management… Even something as simple as raising our deposit from a half month, which we used to do for Section 8, a month for non-Section 8 tenants… We raised it across the bar, we did nicer properties, cleaner, and we did a month and a half for everybody; it did not matter if you were Section 8, private pay… Everybody had to pay a month and a half. And all of the bottom feeders, who had tried to negotiate with you over a security deposit because they didn’t have any money no longer applied for our properties.

Joe Fairless: Switching gears back to wholesaling, you said that’s gonna be dialed up in the foreseeable future based on where you see the market heading… How do you maximize the conversion rate whenever you receive the leads, from receiving it to actually making money on the deal?

Lee Kearney: That’s a really, really good question. First, not every lead is the same. What I mean by that – if you spent the same amount of time on all leads, you would never process your really good leads effectively… So one of the first things we try  to do is weed out the “definite no’s” we call them. What I mean by that – if in your initial screening of that lead you realize these people are over-leveraged and they cannot sell, they’re gone. So we don’t spend any more time on that. It doesn’t matter if they want to sell, or they have to sell; they can’t sell.

So the first thing we’re always trying to do is to not waste time on deals that we can never convert to a deal… And I think a lot of people out there, when I talk to them, they’re on the front-end, they’re the opener, and they’re screening every deal, and then they’re trying to analyze the really good deals and wonder why they’re missing the really good deals… It’s because they’re working on analyzing all the deals that will never become a deal.

If you wanna get your conversion rate up, your openers should be weeding out the people who are not good leads, and then your closers should be hand-fed any lead that’s in range. What I mean by that – they can sell, they have to sell, and they recognize that they need to sell. That’s really the unicorn seller… When you’re dealing direct with seller, you’re looking for three things: those who can sell, those who have to sell, and those who realize they have to sell. They’re the ones we’re focused on.

We have not limited geography. As we move forward now and we’ve really matured in this space, we’ve realized we’re chasing distressed sellers and not chasing geographical locations… So we open up a much wider geography, to cast a much wider net, to get the most distressed sellers.

Joe Fairless: You mentioned that you’ve done some commercial, and then also some multifamily, but your bread and butter is single-family. For a lot of people, they do single-family and then they decide to do something else, like multifamily or commercial or something like that… So what about single-family has attracted you to it to maintain that for the long-term?

Lee Kearney: When we made the decision to begin to move into multifamily, we realized the multifamily space was overheated… So although I would take down 100 units, 500 units tomorrow, the market’s not bearing a price that I can live with. That means that we are very dialed in in the single-family space, so we’re gonna keep doing that until the right opportunities come along.

Unlike a lot of people out there, just because I want to move into multifamily, I’m not gonna chase it down to the lowest cap rates. I’m not willing to do that. I believe that economically we could be coming into a time of recession, I believe the real estate cycle has almost gone full circle, and with all those things being said, to chase multifamily deals at peak pricing is not in line with our core business model.

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

Lee Kearney: I’ve got a couple, actually. I’ll give you one, if you want one – it’s not important to call the bottom of the market, but it’s important to call the top of the market.

Joe Fairless: What indicators do you look at in order to call the top of the market?

Lee Kearney: Extreme euphoria. Everybody’s buying real estate, everybody’s an investor, rates are going up, there’s no supply, there’s a desperation to buy a deal just to keep your pipeline full. All of those things I see going on in a lot of primary markets, which means that desperation means that people are overpaying, and ultimately the chickens come home to roost. You make your money in real estate typically on your acquisition, and if you get that wrong, that’s also where you’re gonna lose money. It’s just when that happens.

I see a lot of desperation in the market, and I see the foreclosure rates –  just to quote a specific statistic here in Florida – year-over-year [unintelligible [00:20:50].22] rate appears to be climbing… So I’m seeing a lot of indicators that we are coming full circle, and even something simple as the rates –  they’re about 2% higher than they were just two years ago.

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

Lee Kearney: Sure.

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

Break: [[00:21:13].09] to [[00:22:29].17]

Joe Fairless: What’s the best ever book you’ve recently read?

Lee Kearney: Tools of the Titans.

Joe Fairless: I love Tim. And all of his books. I haven’t read the cooking one, but all other Tim Ferriss books – I love those. What’s the best ever deal you’ve done that we haven’t talked about?

Lee Kearney: It was a deal that had a second mortgage. We were able to wipe out the second mortgage. We are selling the property next month, and will net about $250,000 on a single-family asset.

Joe Fairless: What’s a mistake you’ve made on a transaction we haven’t talked about?

Lee Kearney: I bought a gigantic rehab; it was a million dollar home, that we ended up losing $300,000 on.

Joe Fairless: And what’s the lesson learned there?

Lee Kearney: The renovation budget was about $150,000 off, and our resell price was a similar figure off. And our hold time was about double what we thought it was going to be.

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

Lee Kearney: We like to support an organization that protects trafficked women and brings them back into society. Redefining Refuge, it’s a charity that we support, and supported for many years. I’m very passionate about that. Those who prey on the weak in our society – I have a tough time with that, whether it’s women or children or anybody that’s considered weak or vulnerable in society; I feel very passionate about supporting organizations that try to help out with those causes.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?

Lee Kearney: Sure. FlipYourIncome.com is the best way to learn about what we do in teaching real estate.

Joe Fairless: Awesome. Lee, thank you so much for being on the show. We talked about a whole lot of stuff, from how to increase your conversion rate if you’re a wholesaler, to the reason why you’re focused on single-family homes and not multifamily, and when to stick to your guns on a court case; when you’re in the right, you ride it out… And lawyers are usually the only ones that win, but in this case you also came out even, or positive, because I’d say from the learning experience that you had working with the lawyers who were essentially paid for by the person who was suing you, I’m sure you learned some stuff too along the way.

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

Lee Kearney: Great, thanks for having me on the show.

JF1577: How To Raise Capital From Private Investors Part 6 of 8 | Syndication School with Theo Hicks

Listen to the Episode Below (20:41)
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Now we have found our investors, had a phone call, and have sent them a deal. Now we’ll have to conquer their objections. Theo will discuss what are common objections and how to handle them. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Sponsored by Stessa – The simple way to track rental property performance. Get dashboard reporting, smarter income and expense tracking and tax-ready financials. Get your free account at stessa.com/bestever


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 syndications. As always, I am your host, Theo Hicks.

Each week we air a podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of this series we offer a document, or a spreadsheet, or some sort of resource for you to download for free. All these free documents as well as free past Syndication School series episodes can be found at SyndicationSchool.com.

This episode is part six of an eight-part series entitled “How to raise capital from passive investors. We’ve done five parts already, so I highly recommend listening to those first, before jumping into this episode, because there’s information in those episodes that we will build upon in this episode.

Listen to part one and you will go through an exercise to determine your current mindset towards raising capital, which likely includes a little bit of anxiety. Because of that, you will also learn how to overcome any fears, anxiety or limiting beliefs you have about raising money. Then you’re going to learn why someone will invest with you, and the primary reason people invest is not because of money or because of your team or because of the market, but because of trusting you. So it’s all about trust.

Then in part two – listen to that and you will learn the differences between a joint venture and a syndication, as well as the differences between the two main apartment syndication offerings, which are the 506(b) and the 506(c). Of course, when choosing between a JV or a syndication, and a 506(c) and a 506(b), make sure you talk to an attorney, because I am not one.

Moving on to part three – listen to that episode and you will learn the first three ways to find people to invest in your apartment syndications. Then in part four we discuss nine more ways to find passive investors, for a total of 12 strategies. With those episodes comes the free document, which is the Money Raising Tracker, for you to track your progress of the people you’re finding to invest in your deals.

Then yesterday, in part five, we discussed the next steps after finding passive investors. Once you find these people, what do you do? Well, you set up an introductory call with them, and then you actually execute on the introductory call.

This episode, part six, is gonna be a little bit shorter, because we are going to essentially set up for next week’s series, where we will go through a list of 49 frequently asked questions that you need to be prepared to answer from your investors. But in this episode we’re gonna talk about how to overcome investor objections.

You are out there, implementing one, or all, or a combination of the 12 ways to find passive investors, and someone fills out your lead capture form, and you reach out to them and they agree to a phone call. You hop on the phone call, you learn about their background, you learn about their investment goals, and then you sign off, you build a relationship, [unintelligible [00:06:14].13] and then you finally get a deal, and you send the deal to them, and you go through the process of presenting the new deal, which we’ll go over in future episodes, and then you follow up with this person and say “Hey, are you interested in investing in this deal? If so, how much?” They reply and say, “No, I don’t wanna invest.” You don’t know why, you ask why, and you figure out it’s because of your inexperience.

The biggest challenge, as I said, when you are starting off as a money raiser and as a syndicator in general is going to be your lack of credibility. So as I mentioned and as I went into extreme detail on in a previous syndication school episode, in order to become a syndicator you need to have past business experience or past real estate experience, and ideally both. And I went into extreme detail on what those two mean. But even if you do, you’re still gonna face objections.

Let’s say you just have a strong business background. Well, when you get to that point with Billy, and you are following up to have him invest and they say no, and you ask them why, they might say “Well, I know you have prior success working for a large corporation, and you’re responsible for 20 million dollars in sales, but that still doesn’t make me feel any more comfortable about giving you my money to invest in real estate, because you’ve never done it before.”

Or if you have a background in real estate but it’s not an apartment syndication or an apartment, they can say “Well, Theo, it’s amazing that you own 13 rental units in Cincinnati, but you’ve never done anything over four units, and I do not wanna be the test subject, so I’m sorry. If you do a few deals, then I will come back.”

Those are just examples. It could be any combination of words, but what they’re trying to tell you is that “I don’t trust you enough yet because of your background.” So what do you do in this situation? Do you just give up and move on? Well, of course not. We’re gonna tell you what you actually do.

What you need to do is you need to have alignment of interests. What this means is that the investor’s interests are to preserve and make money, so they want to know that if they lose money, then you lose money, too; or other people involved in the deal lose money. If that’s the case, then they feel that you are more likely to perform efficiently, so that you don’t lose money, which in turn means that they don’t lose money. That’s essentially what alignment of interests means.

Now, on your first deal you’re probably going to need a lot of alignment of interests, which means you might have to give up a large portion of the general partnership. And as the saying goes, a percentage of something is better than 100% of nothing. So do not be afraid to give up the majority of your stake in the deal in order just to get a deal done, because once you’ve got that momentum, eventually you’ll get to the point where you might not be able to do it all yourself, but it will only be a few of you on the general partnership, which means more money for you.

The alignment of interests – we rank them from the least alignment of interest to the most alignment of interest. There’s gonna be five tiers. For your first deal – maybe you’re gonna need to be on tier five or four, whereas eventually you can be on tier one, or maybe not have any alignment of interest at all, because of your past performance.

Tier one is going to be you bringing a qualified person on to partake in that project. This is when you hire a credible, experienced property management company, following the strategies outlined in the previous Syndication School series. Same for a mentor or consultant. Same for a real estate broker. This is just you bringing on someone who’s got experience doing what you’re trying to do. The reason why there is an alignment of interest is because your passive investors know that at the very least the people managing the deal have done it before. But the reason why it’s tier one is because they’re just there, and their skin in the game is limited to really their effort. But if the deal does well or bad, it doesn’t necessarily impact them that much, because they don’t have any financial skin in the game. Sure, it might hurt their reputation if their property management company is known for failing on a project, but they’re not gonna actually lose money.

Number two is to provide this qualified team member with equity in the deal, or some sort of stake in the deal. So there’s a little bit more alignment of interest, because now there is skin in the game, because if they perform well they can make money… But if they perform poorly, they’re not necessarily losing any of their own money; they’re losing money they could have earned, but they’re not losing their own money.

An example of this tier would be just give them 5% of the GP, but a better example would be to go to your property management company and negotiate a reduced property management fee. Let’s say they are wanting to charge you 5% – I’d go to them and say “Hey, how about you charge me 2.5%? I plan on holding on to the property for five years, so obviously five times 2.5% is going to be 12.5%, so I will pay you 25%, so two times what you lost on your property management fee during those five years, at the sale of the property. You will get paid less ongoing, but then you will be rewarded with a big bonus at the end of the property.”

This way they have a stake in the deal, but you’re also getting the benefit of having that reduced ongoing management fee. But again, they don’t have their own  money in the deal, so if they perform well, they get paid, if they perform poorly, they don’t get paid, but they’re not actually losing money. So that’s why it’s tier number two.

Tier number three is if this qualified member actually invests in the deal – the property management company invests in the deal, or the property manager themselves invest in the deal. If the real estate brokerages invest in the deal, or if the real estate brokerage invests their commission into the deal. Or if you’ve got a mentor who is invested in the deal. Someone who is qualified and will be helping you with the project, and also actually now has skin in the game. So if they perform well, they make money; if they perform poorly, not only do they not make money, but they lose money. So that’s tier three, alignment of interest.

Tier four is even better, because not only is the qualified team member bringing their own capital into the deal, but they are bringing on their own investors. So not only is their skin fully in the game, but they have brought other people’s skin fully in the game. So if they perform well, they make money and their friends make money, or whoever they brought into the deal, but if they perform poorly, not only do they lose money, but the other party also loses money, which makes them more likely to obviously treat the deal as if it’s their own, and the passive investor will perceive it that way.

Then tier five is going to be if you can get one of these team members to actually sign on the loan. They invest their own money in the deal, they brought on investors, and they’re signing on the loan. So if they perform poorly, not only would they lose the money they have invested in the deal, but now their personal assets might be at stake as well.

The highest level of alignment of interest would be for a qualified team member to invest in the deal, to bring on their own investors, and to sign on the loan. If you tell your passive investor that you’ve got a team member who’s doing those things, when they say “I don’t trust you because of your experience”, you’ll say “Well, I’ve got a property management company who has been managing properties in this area for 25 years, and they are themselves investing in the deal, they brought on investors, and they’re also signing on the loan. Plus, the real estate broker is investing their commission in the deal, plus I’ve got a mentor or a consultant who’s also going to be signing on the loan. So I understand your hesitation to invest because of my experience, but I have stellar team members who will be helping me manage the deal, plus they have financial skin in the game, which makes it even more likely for them to perform properly.”

That’s a powerful response to an objection. Now, not all of these team members result in the same level of alignment of interest. Let’s take for example tier number three, when a qualified team member invests in the deal – you’re gonna get the highest level of alignment of interest if it’s the property management company, because they have an ongoing role in the project. The level below that would be a local owner, or a mentor or a consultant. They’re going to have an ongoing role, but not as much as the property management company. And then the lowest would be if your real estate broker invests in the deal, or invests their commission… Because all three of these parties are investing their own money in the deal, but the real estate broker really doesn’t have any involvement in the ongoing business plan until the sale… So that’s why they result in the least level. But regardless, having a real estate broker invest in a deal is gonna be better than having a property management company just be on the team.

The tier system, one through five, an increasing level of alignment of interest, but within the tiers the increasing level of alignment of interest is the real estate broker is at the lowest, the local owner, the mentor and the consultant is the middle, and the highest would be the property management company.

Now, another way to overcome these objections — the best way is gonna be these alignment of interests, but another way would be to hire a mentor, and the mentor is gonna need to be an active apartment syndicator, who is still active and has previous success. That will help you because you will be able to leverage their success in order to overcome those objections.

You can tell your passive investor who is objecting to your lack of experience by saying that “I have a mentor who (using Joe’s example) has over 450 million dollars in apartment syndications under control, he has a consulting program that I’m in where he offers the system that he used, so that I can replicate his success. I am able to e-mail him or call him not necessarily 24 hours/day, 7 days/week, but any time during the day and he’ll get back to me within 24 hours. And he is also going to be signing on the loan, or he is also going to be an advisor for me to lean on whenever I have any issues that come up… Plus, he is allowing me to use his credibility to qualify for financing.”

So not as great as having them actually invest in the deal or have skin in the game, but if it’s between a first-time investor who’s doing it by themselves and an investor who actually has a mentor who is a successful syndicator, you’re gonna do with the latter person over the former person. So it’s not the best way to overcome this objection, but it’s something that can definitely help and push you in the right direction.

Then lastly you’ve got your brand – you’ve got your thought leadership platform and your online presence. The reason why this is gonna help is because that’s gonna help you with your credibility. If you’ve got a first-time investor — let’s say I am a passive investor and I am talking to two first-time investors, and I’ve got this concern that they don’t have any experience with apartment syndications, so why would I give them my money… And I do a quick Google search, and the first person, Theo – all I see is a Facebook page and a LinkedIn profile that hasn’t been updated since 2015. Then I google Joe, and I see that Joe has a really nice website, he has a podcast that I can actually listen to and hear him talk… He’s got a yearly conference that he does, and other things that I find online about this person. Who am I more likely to invest with? Obviously, I’m not investing with Theo, I’m investing with Joe, because just by googling him and seeing his online presence gives Joe an extra level of credibility compared to Theo, who doesn’t have that brand, doesn’t have that online presence.

Again, this is not going to be as great as having a qualified team member signing the loan, but it is something that is still going to set you apart from other first-time investors, and that might be the difference between you getting an investor and not getting an investor. Maybe they’re willing to take a chance on you because of the effort they’ve seen you put forth in order to create such a large online presence.

Those are really the three main ways to overcome that lack of experience objection, and that is the alignment of interests, having a mentor, and then focusing on that online presence through the brand and the thought leadership platform.

Now, I wanted to get into the list of the common questions that investors are going to ask you on these either intro calls, or essentially before you have a deal, but I’m gonna stop here for now, and then next week, the podcasts will be about those questions.

Until then, I recommend listening to parts one through five of the series “How to raise capital from passive investors.” Check out the other apartment syndication school series, as well as download your free money-raising document and the other free documents we have for previous series. All those can be found at SyndicationSchool.com.

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

 

JF1576: How To Raise Capital From Private Investors Part 5 of 8 | Syndication School with Theo Hicks

Listen to the Episode Below (25:44)
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Ready for some more apartment syndication knowledge? Lucky for you, Theo has plenty more knowledge to drop on us today. We’ll be learning more about raising the money we need to complete these deals. Specifically, we’re discussing how to “court” the passive investors that you have found through the methods discussed in the last two Syndication School episodes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:


Free document for this episode:

http://bit.ly/2VdxYmn


Sponsored by Stessa – The simple way to track rental property performance. Get dashboard reporting, smarter income and expense tracking and tax-ready financials. Get your free account at stessa.com/bestever


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 podcast series focused on the how-to’s of apartment syndications. As always, I am your host, Theo Hicks.

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

This episode is a continuation of what was supposed to be a four-part series, which turned into a six-part series, and now is likely going to be an eight-part series, entitled “How to raise capital from passive investors.”

In part one you determined your current mindset towards raising money, and you learned how to overcome any fears or limiting beliefs of this mindset that you have about raising money, as well as you learned why someone will actually invest with you, which comes down to trust.

In part two you learned the differences between a joint venture and a syndication, as well as the differences between the two main apartment syndication offerings – the 506(b) and the 506(c).

In part three we transitioned into discussing how to actually find investors. In part three we learned the first three ways to find people to invest in your apartment syndications, which was a thought leadership platform using Bigger Pockets, as well as meetup groups, and then in part four you learned nine more ways to find passive investors, which include volunteering, referrals, advertising, building relationships as a couple, tapping into your current network, partners, mentorship, having alignment of interests, and then getting creative.

For all of those 12 ways we either provided you with a step-by-step process for what to actually do, or gave you some high-level advice on how to approach that strategy. Then we gave away a free document, The Money Raising Tracker, so that you can begin to log the information of these people that you found.

In this episode you will learn what the next steps are after you find a passive investor, using one of these 12, or a creative way that you’ve come up with… And that is to set up an introductory call and then to execute that introductory call.

Once you’ve actually found an investor, as I mentioned in previous parts, your goal is to set up an intro call. Your goal is to get them on the phone with you. Now, this is gonna be accomplished with the fancy technology known as the e-mail. You’re gonna send them an e-mail with the goal of scheduling an introductory phone call with them. The e-mail content – what is actually within the e-mail – is going to be based on your understanding of this person, as well as your relationship with this person.

Let’s say you have your thought leadership platform and that’s what you use to find investors. A listener goes to your landing page and fills out their information, and says “This is my name, this is my e-mail, this is how much money I can invest.” Now you’ve got their e-mail address, so you will send them an e-mail. If you actually know this person already, you have an existing personal relationship with them, and you have previous real estate experience, whether that’s syndicating a deal already, of being a fix and flipper, or smaller rentals, or teaching real estate, or really any sort of real estate experience, here is a template that you can use. Now, don’t use this template exactly; adjust it based on your communication style, and obviously the examples aren’t gonna be the same for every single investor, but here’s an example of what I would send to someone I had an existing personal relationship with, based off of my real estate background. For some reason I really like the name Billy, so we’ll say I’m e-mailing Billy.

“Hi, Billy.

First off, I hope you’re having a wonderful week, and that your job is going well at GM.”

I’m gonna pause… “Your job is going well at GM” – obviously, you’re gonna wanna insert a personal reference that’s specific to them. “I hope your kid is doing well in basketball”, “I hope your wife is doing well”, because obviously you know this person already, so you can bring up something that’s a personal reference to them. Back to the e-mail:

“I’m writing to let you know that I’ve evolved my business to incorporate investors into the deals I do. As you might know, I’ve ________” Here you wanna insert your own personal real estate experience. For me, I would say “As you might know, I’ve acquired a personal portfolio of 13 rental units in Cincinnati, Ohio, and recently co-authored a best-selling book about apartment syndications. Continuing the e-mail:

“…and after doing that, I realize it makes sense to have a small number of people I know join me in the best deals I come across. I’d love to meet with you and learn more about your financial goals to see whether I can help you reach them. It’d be great to catch up, too.

Are you free ______? Either way, I wish you the best and I’m looking forward to staying in touch.”

So you’re not asking them for money, you’re not asking them to invest in a particular deal. The purpose is to just have a conversation with them, and get them to agree to going on the phone, and you’re suggesting a time and date, so that they don’t have to come up with one themselves. You’re explaining how you progressed from doing what you’re doing what you’re doing now, which is actually you doing something in real estate, to wanting to raise money for those deals. You’re basically saying, “I’ve had success, so I’m gonna share the success with others as well.”

Now, let’s say you have an existing relationship with this person, but you don’t have any real estate experience, you just have your business experience, because you need to either have real estate or business experience before becoming a syndicator; then instead of talking about your past experience, you would say – this is very unique, but you would say “I’m writing an article for my blog about lessons business professionals such as yourself have learned as they’ve evolved their careers. I’d like to include some of the lessons that you’ve learned in this article.”

Since you don’t have real estate experience to leverage, you shouldn’t even bring up the fact that you are going to be an apartment syndicator, or that you are interested in raising money. Instead, you want to just say that you’re gonna write a blog about them. That way you can get on the phone with them and then you can obviously interview them for your blog. Then you have them on your e-mail investor list, so as you start sending out your blogs, your podcasts, any new deals that you come across, they’re on that list and they will see them, and then maybe in the future you can follow with the previous e-mail, which is to invite them on a call to discuss their financial goals.

Now, the e-mail service that we use is MailChimp. It’s very simple and it should be free up to 50 e-mail subscribers; I’m not exactly sure how many, but starting out you get the free version, and then eventually once your list grows, you’ll have to pay money for it… But it’s a very simple service and you can create decent-looking e-mails without having to have any sort of design experience, because their guides are pretty straightforward. Plus, you’re able to link MailChimp up with your website, so you can have your lead capture form go directly to MailChimp, which is nice and saves you some time… So I recommend using MailChimp to create this e-mail list.

But anyways, once you have confirmed a time with them – and this is not for the blog strategy, but for the strategy where you mentioned your real estate background, so someone you have a pre-existing relationship with and you have a real estate background, you want to send them your company presentation, which you created and we’ve provided you a free template with in a previous Syndication School series.

Let’s say you send that e-mail and they say “I’d love to hop on a call. That day and time looks great, looking forward to it”, you reply with:

“Hi Billy,

You’re scheduled for December 25th at 6 PM. In the meantime, I’ve attached the Hicks Acquisitions company overview to give you some background on my company. I’m looking forward to our conversation and we’ll speak to you on Christmas Eve.”

So we created that company presentation earlier, and that wasn’t just for you to look at yourself… Now we’re actually gonna use it, and we’re going to use it by sending it to our prospective investors. That way they can familiarize themselves with you, your company and your business plan before you do the phone call, which will allow you to focus on talking about them, and not reading the presentation.

Now, for your first few deals you’re likely gonna stick with a 506(b) and you’re going to have a pre-existing relationship with that, which means you have a pre-existing relationship with your investors, so these two templates, with and without real estate experience, should apply. But as you start to grow, and people that you don’t have a pre-existing relationship with reach out, the approach will be a little bit different. [unintelligible [00:11:54].06] being proactive with them, because these e-mail templates above are you being proactive with people you already know, or reactive to people who have filled out your contact form… But as you progress through your business, people will start to actually reach out to you, so you don’t really need to convince them to hop on a phone call with you; they already want to talk with you… Instead, it’s just figuring out a date and time that works best.

I’m sure eventually you’ll have so many of these inquiries that you’ll have an extra qualification process before hopping on a call. Maybe on the lead capture form there’s a section where it says how much money they can invest, or there’s a section that says “Do you wanna be passive or active?” Just things so that you can eliminate people who aren’t going to be good fits for your investment strategy.

Now, for the actual introductory call there are three keys to a successful call that Joe has learned from doing thousands of these things. Number one is to take a ton of notes. So before the call, open up a Word document, put that person’s name at the top, and then Enter, and then put the date of the conversation, and then Enter, and then Bullet Point. During the call, take as many bullet points as possible based off of what they’ve said; and again, anything that they’ve said. Then save that document with their name, and maybe have a folder for these investor conversations where you can put all the different documents for your conversations, and the next time you talk to this person you can open up that document, and obviously hit Enter, put today’s date, and then Bullet Point and then take more notes… But during the conversation you can bring up something that you have in your notes above.

Never underestimate how impressed someone will be if you remember what’s going on in their lives. During your first conversation, Joe’s go-to question is “What’s been the highlight of your week?” If they say “My son made All-Conference for football” or “I just closed on a big business transaction for the company I’ve been working on for two years, or six months…”, bring that up. I don’t know what you would say to follow it up, I’m sure you can figure it out, but bring that up during the next conversation.

Again, raising money is all about building trust with people, and if you actually care about them and remember them, then they are going to trust you more. So that’s number one, take notes.

Number two is to keep in mind that this is a conversation, not a presentation, so you aren’t gonna read through your company presentation slides; you’re not going to do a webinar where your company presentation is up and you go through each slide and say “Any questions on this slide? Any questions on this slide?” Number one, they’ve already seen the company presentation – that’s why we’ve sent it in the first place – but number two, if you’re presenting, that means you’re talking… And the goal of the conversation is to actually get to know them, identify their ideal investment, and then answer any questions they have. But if you’re presenting the whole time, then they’re not gonna have a chance to tell you about themselves, to tell you what their ideal investment is, and ask too many questions. So no matter what, do not present to them, do not read through the company presentation.

Number three is going to be the 70/30 or 80/20 rule, them to you talking. They should talk at least 70% of the time, whereas you should only talk at most 30% of the time. They need to talk, so that you can accomplish your goals of that conversation, which is to get to know them and their investment goals. Now, the only exception is if they obviously want you to lead the conversation. If you ask them about their background and they say “Oh, I’ve been interested in real estate for five years, I’m a pilot and I live in Tampa.” If that’s all they say, then obviously they want you to lead the conversation, so make sure you’re prepared to actually lead the conversation with questions to ask them, and based off of their answers to those questions, what you’ll say next… Because the last thing you want is a bunch of awkward silence.

Now, when you know what their investment goals are, which you will be able to accomplish by not talking and letting them talk, then you can match them up with the ideal investment solution. This investment solution could either be them investing in your deals, or you might have to refer them to someone else… But by taking the time to listen to them, speak with them, and then by giving them a referral, now they know what you do, and who knows, maybe a year from, two years from now, ten years from now they come back and invest in your deals.

So the two main questions that you want to ask the investor is 1) what is your background, and 2) what are your investment goals? So to lead off the conversation, you should ask them about their personal and investing background. So I’d say “Billy, tell me a little bit more about your background, as well as your investing background”, and then just let Billy go; let Billy talk as much as he wants. And I don’t know about you, but if people let me talk and ramble on, I guess kind of like these podcasts, it makes me like them more… And when you like someone, you trust them. So if you are allowing your investors to do all the talking, they’re going to like you more and trust you more, or at least like you faster and trust you faster.

At the same time, you are also deciding if you actually want to partner with them. This is less relevant when you’re first starting out; you should probably take anyone who is interested in investing. But eventually you might be interviewing them as much as they’re interviewing you, and you want a person who’s an ideal fit to invest in your deals.

Now, the two signs, or two red flags that you might not want to have someone invest in your deals is 1) contempt – if they show you contempt, or if you show them contempt, then it’s probably not gonna be a good idea… Because if things get rocky at all and you hold contempt towards them, or they hold contempt towards you, it’s not gonna be a very pleasant situation. And in fact, things might get rocky because of the fact that one party holds contempt for the other one.

Then another reason would be if they ask you a lot of accusatory questions that don’t convey that they trust you. So if they’re being kind of snotty and ask you questions that make it seem like they think you don’t know what you’re doing and that they’re better than you, and it’s not going to be a partnership, then it might make sense to pass, because again, if things get tough — or this might be the reason why things get tough, and that is not going to be pleasant.

So learn about their background, and then again, of course, knowing about their personal background will allow you to bring that up on a future call with them. But the next question, and probably the most important question, is to ask them what their investment goals are.

After they’ve talked about their background, whether that’s been for 30 seconds or for — I guess not an hour, but maybe 20 minutes, you wanna transition into asking them questions about their investment goals. So ask them first “What does a good passive investment look like to you?” One, that question eliminates any active investors, because you’re saying “What does a  good PASSIVE investment look like to you?” and if they say “Well, I wanna be involved”, then you know they’re not a good fit for your deals… But also, it’ll help you understand what’s important to them.

They might say “I want alignment of interests”, or “I want 10% return on my capital”, or “I don’t wanna lose money”, or “I wanna be comfortable with the person and the team calling these shots.” Whatever their reason is, you want to focus the conversation on the aspects of apartment syndications that will fulfill those needs. Again, this is why you don’t present, because when you present, you’re telling them everything about the process, but most likely 90% of that stuff is irrelevant to them, at least for now, and they only wanna know why apartment syndications will help them solve their goals.

For example, if they say “The idea passive investment to me has a lot of alignment of interests”, I would say “Well, that’s great, because I personally invest at least $50,000 in all the deals, and I have a mentor who has a portfolio of over 450 million dollars in real estate who will be signing on the loan.” Boom! Two examples of alignment of interests.

Or if they say “I want an 8% or a 15% IRR, or an 8% cash-on-cash return”, I would say “Well, when we underwrite deals, we only submit offers on deals that have at least a 15% IRR, and at least an 8% cash-on-cash return to the investors.” That’s how you qualify the deals; I don’t ever wanna guarantee a return, because that’s not what apartment syndications is  – it’s not a guarantee, it’s an offer.

The same things applies to “I don’t want to lose any money” – you can mention the strategies you put in place so that at the very least they will get their capital back at the end of the business plan. This would be the three immutable laws of real estate investing, which is buying for cashflow, not appreciation, securing a long-term debt, and having adequate cash reserves.

And if they say they wanna be comfortable with you and the team calling the shots, then you know that you need to discuss your team members, their background, you’re going to want to meet with this person more frequently than a person who just cares about making money… Again, as you’re kind of getting an idea, the reason for wanting to invest, or their idea of a good passive investment – that will determine how you will approach the conversation.

Now, you also want to learn what type of deal they prefer to invest in, if any. If they’re more advanced, they might say “I only invest in new construction, or distressed, or value-add, or turnkey.” And then you also wanna know how much money they might be interested in investing. You could ask the following question – “If I find something that I think you might be interested in, what would be the range of investment you’re looking to do?” Because if you don’t ask them how much money they’re willing to invest, you won’t know how much money you’ll be able to raise, which means you won’t be able to set a goal, you won’t be able to set an investment criteria, and things like that. So “If I find something that I think you might be interested in, what would be the range of investment you’re looking to do?”

Now, from there you can include the conversation, see if they have any other questions based off of your company presentation, but these conversations can really be anywhere from a few minutes, to half an hour, to maybe even an hour, depending on the person. The shortest phone call that Joe has ever had, that resulted in the highest investment, was when he had built a relationship with someone via e-mail before; they had to go back and forth for a while, until this person finally agreed to hop on a call with Joe. The call was about eight minutes, where Joe learned about his background, and then the investor asked Joe what he had… To which Joe replied, “I happen to have a deal, and I will share that information with you.” That person ended up investing $100,000.

So sometimes it’s just that fast – quick phone call, boom, 100k in the bank – whereas other times you might be on the phone with them for half an hour or an hour, they ask you a ton of questions, but they never invest… Although “never” is probably not the right word, because you never know. If somebody doesn’t invest for five years, they haven’t invested yet, but they still might invest in the future, so… Unless there’s contempt or accusatory questions, or unless they’re willing to be active, then it’s worth having a conversation with them, especially upfront, for your first couple of deals.

This concludes part five, where you learned how to set up the intro call with prospective investors. You learned the three keys to a successful intro call, which were take a ton of notes, it’s a conversation, not a presentation, and the 80/20 or 70/30  them to you talking… As well as the two main questions you want to ask the investor during the call, which were “What is your background?” and “What are your investment goals?”

In part six, we are going to discuss how to overcome passive investor objections. It’s your first deal, you’ve never done this before – they’re likely going to have objections to giving you their capital, and we’re going to discuss how to overcome that challenge.

To listen to parts one through four, as well as to other Syndication School series about the how-to’s of apartment syndications, and to download your free money-raising tracker spreadsheet, visit SyndicationSchool.com.

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

JF1570: How To Raise Capital From Private Investors Part 4 of 8 | Syndication School with Theo Hicks

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Yesterday Theo gave us six ways to find passive investors for our apartment syndication deals. Today we’ll hear six ore ways to find our limited partners. If you’ve been following along with this series, you know how important raising money is for this process. These 12 ways to find investors are tested and proven to work by Joe himself. These tactics and strategies have raised enough money from passive investors to close on over $460,000,000 in apartment communities. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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https://www.dropbox.com/s/wca7zbnpq5p0g23/Money%20Raising%20Tracker.xlsx?dl=0


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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 syndications. As always, I am your host, Theo Hicks.

Each week we air a podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of this series we will offer a document, or a spreadsheet, or some sort of resource for you to download for free. All of these free documents, as well as the past Syndication School series, can be found at SyndicationSchool.com.

This episode is going to be a continuation of what will likely be a six-part series entitled “How to raise capital from passive investors?”

In part one you learned how to determine your current mindset towards raising money, as well as how to overcome any fears or limiting beliefs you have about raising money, as well as why someone will actually invest with you. In part two, you learned the differences between the joint venture and syndication strategy, as well as the differences between the two main apartment syndication offerings, which are the 506(b) and the 506(c).

Then yesterday, in part three, you learned three ways to find people to invest in your apartment syndications. Those were a thought leadership platform, Bigger Pockets and meetup groups.

This is part four, and we are going to continue to discuss various ways to find people to invest in your apartment syndications. We did three yesterday, and we have nine more to go, so hopefully we’ll cover all of those. If not, we will continue this series next week, with the remaining ways of how to find the passive investors, as well as start the discussion on what to actually say to these investors once you have found them. Let’s jump right into it.

Number four, the fourth way to find passive investors is going to be through volunteering. A strategy that has way more benefits than just you obviously raising money would be for you to find a non-profit that aligns with your values and interests, and then you go there and volunteer.

The ways to do this – you might have a charity or a non-profit in mind already, but there are a lot of good resources online that list out the charities in your local area. It’s as simple as googling a couple of things you’re interested in, with the word “volunteering” at the end. Hospice volunteering, or young entrepreneurs volunteering, or nonprofits, and  finding some sort of nonprofit to actually go volunteer. The process of volunteering there might be different; I know Joe had to go through a couple trainings first before he did his hospice; I volunteered back when I was in Cincinnati for a nonprofit, and I had to do a background check and things like that.

So there might be some hoops to jump through, but the primary goal of volunteering is obviously to give back, to contribute to your local community… But your secondary goal is going to be to get on the board of the nonprofit. Again, longer-term strategy. You’re not going to work there for three months and then get on the board, but the reason why you wanna get on the board is because of the relationships you’re going to form with the board members. Because if you listened to yesterday’s podcast, all these strategies are about building trusting relationships with people, and if you are able to build trusting relationships with these board members, these board members are likely going to be affluent, which means that they are themselves a high net worth individual, and they know other people who are high net worth individuals.

Once you’re on the board, your goal is to genuinely form relationships with this person outside of volunteering with them. You wanna truly bond with these bond members personally, talk about your family and things outside of just work and actually volunteering.

Also, you’re gonna have the same approach for people that are volunteering this as well, but you’re doing this without expecting anything in return. You can’t go in with the idea that you’re going to build a personal relationship with them for six months and they’re going to invest with you, because 1) that’s not genuine, 2) if you do that and they don’t invest after six months, you’re probably gonna get angry and ruin the relationship, and that is proof that it wasn’t genuine in the first place.

So you wanna do this slowly and organically over time… And heck, if you’ve got time, you could repeat this for multiple charities. If  you start looking into charities and there’s two or three that you’re really interested in doing, then just them all. But I’d start with one, and then kind of grow from there.

Again, the primary goal is to give back and to contribute, the secondary goal is to get on the board, because these board members likely have a lot of money, and will ideally invest in your deals eventually.

I guess one more thing about this, and really any other conversation you’re having with other people – we’ll get into this  a little bit next week – you want it to be an organic transition to talking about investing. You don’t want at the first board meeting you go to, have an [unintelligible [00:08:07].06] agenda where you get to talk about your real estate business. You build a personal relationship first, and then it’ll naturally transition to them talking about their business goals or financial goals, and then you can learn about what they’re investing in, and how much the return is, and then that’s when you can mention what you’re doing. So let them bring it up. So that’s number four, volunteering.

Number five is going to be referrals. Again, this is not something that’s going to happen instantaneously, although it’s possible, but you’re going to follow one of these 12 strategies I’m talking about and find an individual to invest in your deal. Then they invest in your deal and you are able to provide them with the returns you projected, or ideally you’re able to exceed those returns, and they’re so happy with your performance that they mention to five of their friends about how great of a syndicator you are and how you’re making them all this money. Then those people will become interested, and their friends [unintelligible [00:09:07].26] the landing page on your website, they fill it out and you have a conversation with them, and then boom, you’ve got a few more investors added to your list.

Referrals is going to be a huge source of new investors, especially once you are established. All this work you’re putting in now is in order for you to get that snowball effect, and eventually the momentum of all of your previous work will allow you to have referrals begin to pour in, and then you won’t have to spend as much time focusing on how to find more investors, rather on how to cultivate the relationships we have with existing investors. Ideally, it gets to the point where you’ve got so many investors that when you send out a new deal, you’ve got the commitments  filled up within a week, and you’ve got a very long waitlist of people who want to invest in that deal. Then that will allow you to start to increase the number of deals that you can do, as well as the frequency at which you do these deals. So number five is referrals. That’s going to be big once you’re established and have done a few deals.

Number six is going to be advertising. And again, this is something that you’re gonna wanna talk to your attorney about, because there are gonna be restrictions on the types of advertisements you can do for the 506(b) offering, whereas for 506(c) I don’t think there’s really anything – you can advertise as much as you want, but make sure you consult with your attorney first, and figure out which offering you’re going to do, and then figure out what types of advertising you can do.

But for 506(c) in particular, you are allowed to advertise your deals. So if you have a deal under contract, or you’ve identified a deal and you don’t have enough passive investors or enough verbal commitments yet, then you can create a targeted Facebook ad, or you can put an advertisement in the newspaper, or you can become a sponsor on someone else’s thought leadership platform or newsletter. Really any marketing strategy or advertising strategy that you would use to attract a customer, you can figure out a way to use that for your apartment syndication deal, and raise money.

Again, for any advertisement, before you actually create it, make sure you consult with your attorney first, and make sure you are in line with securities law. That’s number six.

Number seven is going to be your current network. For your first deal – and maybe your first few deals after that – the majority, if not all of your investors will be people you already know. These are people that you’ve known for at least a couple of years… Something that you’re going to want to do at this stage in the process is do a formal analysis of your current network in order to determine if anyone in your current network is a prospective passive investor.

Again, this will depend on whether you’re doing 506(c) or 506(b), because if you’re doing 506(c), you can only attract accredited investors, but if you’re doing 506(b), then you can attract sophisticated investors that you have a pre-existing relationship with… So more than likely – and again, consult your attorney first, but more than likely your first deal is gonna be that 506(b) where you are raising money from sophisticated investors that you have a pre-existing relationship with. And in order to do so, here is a process for formally analyzing your current network, with the purpose of getting them interested in investing in your deal.

This is before you even have a deal, because right now in the syndication school series we haven’t even talked about finding deals yet.

So this is before you have a deal – step one is to create a list of all of your personal connections. Really anyone that you’ve known for at least a couple of years. Anyone at work, anyone in your family, any friends, any extra-curricular activity that you do – this could be you’re volunteering, this could be if you’re playing on a football team, or if you play pickup basketball, the people you know from the gym, obviously people at work, but also previous jobs; this could be people you went to college with, people you went to high school with… Really anyone that you could think of that you had a relationship with for more than two years, write them down.

Maybe it’ll help by going to Facebook, and going to your friends list and starting there, and then maybe going to LinkedIn next and seeing your business connections and creating a list there… So create  an exhaustive list in Excel of all the people that you know.

The next step is going to be to categorize these individuals based on how you know them. You have a category for family, you have a category for friends, but it should be more specific than friends; have a category for Cincinnati friends, and a category for college friends, and then a category for previous roommates, and then a category for people you know from your first job, your second job, your third job. You get the idea. Put every single person on that list into a category. That could be a few category, or that could be 20 categories, it doesn’t really matter. The more categories, the better, because that means you know more people.

Once you have them broken into categories, the goal is to get one person from each category to say “Yes, I’m interested in investing” or “Yes, I’m interested in learning more.”

Again, I will mention how to get them to say this next week, but once they’ve done that, then with their permission you want to namedrop that person to others within that category. For example, you’ve got your work colleagues, and let’s say you get Bob to become interested in investing; then you can go to Billy, and I’ll tell you exactly what to say, but you’ll namedrop Bob, and say “Bob is interested in investing.” Then they’ll think to themselves “Oh, Bob is interested in investing? Well, I know Bob is really smart, he’s a fiscally-responsible guy, so I’ll definitely take a look at this.”

It’s the concept of social credibility. We’re more likely to buy something/to do something that someone else that we know has already bought or done. We want to leverage this concept in order to get others in that category to become interested in investing in our deals.

For Joe’s first deal, as an example – the raised $843,000 from 12 different people. These are people that he’d known for 2 to 10 years, and none of them were actually family members, which is quite impressive. So three were colleagues from his advertising days, so people that we worked with through advertising. Two were from the Texas Tech Alumni Advisory Board; Joe was on the advisory board of the Texas Tech Alumni Association. Two of them were actually friends of his brother’s… So they don’t necessarily have to be — well, I’m sure Joe knew these people, since he grew up with them.

He also had a college roommate, and then someone that he lived with after college invest in his deal, as well as two high school friends, and then one person from his flag football team. Now, this is what you will do starting out, but it doesn’t necessarily have to be people that you know directly.

Another strategy is to tap into the current network of your friends and family. A really good example of this is one of Joe’s clients. He was able to raise one million dollars for their first deal, and $350,000 of that came from his wife’s network… Which naturally transitions into number eight way to find passive investors, which is to build relationships as a couple.

Joe’s client was able to build a relationship with multiple couples that his wife knew, [unintelligible [00:16:37].03] the conversation with their people in his wife’s network, and doing so, they were able to get verbal commitments, and then actual commitments of over $350,000.

Now, the reason why this is a great way to find passive investors is because building relationships as a couple will add an extra dimension to the relationship. So you’re able to establish trust quicker, and the bond is stronger because not only are you forming a relationship with the husband or wife, but your husband/wife is also forming a relationship with both of then, but more likely their significant other.

For example, if me and my wife were reaching out to people, maybe through her work, we would speak with them, eat dinner with them, and naturally the conversation would transition into investing… And since my wife already knows them really well, that gives me an extra level of credibility, as opposed to me approaching them and them not really knowing who I actually am.

So when you’re working with your significant other, and whether they’re already friends, or even if they’re not friends already, they’re more likely to invest.

A different example would be if I start to get interest from people in Tampa, and I start meeting with them in person, rather than me just meeting with Billy one-on-one, I’ll say “Hey Billy, do you and your wife want to go get dinner with me and my wife?” So me and Billy become friends, our wives become friends, and now we have a more trusting relationship and they’re more likely to invest.

Examples of these, as I said, could be dinner, but it could also just something as fast as drinks, and then as you build a strong relationship, you can actually do weekends away together – a trip to a lake house, or a trip to Las Vegas, or a trip to a real estate conference. It really depends… This is a pretty unique strategy.

Again, all of these strategies take a lot of time, and this particular strategy – you need to have a significant other to actually do this, but… I don’t see why you couldn’t do it with a really close friend too, but I think this would work much better with a significant other. So that’s number eight.

Number nine is going to be to partner. This is kind of a hack, where you don’t necessarily have to find passive investors, you just have to find someone to find passive investors on your behalf. This is what I did – I partnered with someone who focuses 100% on raising money and nothing else, while I focus on everything else. So I don’t have to really implement any of these strategies. I do have to keep an eye out for, obviously, potential passive investors and then send their contact information to my partner… But I don’t have to focus on money-raising strategies because I’ve got someone else to do it with me.

Additionally, it doesn’t necessarily have to be a business partner, but you could also partner with a real estate brokerage or a property management company, or a mortgage brokerage, and they could invest themselves, or they could also raise money.

During my conversations with various real estate brokerages, and — I don’t think I’ve found any property management companies, but definitely real estate brokerages and definitely mortgage brokers, who I obviously was talking to them with the purpose of the real estate brokerage to have them find me deals, and for the mortgage broker to have them help me secure debt for deals… But I did come across maybe two brokers and one mortgage broker who also said that they have a money-raising arm, so they can actually help me raise money for my deals. What’s good about that is there’s also an extra level of alignment of interest, because someone who has an active involvement in the deal besides you is also putting their money in the deal…

So the mortgage broker is investing in the deal, the real estate broker who found the deal is investing in the deal – alignment of interest between your team and your investors… And then of course, they themselves might actually invest their own capital in the deal, or they themselves might have some sort of discounted rate in order for an equity stake in the deal. So that might help you raise some money, but it really depends on the actual structure; if you’re just giving away equity, then of course that’s not helping you reach your funding goal… But if they’re going to bring money into the deal, whether through their company or they themselves personally, that is another great way to actually raise capital.

And then going back to the “partner with a money-raising expert”, there are a lot of people out there who could potentially sponsor your deal, and they could do more than just raise money for the deal, but that will just be one particular aspect of the services that they offer. So it doesn’t have to be someone that you partner up with and you guys do it for every single deal. It could be a one-off thing where for your first deal or for your first two deals you can find someone to find one of these sponsors who can help you raise money, and then once you’ve kind of established yourself and you’re able to start getting investors yourselves, you can go on your own. So that’s number nine, partner.

Number ten is a mentorship. When you get a mentorship – and again, this is a paid consultant who is an active apartment syndicator, and obviously is successful as well… Because one, they can actually teach you how to raise capital; so they could do what I’m doing, which is tell you how to do it, but then since they’re your mentor, they can kind of walk you through the process in more detail and make it more personalized to you, since you’re having a back-and-forth face-to-face conversation.

They may also bring you on the GP side of their own deals, and in that case you can raise money for their deals, but that’s good because you don’t need to raise 100% of the funds. If it’s a ten million dollar raise, obviously you can’t do that yourself, so you wanna be able to do the deal… But if they bring you on the GP, then maybe you only have to raise a couple hundred thousand dollars for the first deal, and maybe a couple hundred thousand dollars more for the second deal. That way you could implement your learnings without having to wait to actually execute a money raise until you’ve got verbal commitments of 5-10 million dollars; you can do it once you’ve got 50k, or maybe even one investor. Maybe they’ll just let you be the GP for one investor.

And of course, they will also likely have connections to help you raise money for your deal. They’ll know a business partner you can go with, a sponsor, or they themselves will sponsor the deal, or they can allow you to tap into their network of actual passive investors to fund your deals… Of course, likely for a cut of the profits.

Number eleven is going to be having alignment of interests. So structuring your deals to maximize alignment of interests with your passive investors will result in them more likely investing in your deal. Alignment of interests basically means that — of course, your investors’ interests are to make money, but if you or your team members don’t have any skin in the game, then the interests aren’t really aligned, because you don’t make money the same way that they make money, or your team members don’t make money the same way that your passive investors make money.

You want to have an alignment of interests where all parties’ ways of making money are aligned, or ways of losing money are also aligned. I wanna go over the alignment  of interests in next week’s episode, because this is going to be a strategy for overcoming objections that passive investors have… And they’re gonna have objections, they’re not just gonna give you their money without any pressure or pushback… But we’re gonna talk about how to overcome these objections, especially when it’s your first few deals.

Number twelve, lastly – this is  a combination of different strategies, but it’s to be creative. Think of creative ways to build relationships with high net worth individuals, or ways to create relationships with people who are interested in passively investing in deals. Here are just a few examples of what Joe does.

Number one, he will host a board game night with the local investors. Very simple – just investors playing board games at his house for a few hours, and getting to know each other better. He also traveled the country in 2018 and hosted happy hours for investors. Obviously, he’s meeting with the investors that are local to him, because that’s pretty easy, but in order to meet face-to-face with investors out of state, this was a strategy – he scheduled a night where he’d have a happy hour, and he’d fly out there and all the investors would come to the bar and they’d all hang out and drink together.

Joe also sends out monthly newsletters to his list of current and prospective investors. Anyone who’s on his e-mail list will get a newsletter every month. Of course, the people investing in his deals get updates on the deals every month, and then whenever he has a new deal, that gets sent out to the e-mail list… But additionally, anyone on that e-mail list, whether they’re an investor or not, will receive a newsletter. That again is actually something that we will publish interviews with other passive investors just to kind of explain to people what it’s like to be a passive investor, from the eyes of an actual passive investor.

Joe also has a passive investor FAQ page on the website. Essentially, it’s a page that will walk someone who has no idea what passive investing is, to figure out whether that’s a good strategy for them. If it is, what should they invest in, and if they choose to invest in apartment syndications, here’s everything you need to know about passively investing in apartment syndications.

Then we’re actually going to use that content, as well as feedback we’ve received from investors, as well as more in-depth research to create a passive investor handbook in 2019. That’s gonna be  our book for 2019.

These are, again, creative ways specific and unique to Joe for how he builds relationships with these prospective passive investors. For you, you will wanna come up with your own creative ways, ways that aren’t on this list, and implement those. Of course, it’s gonna be trial and error, and you will learn what works and what doesn’t work as you progress through your career… But the more creative you are, the more personal it’s going to be, and the more trust that you’re going to build, because it’s going to be authentic and real.

So those are the 12 ways to find passive investors. In this episode we went through nine, in the last episode we went through three, for a total of 12. We’re going to provide you with a free resource with this series, and that’s going to be the money-raising tracker, which is a spreadsheet which allows you to input as you find these people and begin to have conversations with them, which we’ll go over in the next week’s series… You’ll want to input that information into your money-raising tracker, so that you know how much money you have in verbal commitments… Which, if you remember from the series about setting goals, you need to know how much money you’re capable of raising to set your 12-month goal, and in order to know how much real estate you can actually syndicate. To download that document, SyndicationSchool.com, or in the show notes of any of the parts of this series.

This concludes part four, and in part three and four combined we learned the 12 ways to find passive investors. In this particular episode we talked about volunteering, referrals, advertising, tapping into your current network, building relationships as a couple, partnering, mentorship, having alignment of interests and getting creative.

In part five and six  you’re going to learn how to communicate with these prospective investors once they are found, as well as an exhaustive list of all of the objections and potential questions to expect from passive investors, and if they’re an objection, how to overcome that, if it’s a question, how to actually answer them.

To listen to parts one through three, as well as the other Syndication School series about the how-to’s of apartment syndications, and to download your free money-raising tracker, visit SyndicationSchool.com.

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

JF1562: How To Raise Capital From Private Investors Part 1 of 8 | Syndication School with Theo Hicks

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Were back with more syndication school episodes. Today we’re going to start talking about raising the money from private investors. You’ll need to get verbal commitments from investors so that you’ll know how much you can raise and what kind of properties you can buy. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

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

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

 

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

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

This episode is part one of a series entitled “How to raise capital from passive investors.” This is series number 11, and I highly recommend that you go listen to series one through ten. I know it’s gonna take a while to listen to those, but everything that we have discussed so far has been leading up to this moment, which is the moment where you are now finally ready to start generating interest for your deals and attempting to raise money.

After that, we will start talking about how to actually find deals, and you’re ready to actually start your syndication journey. But before you start  finding deals, you need to actually have verbal interest. The reason why, if you remember back to when we set our goals, you need to know how much money you’re capable of raising, because that will determine the type of property you can buy.

If I’m only capable of raising $50,000, then I’m not going to be looking at 100-unit deals. But if I’m capable of raising a couple million dollars, then that’s an entire different story. Plus, understanding how much money we can raise will help us set our 12-month goal. But more importantly, we need to know how much money we can raise to actually set investment criteria for the types of deals to look at.

This will be part one, where we will talk about the introduction to  raising money. First, we’re gonna go over a task to gauge your mindset as it relates to raising money. Then you will learn how to overcome any fears or limiting beliefs you have about raising money, and then we’ll talk about why someone will even invest with you in the first place.

All of this episode is basically focused on mindset, because for some, raising money and using other people’s money to buy real estate could be something that you are a little hesitant at doing.

In The Best Ever Apartment Syndication Book we offer a five-question sanity test to essentially gauge where you’re at and how you think about using other people’s money… So answer these five question; they’re just yes/no questions:

Do you have a fear of using other people’s money? Yes or no.

Do you have reservations about partnering with investors?

Do you think your relationships with your friends and family will be forever changed if you partner with them on a deal?

After successfully completing ten or more syndications, do you think you’ll be ten times more concerned with gaining and maintaining trust with your passive investors?

And then finally, do you think after you’ve done ten or more successful syndicated deals your ongoing awareness of the importance of being trusted with investors’ capital will be magnified by ten times?

Unless you’ve actually used other people’s money for investing before, then you will likely answer yes to all these questions. In the book we made a joke about if you don’t answer yes to these questions, you’re probably a sociopath, which — obviously, this isn’t a sociopath test, but the whole entire point is that the sanity test lets you know that it’s okay to be, for example, slightly fearful of using other people’s money… Because if you’ve never done it before, of course you’re going to have some sort of anxiety around it, just like anything new that you are trying; you’re not gonna go in there super-confident, because at the end of the day, you don’t really know what you’re doing.

The second question about “Do you have reservations about partnering with investors?”, of course you should. It’s a huge responsibility. They’re giving you their hard-earned capital, and you are using that to hopefully make them money, but obviously at the end of the day things could go wrong and you might not make them money. So it’s a pretty big burden on your shoulders to make sure that you are doing things properly.

The third question – “Do you think your relationship with your friends and family will be forever changed if you partner with them on the deal?” Of course it will. It’s probably different when a stranger invests in your deal than a family member, because when a stranger is investing in your deal, you’ve only known them for as long as they actually reached out to you, whereas for a family member you’ve known them for your entire life… So there’s a lot of extra baggage that comes with that. And typically, your relationship with your family is a lot more personal, whereas if they actually invest in your deal, that relationship is gonna have the added business dimension. And you know your family members really well. Sometimes they might be really weird about money, so definitely expect if you’ve got your family investing in deals for things to change with that relationship.

Question number four, “After successfully completing ten or more syndications, do you think you’ll be ten times more concerned with gaining and maintaining trust with your passive investors?” Well, after doing ten deals with the same passive investor, you’re definitely going to have a much closer and stronger personal connection with them, and you’ll look at them as more of a friend, and as a result, you’ll want to take care of them more. So yes, you’ll be way more concerned about making sure you’re maintaining that trust factor with them, and that you are able to return their capital to them, because they’re your friend now.

And then lastly, do you think that after doing ten or more successfully syndicated deals your ongoing awareness of the importance of being trusted with investors’ capital will be magnified by ten times? Of course, the answer is yes, because they are actually helping you to achieve your financial goals by investing in the deal, so you want them to trust you, so they’ll keep coming back… But at the same time, not only do you want them to trust you so they keep coming back, but one of the main sources of new investors are going to be referrals. So if they trust you, then they are more likely to refer you to one of their friends, and that can start a domino effect, where you’ve go referrals from them, and then that person refers you to someone else, and you  can eventually grow your investor database based solely on these referrals.

Overall, the purpose of that five-question sanity test was to let you know that it’s okay to be afraid, and it’s okay to have reservations, and we are going to talk about how to overcome that fear and reservations in this episode.

So how do you overcome this fear or this barrier of using other people’s money to invest in real estate? This is not the most common question, but it’s a pretty common question… Maybe not asked exactly in that form, “I’m afraid to use other people’s money”, but you can see it subtly through these questions that the reasons why they’re asking that question is because they’re probably a little hesitant about using other people’s money to raise capital. I know I’m for sure a perfect example of that.

The way you overcome this fear – it really varies from situation to situation, and person to person… So I’ll just give you a few examples, because examples are really the best way to explain things.

For Joe, it was out of necessity. Now, keep in mind he has always been confident with raising money; it was never something he was necessarily afraid of, but this is more of a story of how he got to the point where he needed to raise money, and if he was afraid, his need would have allowed him to overcome that fear… Because he had a goal and he needed to accomplish that goal, and raising money was the only way.

So Joe initially started off by purchasing four single-family homes in about three years. His original goal was to make $10,000/month, and I believe with these four properties he had about $1,000/month coming in, cashflow. But the problem was that he couldn’t see a quick way to scale this single-family business to $10,000/month, because four properties generated a $1,000, so he would need 40 properties to generate $10,000/month… And he didn’t know how he would get there. He didn’t know how he would save up the down payments, mostly, for all those properties, let alone actually qualify for financing, since you’re only allowed to get up to ten of these residential loans.

At the same time, he was spending a lot more of his time managing these four properties than he would actually want to. And then, of course, only making $1,000/month, if you have one move-out or one large maintenance issue, then all that $1,000 goes away, and all that time and three years of energy was not necessarily wasted, but he was that much further away from his $10,000 goal.

So he started to investigate ways to overcome this problem. He went to the Rich Dad, Poor Dad seminar, where he heard that the only way to get rich was to not do single-family residence, but to do apartments or mobile home parks. Joe wasn’t familiar with mobile home parks, although he had lived in one when he was younger… But he did live in an apartment at the time, and decided to choose apartments over mobile home parks for his way to reach that $10,000/month goal.

But of course, the same issue arises, which is how do you afford the down payments, and then Joe discovered the apartment syndication investment model, and obviously the rest is history.

Again, he wasn’t necessarily afraid of using other people’s money, but if he was, then he would have been able to overcome that fear out of necessity. So if you’re in the same situation and you have a goal of making a certain amount of money per month, or something else that you want to accomplish, and you aren’t able to do it on your own, by using your own capital to finance deals, then you need to ask yourself “What’s worse? Me being afraid of talking to other people and raising money, or would I much rather be afraid, but be able to reach my goals? Or would I rather not reach my goal, but not have to face an investor and ask them for money?” It kind of just depends on who you are, but obviously, for Joe, actually talking to investors and reaching his goals was better for him than just not doing it, and trying to figure out how to actually scale these properties.

Now, even though Joe, again, wasn’t necessarily afraid starting out, a better example would be me, because I never even imagine myself raising money for deals, because I was afraid of using other people’s money… And the way that I overcame this fear was a combination of things. Number one, it was just sheer luck. If I had never met Joe, which was really sheer luck… I happened to become interested in real estate around the same time Joe moved to Cincinnati, and Joe was also active on Bigger Pockets, and also was interested in starting a meetup, so the stars aligned… So I met Joe, and obviously Joe raises money, and that was kind of my introduction into the concept of apartment syndications, whereas before I had no idea that that even existed.

Secondly, it would be experience and education. Through working with Joe, I obviously have gained a ton of experience and knowledge about the syndication process, and obviously education and experience are the two main requirements to becoming an apartment syndicator. You can learn more about that in the Syndication School episodes 1499 and 1500.

Obviously, with that experience and education I had more confidence in my ability to successfully implement a syndication business plan, which then in turn gave me a little bit more confidence in raising money… But I still wasn’t there yet. I was still afraid. I still was like “Well, I have all this information in my head about syndications”, but earlier I said that people ask questions, and they don’t necessarily say “I’m afraid of raising money. How do I get over it?”, but they’ll ask a question that is assuming they’re afraid. One of those, I think, is “I don’t know how to raise money” or “I don’t know anyone to raise money from”, whereas in reality what you’re saying is that “I’m too afraid to approach anyone in my network to ask them for money.” At least that’s what I was doing. I would say I didn’t know who I’d raise money from, I didn’t have anyone in my network who was high net worth, whereas in reality I’m sure I did, but I just was too afraid to actually do anything.

But the big game-changer for me was actually the Best Ever Conference in 2018, where I got dinner with a handful of people, but one of the people at the table had just completed their first syndication deal. We were talking about kind of the process, and what he did, and just based off of his situation, and the fact that he did a deal, I told myself, “Well, I’ve been working with Joe, and I definitely have a lot more of an education foundation than he does, and I definitely have more experience as well with real estate…”, however the key difference was that he had a partner. So that was kind of the key that I was missing the entire time. It was like, well, if I don’t want to raise capital for a deal, if I’m too afraid to, sure, I could do sort of what Joe does and just get over that fear, and out of necessity do it, or I could just partner with someone who can raise money, and I can do everything else…

And there’s still obviously that anxiety, because if I’m doing the acquisitions and the operations of it, then I’m still responsible for the money that these people have invested in the deal… But I’m not the one that’s actively going out there and actually raising the capital. So what I did is based on the conversation with the guy at the Best Ever Conference, I decided to partner up with someone who had experience raising capital.

Now, the last reason why someone might be afraid of raising capital, and this likely applies to me as well, and it probably applies to you, and it might be  a little harsh, but this is the Syndication School, so we tell the truth here… And that reason would be selfishness.

Here’s examples that we use again from the Best Ever Apartment Syndication Book; Joe came up with this analogy, and I really like this analogy. Imagine that you’re living in a town that has a plague that might wipe out 50% of the population; it’s a really nasty plague. Let’s say the Black Death has re-emerged in your hometown, and you happen to, for some reason, have the cure for this plague… But again, for some reason, the only way for you to get this cure out to the public is for you to go to the town hall, go up on stage in front of the entire town population, half of which are infected, and give a speech about how you came up with this cure. You basically have to sell the cure to them, because you’re some random guy, so how do they know the cure is gonna work? But let’s say you have stage fright, and you’re too afraid to go up on stage and present this cure to an audience, so you just decide not to do that because you don’t wanna be uncomfortable.

Obviously, thinking about it in that situation, of course you would go on stage and you would forget about the stage fright, and  you’d go up there and you’d probably be afraid and sweating, but you still get over it, and present the cure and save the town.

Now, obviously, helping someone achieve their financial goals through apartment syndications isn’t as severe as a plague, because no one’s going to die; at least 50% of the population isn’t going to die if you don’t do a syndication… But it’s still kind of the same concept, because you have the potential to positively influence people’s lives in a positive way. Just by listening to this school, you are aware of the syndication concept. Now, it doesn’t mean you can do one today, or tomorrow, or a month from now, or even a year from now, but just the fact that you’ve been given access to this information is such a rarity, because not many people know about syndications. So since you’re one of the few people that know of its existence, then there’s no reason why you can’t put your comfort aside, put whatever it is you’re afraid of aside, and spend the next couple of years educating yourself, getting experience in order to raise capital for deals, and influence people’s lives in a positive way.

Obviously, you’re gonna influence your investors’ lives, because they’re investing in your deals, instead of investing in the stock market or in something else, or just not investing at all… You’re giving them a great opportunity to invest their funds into a large apartment deal and see some pretty solid returns.

Obviously, that will have a positive influence on their lives, but it’ll also have a positive influence on your close bubble of people that you’re close with, your circle of influence, because by you doing these types of deals, they could also obviously invest in those deals as well, but you’re going to have more money and more freedom to obviously improve the lives of those around you.

And then lastly, you’re going to positively influence the lives of people all over the world. A belief that Joe has is that people are inherently good, and if they actually have more free time, then they’re gonna be able to do more things. And if you are an apartment syndicator and these people invest in your deals, and are able to increase their passive income to a point where they can leave their full-time job, then they’ll have 40 hours a week extra to spend on doing good in the world.

So you really have no idea how much of a positive influence you starting a syndication business can have. Of course, the only way to find out is to actually do it, but these are just a couple examples of things that will be benefitted, that are outside of yourself.

Now, of course, if you need to be selfish, then you can still do apartment syndications and still raise money, and just instead of saying how much you’re going to improve the lives of others, you can say you’re gonna improve your own life, because obviously you’re gonna make a ton of money, too.

So I’m not gonna judge. At the end of the day it depends on how you are motivated. If you’re motivated by other people, then I would definitely focus on how you will positively influence other people’s lives. And if  you aren’t, then obviously you can focus on your 12-month goal and your long-term vision, and how it will positively influence your life… But the best is to go with a combination of both – a little bit of selfishness, sprinkled in with a little bit of selflessness, and finding that right balance.

Again, we’re talking about how to overcome that fear of losing other people’s money… And if you’re just focused on yourself, it’s going to be difficult, because you’re going to focus so much on how it makes you feel, as opposed to how you overcoming that fear could benefit other people’s lives.

Overall, the ways to overcome the fear of using other people’s money to invest in real estate is one, it comes out of necessity, using Joe’s example… Two, three, four and five, which was my example, are sheer luck, really; just kind of putting yourself in the right situations. Number three, getting that experience and education to give you the confidence to do so, and to learn more about that, remember to listen to the episodes 1499 and 1500. Number four, we start talking to other successful syndicators to see how they’re overcoming that fear. And then number five would be to actually partner with someone… So rather than overcoming the fear, just have someone else do it for you. And then lastly, number six is be selfish.

The last thing I wanna talk about in this episode is to give you an understanding of why someone will actually want to invest with you. What do you think that is? Do you think it’s the types of returns that you offer? Do you think it’s the market that the property is in? Do you think it’s the business plan – value-add vs. distressed vs. turnkey? Do you think it is the actual deal itself? What do you think it is?

The answer is actually none of those. Obviously, those are reasons why people invest in deals, but that’s not the primary reason people invest in deals, and sure enough, the primary reason people will invest in your deals – and we’ve kind of hit on this earlier in this episode, during that five-question sanity test, is going to come down to trust.

A passive investor can get returns from anyone; each market will have a handful of syndicators they can choose from, there is a handful of syndicators that are operating the exact same business plan within that market, so the reason why they pick one syndicator over another is going to come down to trust.

Now, there are three main ways to gain trust, specific to this apartment syndication process. Obviously, there’s more ways to gain trust than just these three, but these are the three main ways to gain trust with a potential passive investor.

Number one is going to be time. A big thing that you see, again, on places like Bigger Pockets, with people asking about “How do I raise money for the deals?”, they’ll say that “I’ve done a couple deals in the past, fix and flips, or small multifamily deals, and I want to raise capital. How do I find investors?” And whenever I see a post like that, I always respond with saying that you just start with your current network. You need to start with people that you already know, because people that are going to invest with you are going to know you already and trust you already… Because since you don’t have experience, you can’t really leverage that experience in order to get strangers or people that you’ve recently met to invest with you, because there’s no proof that you’re going to be able to execute the business plan properly, and to get them their returns, and to keep their capital.

Whereas if you reach out to people that you already know, then you have that business background that you need, and that education foundation, they’ll know that, and they’ll know that maybe you’ve been trusting in the past for a certain situation… Or for some reason or another they’ve known you long enough and they trust you and they’ll invest in your deal.

Obviously, the first way to gain trust is going to be that time factor. you need to spend time with these people in order to gain their trust to invest. Back to the Bigger Pockets question about “How do I get people to invest with me?”, start with your current network, start with people that you’ve known for at least a couple of years.

Now, if you don’t know anyone at all, or if you haven’t known anyone for a couple of years, then obviously you’re gonna need to work on that first before you have the potential to raise capital. Obviously, you can get over this by partnering with someone else who does this, but this is specifically for you trying to raise capital yourself… The answer is going to be time.

Joe, for his first deal, knew his investors for 2 to 10 years. So these weren’t people that he just met in the past couple of months. It was people that he had built a relationship with over 2 to 10 years, and they trusted him enough with their money to invest in his real estate deals.

Obviously, now that he’s done over 10 deals, this time horizon decreases to maybe even a couple of months. As you complete more deals, the time horizon for how long you need to know someone before you’re getting their trust will decrease, because  – this transitions to number two – of your expertise.

So the second way to gain trust is through your expertise. You display your expertise in a way that a potential investor understands. You’ve done a few deals, and now you know what you’re talking about, so you can set up a lead capture form on your website, for example, where people can contact you if they want to learn more about investing in your deals.

Or your ten investors starting out, you’ve done such a good job and you know what you’re talking about, that they refer you to other people, who in turn come and reach out to you to ask you about the deal, and since you know what you’re talking about, you can get them interested based off of their communication style.

For example, you want to make sure you obviously displaying your expertise in a way the investor understands; a salesperson understands differently than an engineer, who understands differently than a business owner, who understands differently than a seasoned investor. So if you’re talking to a salesperson, then you’re going to display your expertise a lot differently than you are to an engineer, who probably wants to know more about the actual numbers; or the salesperson wants more high-level, overview of the actual business plan.

So again, it’s not only displaying your expertise, but displaying it in a way that the person you’re talking to understands. Of course, if you’ve done a few deals, then that’s how you’re gonna be able to display your expertise, talk about those first few deals… But if you haven’t, again, this is where that past experience and education comes into play. You’ve got your past real estate or business experience, and you can talk about that… And obviously, you haven’t done a syndication deal yet, but you can communicate how you are going to be able to successfully execute the business plan based off of your past real estate and business success.

Also, a great way to display your expertise is through your thought leadership platform, which is something else we’ve talked about on the Syndication School. So if you’ve got your interview-based thought leadership platform, you’re talking to apartment professionals and people are listening to your podcast, and they look at you as a credible expert, because you’re out there talking to the movers and shakers in the industry… And I know I’ve said this before, but a lot of people will reach out to Joe, who are interested in investing, and they mention that they feel that they already know him because of his podcast.

And then lastly, you’re gonna display expertise through your team. You wanna use your expertise, but also your team’s expertise to gain the trust of the investors. Talk about their background, how many deals they’ve done in the past, things like that.

And then lastly, a way to gain trust is just the good old-fashioned personal connection… Because at the end of the day, people make decisions – and that includes investment decisions – based on emotions, not rationality or analytically. You need to figure out what they care about, and then see whether you can align with that thing in a genuine way. If  you’re able to do this when you’re communicating with investors or potential investors, or just anyone you meet or know, is ask them what’s been the highlight of their week – maybe some business deal they’ve done, something with their family… Just to kind of build that personal connection.

And whenever you’re talking to someone that you think might be a potential investor, make sure that you allow them to lead the conversation. Ask them what’s been the highlight of their week, see what they say. Ask follow-up questions, see what they say. Obviously, the goal is identifying some need that they have, that you can provide a solution to, by having them invest in your syndication deals. So when you’re talking to investors, later on in the series we’ll focus on how to actually communicate and have these conversations with investors… But for now, the rule of thumb is the 80/20 rule, which is 80% of the time they should be talking, 20% of the time you should be talking… Again, with the purpose of identifying some sort of need that they have that you can provide the solution to with your syndication business.

Overall, the three ways to gain trust is time, displaying expertise and building a personal connection. That concludes this episode, where you took the five-question sanity test to gain your mindset as it relates to raising capital. We also talked about the six ways to overcome any fears or limiting beliefs you have about using other people’s money… And finally, we talked about the three ways to gain trust from potential investors, because the primary reason people invest is because they trust the syndicator.

In part two we are going to have a discussion about the different types of structures, because you need to know what type of syndication structure you’re going to pursue before you start reaching out to passive investors… Because the ways that you’re allowed to reach out to them, as well as the actual qualifications of the investor varies from structure to structure.

This episode has been more of a (I guess) story time, whereas this next episode is going to be pretty technical and into the details on the structures.

To listen to the other Syndication School series about the how-to’s of apartment syndications and to download those free documents, visit SyndicationSchool.com.

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

JF1555: How to Build Your All-Star Apartment Syndication Team Part 3 of 4 | Syndication School with Theo Hicks

Listen to the Episode Below (35:17)
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Today Theo will cover another important part of your apartment syndication team, finding and hiring real estate brokers. This will most likely be your best source for deals so getting in with a good broker is HUGE for you syndication business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Sponsored by Stessa – The simple way to track rental property performance. Get dashboard reporting, smarter income and expense tracking and tax-ready financials. Get your free account at stessa.com/bestever


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 a two-part or four-part podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will offer a document, spreadsheet, or 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 episode will be a continuation of the four-part series entitled “How to build your all-star apartment syndication team.” In part one, which is episode 1548, you learned the six ways to find your prospective team members, as well as the process for hiring the first two team members, which are a business partner and a mentor. Then in part two, which is episode 1549, you learned the process for hiring the third team member, which is a property management company… And in this episode, which is part three, we will be discussing the process for hiring a real estate broker. By the end of this episode, as well as the previous two episodes, you will learn how to find and hire a business partner, a mentor, a property management company, and a real estate broker. In the next part, part four, we will discuss the final three team members, which are your attorneys, your mortgage broker and your accountant.

The free resource for this four-part series will be a Building Your Team spreadsheet, which is a spreadsheet that allows you to log your various team members and make sure you are hiring everyone that you need. That is available for you to download for free, either in the show notes of this episode, or any of the other three parts, as well as at SyndicationSchool.com.

Let’s get right into it, the process for hiring a real estate broker. First, what is a real estate broker’s responsibility? Well, primarily, they do five things… And these are the five things that all real estate brokers will do. Number one is they will source deals with the purpose of wanting to represent the owner of the property, and list that property for sale to the public. These are considered on-market deals, which are deals that are listed by a real estate broker. There’s  an offer memorandum created, and it’s mass-marketed to the entire population, I guess, technically.

Now, this is slightly different than for single-family residents, because when you are investing in single-families or in smaller multifamilies, typically you’ve got a real estate broker or agent who’s representing you, and then they’ll set you up in the MLS. The deals on the MLS are listed by a different broker, so there’s two agents involved – your agent, and then the selling agent… Whereas for apartments, the more likely scenario is that you are going to reach out to a ton of brokers; you’re gonna work with 5, 10, 15 different brokers, and if you end up submitting an offer on one of the deals they have listed, then they are likely going to represent you. So a little bit different that single-families or smaller duplexes and fourplexes, where an agent is representing you as a buyer, and then the seller as well. For apartments, it’s usually the one broker representing both parties.

Another responsibility is they create the offering memorandum (OM), which briefly mentioned. This is the sales package that the broker puts together, that essentially highlights the investment. So it’s got information on the market, the property, the financials, things like that.

They also help the owner of the property with the listing is live, to the signed contract. They will work with the owner between the time the property is listed for sale, and between the time the contract is signed, with things like confidentiality agreements, scheduling and conducting the property tours, answering potential buyers’ questions, and things like that. They will also manage the offer process, so from offers to contracts being signed. They’ll schedule the calls, the offer date, and they’re the ones that accept the offers and relay those to the owner. They’ll coordinate the best and final sellers call, and essentially everything that is involved in the offer process, they will help manage that.

Then once the contract is signed, they are responsible for ensuring that the deal makes it to the closing table, and then also as you’ll repeat that process for you in the back-end. So if you buy a property from broker A, then they will be your point person for getting the property to the closing table, and then 5-10 years later when you sell the property, you’ll likely use that same broker to list the property for sale.

Those are the five primary responsibilities that more or less every single real estate broker will do. Now, there are additional services that a real estate broker will provide to you once you’ve proven yourself worthy of the services. Those are – most importantly, they are a great source for off-market deals… Again, on-market deals are deals listed by a real estate broker to the public; but at the same time, since real estate brokers are sourcing deals, before putting it on market, they might send that deal to a list of premier investors or people they know can close, and bring them the deal first to see if they wanna take a look at it, see if they wanna buy it, and if not, they’ll put it on the market.

Most of the rest of this podcast will be a conversation on how to get brokers to send you those off-market deals, which involves winning over their trust and portraying yourself as a credible, serious person who can close on a deal. We’ll talk about how you can do that here in a few seconds.

Another additional service a broker could provide is offer advice on particular markets, and submarkets within that market, and neighborhoods within that submarket, as well as help with deals. The deal depends on the situation. If you are working with the same broker who’s listing the property, then they can definitely help you to an extent with the deal, but at the end of the day they want to sell that deal, so trust their information, but also verify that what they’re saying is correct and it’s not biased because they wanna sell it. But if you happen to find a real estate brokerage who’s also a property management company, and you bring that property management company on, then whenever you’re looking at deals, you’ll have the eyes and ears of a broker to kind of review the deal with you, in addition to your property management company reviewing the deal.

That’s one example where they could help you with the deals, but again, if you’re working with the actual listing broker, do not take everything they say at face value. Trust what they say, but you wanna verify that what they’re saying is correct.

They can also provide a broker’s opinion of value (BOV) when you’re ready to sell, or considering selling. After you buy the property from a listing broker, and every year or two you should get a broker’s opinion of value, or at least determine what the value of the property is, to see if it makes sense to sell – ideally, your broker will help you out with that.

They could also invest their commission in the deal. This is what actually happened for Joe’s first deal that he did – the real estate broker invested a portion or all (I can’t remember which one of those is true) of their commission into the actual deal. This is great because it provides alignment of interest with your investors, because if the listing broker is investing on the deal, then the perception is that it’s a really good deal, because why else would the broker put their money in the deal.

And then lastly – and I kind of already mentioned this – they could potentially fulfill the role of another team member. For example, my property management company – and most property management companies are also going to be brokerages, too… So the property management company I work with, the wife is the president of the management company, and the husband is the president of the brokerage… So I kind of get to rely on both of them whenever I’m underwriting a deal; they help me check my assumptions, or tour the property with, but at the same time, since he’s a broker, he’s also out there looking for deals, so every once in  a while he’ll send me deals.

Then there’s another brokerage that I talk to who also has an equity raising arm of their brokerage. They have the ability to help you raise funds for your deals as well, as an example of how they can fill another team member role.

So how do you find your real estate broker? I discussed this in part one, which is episode 1541, and I talked about the six ways to find your team members… But here’s exactly what I did to find my real estate brokers in Tampa. A little bit more specific, since I mentioned in part one finding these team members – whether it’s a property management company, a broker, a mentor, an attorney – there’s really only a certain number of ways to find them, and it’s going to be very similar, a few iterations… But I wanna provide an example of exactly what I did to find my real estate brokers in the Tampa Bay market.

First, obviously, I created a list of Tampa brokers, but exactly how I did that is I googled “top Tampa Bay real estate commercial brokers”, and essentially went through 10-20 pages of Google, and whenever a website came up, I would open it up in a tab, and by the end of it I had 20 tabs open of potential brokers to work with.

I also searched for commercial brokers, real estate brokers, multifamily brokers on Bigger Pockets, and created a list of a handful of people there. Then I did the same thing on LinkedIn. Now, LinkedIn is gonna be a little bit harder, because there’s gonna be a lot of results… So I started doing it, I got through a couple of pages, and realized that most of the people that I came across worked for the companies that I already had opened in a Google tab. So I just used Google and Bigger Pockets, but LinkedIn is another source you could use as well.

Once I created my lists – I created the name, the website, the e-mail and the phone number… And I contacted the local team. For some of these brokers – they’re national brokerages, and I needed to make sure I actually found the Tampa Bay office, instead of just reaching out to the general phone number or general e-mail address. And then obviously, for the Bigger Pockets or LinkedIn I would have reached out to the actual individual via direct message.

And here’s exactly what I’ve said to every single person, and I had a 100% response rate… This is exactly the e-mail I sent to every single person. I said:

“My name is Theo Hicks, and I’m reaching out because my business partner and I are actively seeking multifamily opportunities in the Greater Tampa Bay Area. We both have previous apartment experience. I work with a 400 million dollar apartment syndicator, helping him with investor relations, co-authoring an apartment syndication book and managing a consulting program with over 80 active apartment syndicators, underwriting hundreds of deals in the process.

I also own a portfolio of multifamily assets in Cincinnati, Ohio. My business partner has a background in raising equity, we have our equity, debt and management lined up, and now all we need is a deal. With that said, I was wondering if you could have one of your directors contact me, so that we can discuss our company’s investment parameters and business plan in further detail, as well as learn more about CBRE Tampa.”

Obviously, that last sentence is gonna change based off of the company and based off of the person that you’re reaching out to. I believe for this one I was reaching out to the office manager, so I asked her to direct me to a person that could help me.

Now, what’s important to include in your opener, and which I included here, is number one, you want to let them know what types of real estate you’re looking at and where; I mentioned I’m looking for multifamily in the Greater  Tampa Bay Area. Also – and this is probably the most important  – is to let them know about your experience; I let them know that I work with an investor, I’ve had investing experience myself, I work in a consulting program, I’ve written a book about this… And then I also talked about what pieces I already had in place. I mentioned how I already had equity lined up, I already had debt lined up, I already had a property management company lined up… So I wasn’t just reaching at random because I just randomly thought “Hey, I’m gonna start reaching out to brokers.” No. They read my statement and realize that I’ve put in effort, I’ve talked to investors, I’ve talked to mortgage brokers, I’ve talked to property management companies, I’ve got everything lined up and now I’m just ready to find a deal. All of this shows that I’m serious, educated and credible, and that I will have the ability to close on a deal.

Now, you should work with every qualified commercial broker that you find, because again, you want to work with as many brokers as possible, because the more brokers you work with, the more deals you will find. Because unlike the MLS, where all the real estate agents and brokers will post their listings there, most of these commercial brokerages will have their own listings service; their own website has their listings… So it’s not one centralized location for all of them, at least not something that I have found.

So you want to work with all the qualified brokers you can; make sure you get on their lists. Then, obviously, once you find a deal, you’re likely going to work with that listing broker until you close, as well as, again, on the back-end when you sell the property. But ultimately, it’s up to you; you can work with one broker, you can work with as many as you want… You can work with one broker on the front-end and a different broker on the back-end, but this is just kind of the general recommendation of what you should do.

Now, before we get into the qualification process and how to actually win these brokers over to your side, so they start sending you off-market deals, I wanted to quickly discuss how they actually get paid. Real estate brokers are paid via commission, and a good rule of thumb is to expect to pay them or expect for them to be paid by the seller 3% to 6% of the purchase price if the apartment is less than 8 million dollars. If it’s over 8 million dollars, expect some sort of flat fee of around 150k. Typically, the seller is the one who’s paying these fees, so when you’re selling the property and when you’re underwriting the property make sure that you are accounting for this fee in your disposition summary.

Now, how do you actually qualify a broker? Your goal of these broker conversations, after you’ve done that initial introduction script that I mentioned – you’ll likely hop on a call with them and have a kind of informal interview of them, and they’ll also be interviewing you at the same time. The goal for you is to determine the broker’s level of experience, as well as their success with apartment communities that are comparable to the types of deals that you actually want to invest in.

If you’re a value-add investor, you want to find a real estate broker who finds and lists value-add deals, because obviously, that will increase the chances of you finding a deal that meets your investment criteria… Because what you’ll notice when you start searching for commercial real estate brokers is that not every single one lists value-add properties, let alone multifamily. For example, you will come across some that really only list retail, or only list offices, or land, or self-storage, but they don’t really focus on apartments… So even if they list one apartment a year, you should probably subscribe to their list, but when you’re interviewing them, the ones that focus more on multifamily (and particularly value-add multifamily) should get more of your attention than a brokerage who lists one multifamily property every year, and most of their stuff is office space.

Here is a list of questions to ask the broker – or at least these are questions you should ask yourself, and then find the answers to them, whether it’s from actually asking the broker or doing some investigations on their website. And again, just like I said in the previous episodes, when you’re talking to them don’t just run down this list and robotically ask them every single question; bring them up more organically, and do some research before you actually speak to them to find the answers to some of these questions first.

One thing you wanna know is how many successful closes they have done in the last 12 months, because obviously the more deals that they’ve done, the more experience they have and the more active they are… Which means you have a better chance of finding a deal that meets your investment criteria.

You’ll also want to know of those successful closes what were the average number of units. Again, does that align with your investment criteria? If they’re closing on an average of 20 units per close, and their investment criteria is 100 units, then that broker might not be the ideal fit for you, or at least you shouldn’t spend a ton of time working on that relationship as you would someone who averages exactly 100 doors per sale.

You also wanna know what percentage of the deals they list are value-add, for example, if that’s what your investment strategy is. Ideally, the majority of the deals that they list are in alignment with your investment strategy. If you’re looking for turnkey properties, then the majority of their properties listed should be turnkey, and same for value-add and distressed.

You also wanna know how long they’ve been working as a real estate broker, as well as how long they’ve been focused on multifamily. Again,  the longer they’ve been working, the more experienced they are.

You also wanna know where they’re located, which you shouldn’t have to ask them that question. You should be able to find that online, ideally. And more of a requirement, your broker needs to be local to the market you’re investing in, or at least have a team nearby. If you’re investing in a smaller city or smaller market, then they should have an office in the closest big city. It’s gonna be difficult to work with a broker in Chicago if you’re trying to buy houses in Florida. It’s possible, but it’s gonna be more difficult than it would be to work with someone who’s actually local to Tampa, because they’ll understand the area a lot better.

You also wanna know how many value-add apartment listings – or whatever your investment strategy is – that they currently have, just to give you an idea of how many potential deals they list and you’ll be able to look at, keeping seasonality in mind. Usually winter, this time of the year, is when these things are the slowest. So if they don’t have a ton of deals listed for sale in the winter, don’t be too concerned; but if it’s in the middle of May and they have no listings, then that should be a concern, or at least a red flag.

Also you wanna ask them if they can walk you through a timeline of a typical deal, just to get an understanding of how that works… So how long after finding a deal do they usually have it listed for sale, how long from the time the property is listed for sale until they call us to offer, what’s the tour process, do they have an open house that you can go to, do you have to call ahead to schedule, and when you should go to the property, will you be able to see? And then also ask them what the offer process is – is there just going to be a call to offer, and that’s it? Is there gonna be a best and final sellers call? How does the offer process work?

You also wanna know how they actually find their deals. This is more for comparison purposes, so compare the way broker A finds deals to broker B, to see which one you should focus on building a relationship with more. You also wanna ask them what stage the local apartment market is in – is it a buyers or a sellers market? What are the cap rates and how are those trending? Are we at the top or at the bottom of the cycle? …just to gauge their understanding of the actual market.

You also want to ask them what they specialize in. As I mentioned before, the term “commercial broker” means that they could  focus on multifamily, retail, office, land, skyscrapers, condominiums… Any commercial real estate that’s not single-family home, or I guess four units or lower, that could be their specialty. Ideally, they specialize in what your investment strategy is, so they specialize in multifamily, or more specifically, value-add multifamily.

You also wanna ask them how they structure their fees – what commission do they charge, and are there any other fees that are charged for using their services? You wanna know if there is anything in particular that they  do differently than other brokers in the real estate market, for comparison purposes.

You also wanna ask them if they can provide you with a property management company, mortgage brokers, attorneys, accountants, referrals. Number one, that will obviously give you potential team members to interview, and that’s gonna be great — if they’re a really good broker, then they’re gonna give you really good referrals… But it also gives you an idea of how tapped into the market they are, and how tapped into the big players they are. If they don’t have any property management or mortgage broker recommendations, it’s not really a good sign. It shows they’re likely inexperienced.

And then lastly, you want to know if they offer both on-market and off-market deals. So are all the deals listed the exact same? So they find them, they create a marketing package, and no one sees it until the sales package is listed, or is posted on their website? Or do they send the deals to a list of preferred investors first, as an off-market opportunity, before listing it on market? When you ask this question, follow up by saying that you completely understand that they’re not going to send you off-market deals until you’ve proven yourself. That’s the transition to the next part of this episode, which is how to prove yourself to the broker, how to win them over, and eventually have them send you their off-market opportunities, or at least increase your chances of being awarded the deal… Because brokers are going to be one of the best deal sources. They obviously aren’t going to send you these off-market deals right away, or really enthusiastically answer your questions until you’ve proven that you can fulfill their need, which is to obviously make money, and then make money by you closing on the deal. So don’t expect off-market deals, don’t expect brokers to instantaneously respond to your questions until you’ve proven yourself worthy to receive those off-market deals. To accomplish this goal, there’s a few things that you can do.

Here’s a list of things you need to do before you even reach out to these brokers, to set yourself up for success. Number one is to have a property management company, or at least have an idea of who you’re gonna work with. You don’t need to have a signed contract or anything, but have an idea of at least one management company you can work with; having two or three is even better. That way they have an idea of who is going to manage the deal after it’s closed on.

You also want to have a mortgage broker or a lender, so they know how you’re going to fund the deal, and that you are qualified for financing. You’re also going to want to have verbal commitments from your passive investors. That way, they will know how you’re going to fund the loan down payment, the renovations and the other fees associated with closing on the deal.

Lastly, you’re gonna want your mentor or consultant, because assuming you haven’t done a deal before, you’re going to need to leverage their experience, expertise and credibility with the real estate broker. Those are the four things you need to do before you even make your list and start reaching out to brokers.

Once you’ve done those four things, then when you’re actually interacting with brokers, in that initial conversation – and ongoing conversations – first you want to bring up your relevant experiences… So what have you done in your past that will show a broker that you’re serious about closing on a deal? This could be real estate experience, this could be non-real estate experience, so business success, if you’ve gotten a ton of promotions, you’ve managed this much money in sales… Then you could also obviously leverage your team’s experience as well.

Then, of course, you wanna tell them what you’ve already done, just to show them, again, that you’re serious, that you’ve put forth effort already, and now you just need a deal to bring everything together… So who are your team members, who’s gonna fund the debt and what’s the debt going to be, what kind of terms can you get, how much can you qualify for, how much equity can you raise, and if you evaluated the market yet… Things like that.

Then lastly, work on building a personal connection with them, because that is the best way for them to trust you and for them to send you off-market deals. Obviously, you wanna do this genuinely. Joe’s go-to question is ask people what’s been the highlight of their week, but a lot of other people will build rapport with brokers by taking them out for drinks, having coffee with them, dinners and lunches, going golfing, things like that. So it doesn’t have to be strictly business, it can be some fun as well.

Now, here are four other things that you can do to win over the broker without having to actually complete a deal. This is after you’ve found them, you’ve had the initial conversation with them, and you’ve told them about all the team members that you’ve brought on already, and your debt and equity… This is what you can do moving forward to start to build that connection with them, that trust with them.

Number one is just to pay them. You can offer a consulting fee of, say, $150 to $200/hour for their advice. Maybe you can say “Hey, can I pick your brain for half an hour and I’ll pay you $100?” Or “Hey, can you meet me at this property and take a look at it? I’ll pay you $200.”

Another thing you do is to visit their recent sales. This is a very good tactic to show them that you’re serious. Ask them for a list of their ten most recent sales, and then actually drive to those properties, drive around the property; if you want to, you can act like you’re a tenant and actually go into the units, but I personally just drove around the outside of the properties and looked at the exterior conditions, then I went online and looked at the interiors, looked at the rents… I essentially did a very high-level analysis of the property, and then I followed up with the broker, creating a pros and cons list as it relates to how that property compares to the type of property I wanna buy. In doing so, one, it is helping me learn more about the market and the types of properties this broker lists. Number two, it gives them the idea of the type of property that you want to buy, but number three, most importantly, as I mentioned, it shows them that you’re serious and that you’re putting forth effort and you’re not someone that just reached out, had that conversation and fell off the face of the Earth. You’re actually out there, boots on the ground, doing work.

Also, you can offer them information on how you will fund a deal… Not how you find the deal – they’re finding the deals for you – but how you will fund the deal, so how much debt are you qualified for, who is your mortgage broker, how much equity can you raise, how will the compensation structure be for the GP and LP… And again, they wanna know that you can close, so if they know that you have enough money to close, then that’s just one more tick in the positive box for you as the investor, in the eyes of the broker.

And then lastly – and this is kind of general, and this could fall into the other categories as well – diligently follow-up with the broker. If they send you a deal, underwrite it right away, and then reply back to them with their feedback within 24-48 hours. Go and visit the actual comps that they selected and give your feedback on those right away. If you do a property tour with them, don’t take multiple days to get back to them with any follow-up questions or feedback. E-mail them right when you get home. If you bring on a new team member, let them know; if you’ve just found a big investor, let them know. Anything that points to you getting closer to completing a deal, let the broker know. Again, it shows that you’re serious, but also, you don’t wanna go weeks at a time without contacting the broker, because then they’ll completely forget about you, so… These are ways to constantly stay in contact with that broker.

Now, we’re running a little bit over, so I’m gonna quickly go over this last section, which are questions that you should be prepared to answer, because obviously, the broker is interviewing you just as much as you are interviewing them… So really quickly, here are the questions that you should be prepared to answer from the broker. Number one is who is your property management company; they’ll wanna know who’s gonna manage the property once it’s been taken over by you, and if they’re credible. They’ll wanna know how many units this property management company manages, what’s the average building size, what’s the biggest building size, what types of properties do they focus on, and are they local? They’ll also wanna know who is your business partner and what their experience is. Essentially, they’re gonna wanna know about all of your team members – business partner, property management company, if you’ve got a consultant or a mentor, anyone else on the general partnership, they’ll wanna know about that.

They’ll wanna know if you’ve purchased an apartment building before. Obviously, if you haven’t, that’s where you want to leverage your team’s experience – your property management company, your partner, and/or your mentor or consultant, which is why you need those three things, because you’re gonna need to leverage their expertise and their experience.

They’re also gonna want to know what types of deals you’re looking for, and they’re gonna want to see you be specific. If you just say “I’m looking for a 100-unit deal”, that’s not specific enough and it’s gonna show them that you don’t really know what you’re talking about. They’ll wanna know how many units, what’s the cost, what market are you looking at, what’s the asset type (A, B, C class), value-add, distressed, turnkey… They’re gonna want to know what age of construction, construction type, roof type, things like that. Be as specific as possible with your investment criteria to show them you know what you’re talking about.

They’re also gonna want to know what markets you’re looking into. Similar to the investment criteria, don’t just say “I’m looking in Tampa” or “I’m looking in New York.” Say exactly what submarkets you’re looking at, what neighborhoods you’re looking at… Again, it shows them that you know what you’re talking about.

They’re also gonna wanna know how you’re gonna fund the deal, so that’s the debt and the equity… And then they’re also likely going to ask you if you are willing to sign an exclusive agreement with them, so they can get you the best deals. Now, out of all the brokers I’ve talked to, none of them have said this, but you might come across this, and we always recommend that you don’t sign an exclusive agreement, because then you’re pigeon-holing yourself to working with only one broker, which means you are limiting your lead pipeline.

Overall, when it comes to brokers — you’ve gotta keep in mind that these brokers are likely contacted by investors all the time, so kind of figure out what sets you apart by other newbie investors. And then also, don’t expect for them to send you off-market deals until you’ve proven yourself. And for both of those – what sets you apart and how to prove yourself – have been the sole focus of this episode… So now is time to get out there and assume you’ve got your bases covered, which means you’ve got your team in place, and you can start looking for brokers so you can start finding deals.

That concludes part three, where you learned the process for hiring a real estate broker, and in part four, the final part of the series, we’re gonna discuss the process for hiring the remaining three team members, which are the attorneys, the mortgage broker and the accountant, and then we’re also going to talk about what order to actually hire these team members in.

To listen to parts one and two, as well as the other Syndication School series about the how-to’s of apartment syndications, and to download your free teambuilding document, visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.

JF1549: How to Build Your All-Star Apartment Syndication Team Part 2 of 4 | Syndication School with Theo Hicks

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Today Theo is covering how to find a great property management company. This is a huge part of your business, to be a successful syndicator you’ll need a great property management company that you can count on to do outstanding work without you having to micro manage. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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

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TRANSCRIPTION

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

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

 

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

Each week we air a two-part podcast series – in this case, a four-part podcast series – about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will offer a document or a spreadsheet or a resource for you to download for free. All of these free documents, as well as past and future Syndication School series podcasts can be found at SyndicationSchool.com.

This episode is part two of the four-part series titled “How to build your all-star apartment syndication team.” In part one, yesterday’s episode, you learned about the four core team members and the three secondary team members that make up your seven-person company team. We talked about the six main ways to find prospective team members, and then we discussed the process for hiring a business partner and a mentor.

This episode, part two, will focus solely on the process for hiring a property management company. Now, just to reiterate, the most important aspect of apartment syndication — I guess the most important aspect of a successful apartment syndicator, is their ability to execute a business plan. The best deal, in the best market, means nothing if you and your team cannot execute the business plan… Keyword there, for our purposes right now, is being “team.” So the team is one of the pieces that will help you implement your business plan, so it’s very important that you find the correct team members.

For the property management company, their primary responsibility is to manage the property after closing. So once you’ve closed on the deal, the property management company will replace the old property management company, and they will be responsible for managing the day-to-day operations: fulfilling maintenance requests, maintaining the occupancy, things like that.

Now, additional services that property management companies may or may not provide based off of the company are [unintelligible [00:06:05].08] for the pre-deal, and they might advise you on what neighborhoods and submarkets to look at. Once you have a deal, they can help you confirm your underwriting assumptions… So your expense assumptions after you take over the property – they can let you know if those make sense based on how they’ll operate the property, and the market, as an example.

Once you have a deal under contract, they can help you with the due diligence process, helping you manage the inspections and the appraisals that happen, and all the audits of the current owners, find historical financials and rent rolls, and help with finalizing the budget… So finalizing your proforma, as well as your renovation budget.

Once you have the deal closed, aside from their primary responsibilities, they could also help you manage the renovations, help you host residence appreciation parties, help you implement the best marketing strategies, and things like that. Typically, and especially when you’re starting out, the property management company is going to be a third-party. So you’re not going to want to start your own property management company when you’re first starting out, because you’ve got a lot of other things to deal with and learn about, and you don’t have time to focus on that particular aspect of the business plan.

But as you grow, and get your portfolio to a certain size, which people differ on which size you should actually bring on your own in-house management company, you can bring the management company in-house and run it yourself, or continue on with a third-party. It’s really up to you.

Now, how do the property managers make money? Well, typically, they will charge a management fee, which is a percentage of the collected income at the property. In general, this could be anywhere between 2% and 10%, but since we’re dealing with apartments, you’re gonna be looking at the lower end of that range, because 10% is for single-family homes, 8% is probably for duplexes… So once you’re over 100 units, you’re looking at around 5% or lower.

Other ways that management companies might get paid are through various fees – lease up fees, renewal fees, eviction fees, application fees, marketing fees, referral fees… There are a lot of different fees that they can charge. Again, it depends on the management company and the size of the property. And you might also run into a property management company who is willing to help you manage renovations at a cost, which is the construction management fee; it’s typically a percentage of the total rehab budget, anywhere from 3% to 10%, with the larger rehab budgets falling on the lower end of that range. For example, say a million dollar rehab and they are charging you 5% – well, then you’ve gotta pay them $50,000 out of that budget, so that’s just 50 additional thousand dollars you should raise at the beginning of the project.

Now, let’s get into the important aspects, which is how do you qualify the property management company? Basically, you’ll use one of those six ways to find a property management company – you’ll create a list, you will reach out to them, and you will — first, what you wanna do is introduce yourself, and when you’re doing so, you want to 1) tell them what you’ve done or what you’re in the process of doing that’s getting your closer to closing on a deal. So I would call them up and say “Hey, my name is Theo Hicks. I am from Tampa, Florida, and I am actively working with real estate brokers right now to find deals. I’ve underwritten this many deals.

Right now I’m just looking for a property management company to bring on. Are you willing to spend five minutes to speak with me, so I can learn more about your company? And you can learn more about my business, as well.” Because, whether you know it or not, this is actually a two-way street; they’re actually interviewing you as well, because they wanna be confident that you are able to satisfy their business needs. Their business needs are obviously to make money, and the way they make money is to manage deals, and the way to manage deals is to work with investors who actually can close on deals.

At the same time, they also want someone who has realistic expectations of what a property management company is supposed to do… So you’re gonna have to prove your worthiness before asking them for additional services that I went over, like coming with you to property tours, and helping you confirm your underwriting assumptions.

Before we go into how you should prepare for this interview, let’s go over the types of things you should be asking and figuring out from the property management company to qualify them. First, how long have they been in business? A pretty simple question.

A couple things about these questions… 1) Don’t just call the property management company and ask all these questions in order like a robot; ask them sporadically, but do your due diligence beforehand and see how many of these answers you can find.

How long have you been in business – you can find that online, on their website, pretty easily. This is a list of questions that you need to ask either them, or ask yourself and find the answers to, whether that be on their website, through someone else, or through them directly… Because if I was talking to someone and they asked me a question that was front and center on my website, I wouldn’t find them very credible.

So you wanna know how long they’ve been in business, because the longer they’ve been in business, the more experience they have, which in turn likely means they are more credible. You also wanna know what areas they cover. 1) Do they cover the areas that you’re targeting? Pretty important… But you also wanna know  if they are focused on a handful of target markets, or if they are spread out across the nation. Again, not a disqualifier, and it really depends on the size of the company, but if they’re focused on too many markets, then they might not be able to give you the attention you need, and they might not be as big of experts on that actual market, because they cover so many and it’s impossible to know everything about every single market.

You also wanna know if they’re actually located in that market. Ideally, they are. Ideally, they say that “I’ve been in business for 20 years. I cover the Tampa Bay market, and that’s where our headquarters are located.” It just makes things easier for you, and it kind of indicates their knowledge of that particular market.

You also wanna know how many units they manage, so total number of units. If they are, for example, the biggest in the market, or at the higher end in the market, that’s a positive, because that indicates that they are credible… But at the same time, you might not get the attention that you want, because they’re working with big-time investors and you’re kind of a little fish at this point in time, and you might not get the attention that you want.

On a similar note, you also wanna know essentially what’s the biggest unit they manage, what’s the smallest building they manage, and what’s the average unit count. You wanna make sure that they are able to manage the size of property that you are interested in investing in. So what you will realize is that when you talk to property management companies, they either specialize in, obviously, single-family homes or smaller multifamily; then you’ll find companies that specialize in that 10 to 50-unit range, buildings that don’t need on-site management. Then you’ll find other companies who specialize in the 100+ unit range, or maybe even 1,000+ unit range, and then everywhere in between.

You wanna find a property management company who aligns with your current business plan. If your business plan is to buy a 20-unit, then you’re gonna want to find a management company who specializes in those smaller multifamilies… But if you were looking at a 100-unit, then that same property management company would not be a good fit. And I’m telling you, when you talk to them, they will try to convince you that they are a good fit, they’ll try to convince you that they’re interested in moving into that market, or they haven’t done it before, but they’ve got the processes in place to do so… But at the end of the day, you don’t want someone else learning on your dime. You wanna find a company who has experience doing that size of a project.

You also wanna know what types of properties they specialize in. Similarly to the unit size, you also wanna make sure that they are able to execute, or at least manage, the business plan that you plan on executing… So if you’re going to buy value-add apartments, you want to make sure that you find a property management company who has experience with value-add apartments.

You also wanna know how many apartments they personally own or their company owns, because that could be a potential conflict of interest. If they own apartments in your market, and a unit goes vacant at your property and a unit goes vacant at their property, which unit do you think they’re going to fill first?

You also want to have them describe to you what their process is for managing a moderate renovation. Again, this is for value-add syndicators. You wanna know how do they track the work, who are the contractors – are they in-house GC’s? Do they find sub-contractors for everything? Who manages these contractors? Who approves the work before the contractors get paid, and then what fees will they charge? Essentially, you want to know what to expect during the renovation process from them, what types of updates that you’re going to receive, who’s actually doing the work, is the work being checked, how much does it cost, how long is it gonna take? Things like that, because those are all going to factor into your underwriting – how long is it gonna take, how much is it going to cost.

Then also you want to plan ahead and figure out exactly how to approach your performance reviews with the property management company, and so now you’ll know “Okay, well the work is tracked this way, so I should expect information presented to me in this way”, and know exactly who the contractors are, their in-house contractors, who they’ve worked with in the past, their sub-contractors… “It’s gonna cost me this much, and it should be done within 12 months.”

You also wanna know if they offer any due diligence services, and what the cost is… So will they help you deal with the due diligence process            ? Will they perform a lease audit? Will they perform a financial audit? Will they look at the bank statements of the property? Will they help you perform the inspections? Will they walk the appraiser through the property? Things like that. And then you also wanna know how much that costs. Will it be free, as long as you close? Will it be free if you don’t close, or will they charge you money if you don’t close? All things to think about.

You also want to get your hands on a list of nearby properties that they currently manage, so then you can go look at these properties and confirm that they are the type of property they say they specialize in, you can see how well the property is maintained, the area, and kind of get a general feel for the property.

You also could ask what special trainings their managers receive from their company. Again, this one right here is not a deal breaker, but if you’re down to two management companies and one has a very specialized training for their managers and the other one doesn’t, that could be the deciding factor.

You also wanna know how they manage the property’s online reputation. I think it’s something like 80%+ of people search for rental homes online, so the first thing that a prospective resident is going to see is likely gonna be the property’s ranking on Google, and Apartments.com, and places like that… So you wanna ask them, are they doing anything to make sure that they maximize that rating? And again, this could be a deciding factor between multiple property management companies.

You also want to know who the point person is going to be to you. Is the point person going to be the site manager (which is ideal) or is it gonna be some lower-level employee?

You also wanna ask them what they see as the site manager’s duties. What do they expect out of the site manager, and does that align with your expectations of what the site manager should do? You can also ask if you can interview and approve the site manager before hiring them.

You also wanna know what kind of relationship they expect their site manager to have with the owner, so how often do they expect the site manager to contact the owner, and when they do contact them, what types of updates will they provide?

Another important thing to think about is what maintenance issues will require approval? Is there a certain dollar amount that if it’s under that dollar amount, then they’ll just take care of it; if it’s not, they’ll come to you and ask for your approval. And you also wanna know how accessible they will be. If you call them, will they answer? If not, how long do they say they’ll get back to you?

You also wanna ask you if they’ll provide you with a written management plan. Will they provide you with a renovation plan, and a marketing plan that they plan on implementing once you’ve closed on the property?

You also wanna ask them about what fees they charge, and what is actually included in the monthly management fee… Because sometimes you’ve got the management fee and then you’ve got all these other fees built on top of that, but you only accounted for the management fee in underwriting. You also wanna ask them what type of property management software they use. Really, you wanna make sure that they’re using one…

You also want to ask how much time it takes to typically do a make-ready. Once a tenant moves out of a unit, how long does it take for them to get that leased again? Depending on the market, it could be a couple of days, or it could be a couple of weeks… You’re going to want to know what the average is in that market and what they are committed to doing… Because again, the longer the unit is vacant, the less revenue you are bringing in.

You also wanna know what types of rent payment methods will be available to the residents, and make sure that that aligns with the renter demographic. If you’re in a low-income neighborhood, then not collecting cash or not taking cashier’s checks might be an issue… Whereas if you’re in a higher, more affluent neighborhood, then not having the ability for them to submit their rent via direct deposit might be an issue.

Also, you wanna ask them if they require you to list the property with them upon sale, because some property management companies will put that in their contract. You also wanna ask if you can have the cell phone number of the site manager, the regional manager and the national office, just in case you need to get a hold of them… And if you can’t get a hold of the site manager, you can go up the chain of command to the regional manager, if you can’t get a hold of them, you can go to the national level.

And then lastly, you can ask them for contact information for a few of their current clients who have buildings that are similar to the types of buildings you will be investing in, so that you can go to those references and check things out.

Now, again, don’t just go through this list of questions and ask them in order, like a robot, to the property management company. Take a look at this list, do you research to see if you can find the answers to these questions yourself, and the ones that you can’t find, scatter them out naturally throughout the course of the conversation.

Now, as I mentioned, you are not the only person that’s doing the interviewing here. The management company will also be interviewing you, because they want to make sure that you are able to satisfy their business needs, which means that you’re able to close on a deal… So there’s a few things that you can do to win the property management company over to your side.

The first one is to be prepared for the interview. There are going to be questions that they’re definitely going to ask you, and if you don’t know the answers, then you’ve kind of ruined your opportunity to present yourself as a credible investor to this management company. That’s why what you do is make sure you know the answers to these questions before you even speak with a management company.

Number one, who is your broker? Who is your real estate broker? They’re gonna wanna know that you are actually looking for deals at this point in time, and that is accomplished by telling them “Hey, my broker is John Doe, from John Doe Academy.”

Next, they’re going to ask you if you’ve purchased an apartment before, and obviously you haven’t, if you haven’t before; if you have, you have. If you haven’t, this is where your mentor or partner comes into play. If your mentor or partner or someone else on their team has completed a deal before, then you can say “I haven’t completed a deal before. However, I have a partner who’s done XYZ, and a board member who control 300 million dollars in apartment communities, so we’ve got that covered.”

They’re gonna wanna know what types of properties you’re looking for, as well as what markets and neighborhoods. Again, this shows that you know what you’re talking about, if you could spit off and say “Well, I’m looking for apartment communities built after the 1980’s, that are 100+ units, that have the opportunity to add value, but aren’t distressed. That are in Tampa, Florida, Ybor City, Temple Terrace, these particular submarkets.” That sounds a lot better than “It doesn’t really matter. I’m looking for an apartment in Florida somewhere.” Those two things sound completely different. The first method shows that you’re active and that you know what you’re talking about, and that you’ve done your due diligence, and also that they can confirm that they cover the market that you are actually investing in.

They’re also gonna wanna know what your business plan is. Again, this will show your credibility and expertise, as well as let them know if it aligns with their specialty. So if someone asks me what my business plan is, I say “Well, I want to buy a value-add property, take 12-18 months to turn over and stabilize the asset with my renovations, that will probably be about 5k-7k per unit… As well as some exterior renovations. We’ll hold onto the property for five years, and then after those five years, we will sell and rinse and repeat.”

They may also ask you how you actually found them… It’s not really important, but I have heard that some real estate brokers, for example, don’t like it when you say “I found you on LoopNet”, but again, I don’t think this one here really matters too much… But they might ask you that, so be prepared.

They’re also gonna ask you if you’re working with any other property management companies, of course, because they wanna know if there’s competition. They also are gonna ask you what expectations you have for a property management company. So now, after listening to this podcast, you know what their primary responsibilities are, as well as the additional duties, so when they ask you this question, you can explain to them that ideally you’d want the additional services, but you know that you’re gonna have to prove yourself first… So it’ll kind of start there, and start with them just managing the property, as well as the renovation budget, the renovations after close, and then go from there.

They’re also gonna want to know how you actually underwrite the deals, and more particularly, they’re gonna want to know what assumptions you actually use, and are those assumptions going to be realistic. So if you tell them that you do the 50% rule, then you’re not going to look very credible, and they’re probably gonna not want to work with you, because since they’re the one managing the project, they’re gonna want to confirm the assumptions, and if they can’t confirm the assumptions, they’re not going to want to manage the project.

They’re gonna want to know how you’re gonna fund the deal. That’s the debt and the equity… So what mortgage brokers are you talking to? What types of debt can you get? What LTV, interest rates, recourse vs. non-recourse, is it a Fannie Mae/Freddie Mac? Is it a bridge loan? What types of debt are you going to get? And then your equity – how much equity are you able to raise? Who’s it coming from? Is it your money? Is it from investors? How many investors? How do you know these investors?

Again, this is gonna show your ability to close on the deal, as well as show if you’ve done your due diligence. If you have no idea how you’re gonna fund the deal, it’s not gonna look too good.

And then lastly, they might ask you for biographies on you and your business partners, so you might want to have those handy; at the very least, have information on your business partners handy. For example, if they ask you “Well, have you done a deal before?”, you’ll say “No, but I have a board member who has done a deal before.” Then they go “How many deals has he done? How long has he been an investor for? Where does he invest?” They might ask you questions like that, so be prepared to answer them.

Besides obviously being able to answer their questions, there’s a couple of other things that  you can do as well to win over a property management company. One, which is something you’re already going to do, because you asked them for a list of their properties — but I actually go visit those properties in person, and then provide them with feedback. For example, let’s say you get a list of five properties; you go to all five properties, and maybe a few of them are pretty distressed, and there’s a couple of issues that are concerning to you, but then one property looks really nice, and is exactly what you would want.

Well, you can go back and say “Hey, I visited the properties. Here are the pros and cons of each, and the questions I have. For property ABC, I went there and realized that some of the roof shingles are missing, and the gutters were falling down, and it looked like it hadn’t been painted in a while, and it looked like the lawn hadn’t been mown in a while… What’s going on? Is that management issues, is that owner issue? Are they not giving you money? What’s going on there? I also saw XYZ property – immaculate condition. What’s the difference between the owners of those two properties? Why are they so different? Is it the owners, is it the market? What’s going on there?”

This shows that you’re interested, it shows that you’re actually out there doing things,  that you know what you’re talking about and you truly want to learn and put yourself in the best position to complete a deal.

Another one would be for you to send them your proformas for deals that you’re underwriting. Again, don’t expect them to fully underwrite a deal for you. What you wanna do is say “Hey, I’ve underwritten this deal. Do you mind taking a look at my underwriting assumptions and give me your feedback on them?” Typically, they might not send you a 1,000-word response, but they might give you a couple pointers and tips; you’re just building more rapport.

And then lastly, and this is kind of overall, is to have timely follow-up. After you do a property tour with them, make sure you follow up and ask them, “Okay, what were your thoughts on the property tour? Can you help me with ABC? Can we create some kind of cap-ex budget? What types of rents do you think we can get? What are your thoughts on the rent comps provided?” But don’t wait a couple of days or a couple of weeks to follow up and ask those questions after the property tour. Show that you’re serious, that you’re putting forth the effort to close on the deal.

And then really after completing any task that brings you closer to completing a deal, let them know. “Hey, I underwrote this deal. I’m gonna go visit it in person next Tuesday.” Or “Hey, I just talked with this mortgage broker and got approved for an additional one million dollars in financing”, things like that.

That is the overall process for hiring the property management company. We talked about what the property management company actually does, how they’re compensated, and we talked about what you need to do in order to qualify a property management company, but also what you need to be prepared for and what you need to do in order to win them over to your side.

Winning over the property management company to your side is gonna be important, because all of those additional services that they can provide to you, that would be an immense value to your business. But they’re not just gonna do that for any random person who calls them up on the phone and says they found them on Google and wants to become an apartment syndicator. You have to prove your worthiness, and we’ve gone over multiple tips on how to accomplish that.

Now, as I mentioned, this is a four-part series. Next week will be part three, and we will discuss the process for hiring your real estate brokers. Now we’re getting into the fun stuff, which is how to actually find deals. To listen to part one, and other Syndication School series about the how-to’s of apartment syndications, and to download your free team building document, visit SyndicationSchool.com.

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

JF1548: How to Build Your All-Star Apartment Syndication Team Part 1 of 4 | Syndication School with Theo Hicks

We’ve worked through finding our market and other aspects that lead up to completing your first apartment syndication deal. Today, Theo is covering the first part of building a great team. In this particular part of the four part series, we’ll hear about the four core team members, who they are and how to find them. He’ll also cover the topic, “Do you need a partner and a mentor?”. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“Whether you need a mentor comes down to your expectations of what they will do and if you want to hire one”

Free document for this episode:

http://bit.ly/2TRkmMZ


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Best Ever Listeners:

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

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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome 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 a two-part podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will offer a document, spreadsheet, some sort of resource for you to download for free. All of these free documents, and the Syndication School series, past and future, can be found at SyndicationSchool.com.

This week is the start of our second four-part series. This will be part one, and the series is entitled “How to build your all-star apartment syndication team.” As the name implies, we are going to be talking about building your team. If you have followed the previous eight series, essentially we’ve built to the point where you are now ready to start actually reaching out to various team members in order to bring them on, and are one step closer to actually looking for deals. So you’ve got your education and experience on lock, your goals are set, market selected… Next step is to start building your team.

In this episode we are going to go over what the core and the secondary team members are, and then we are going to have a conversation around how you find these team members. Some team members are found a specific way, but in general, you’re gonna find these people in a similar way… And then we’re going to actually talk about the process for hiring two of your team members in this episode; that would be the business partner, and a mentor. Over the next three episodes, we will go over the process for hiring the remaining team members.

If you remember, in episode 1527, when we discussed the market evaluation strategies, if you remember, we posed the question “What’s the most important factor in real estate?” Obviously, in that episode we went over how to select and qualify a target market, but what I said is that the overall MSA or city is not as important as the actual neighborhood or submarket, and the neighborhood and submarket are not as important as the actual deal, but all of those things are trumped by the ability to execute the business plan. So the market is not the most important factor, nor is the deal, nor is the cap rate or anything else. The most important aspect of real estate, and in particular apartment syndications, is the ability to execute the business plan. Because if you can’t execute the business plan, then the best deal and the best market really means nothing.

We said that one way for you to build up your ability to execute the business plan is obviously gonna be your education and experience, but the most important piece is going to be your team… Because when you are first starting out, you’re not going to know how to execute the business plan properly, and that’s kind of the catch-22, because the best way to learn how to do it is to actually do it, but you can’t really do it until you’ve done it before. So the way to get around that is to surround yourself with an incredible, experienced team, who has experience executing the business plan in the past successfully. So that’s what we’re going to talk about over the course of this next four-part series.

I just wanted to start off by mentioning how important your team actually is, because your  team is gonna be the one that’s gonna be helping you implement the business plan. With that being said, who is on the apartment syndication team? I’ve broken it into two different categories. The first is the core team members – these are people that you are essentially working with on a daily or weekly basis, and are pretty heavily involved in the process… Whereas the other team members are more deal-specific, or maybe you have meetings with them once every quarter or once a year; those are your secondary team members.

The four core team members are gonna be a business partner, a mentor,  a property management company, and a real estate broker, or brokers. Those are gonna be the four most important members of your team.

The secondary team members are going to be the attorneys, so the real estate and securities attorneys, as well as a mortgage broker or a lender, and then finally, an accountant. Essentially, there are a set of companies that you’re going to need to bring onto your team. In this episode, we’re going to talk about the first two, the partner and the mentor. In part two we’re going to talk about the property management company. In part three we’re going to talk about the real estate brokers, and then in part four we’re going to talk about those secondary team members. For this series, there is going to be a free document, of course, and it’s going to be a Building Your Team spreadsheet, so it will be a place for you to log the contact information of all the various team members that you need… Kind of like a checklist to make sure that you’ve got all of your bases covered. To download that document – you can find it in the show notes of any of the four episodes in this series, or at SyndicationSchool.com.

Before we dive into the process for hiring a partner and a mentor, I wanted to discuss how you actually find these team members. Again, for some of them it’s gonna be a very specific way to find them, or you might have a different strategy in mind, or have heard of ways to be able to find people in the past… But generally, you’re gonna find all of these team members through one of six ways.

The first way to find potential team members is through your interview-based thought leadership platform. In last week’s series – it actually was a four-part series, so the previous two weeks – series seven and eight, we discussed the thought leadership platform, and the importance of building a brand as an apartment syndicator… And one of those benefits was the networking capabilities of having an interview-based thought leadership platform. You are having a conversation with one real estate professional every week, bi-weekly or once a month, and that person in particular could be a potential team member, or maybe they know someone who could be a potential team member.

For example, you could make it your goal to try to interview at least one person from each of these four team member categories a month. Maybe one month you’ll interview a potential partner, and the next month a potential mentor, and the next month a potential property management company, and so on and so forth… And you get the dual benefits of  having a podcast or YouTube episode, but also you have the opportunity to meet with them, talk with them, get to know them, and see if they would be a good fit for your business.

Again, I’m just talking about how to find these people. We will go into particulars on what to do once you’ve found them in the later sections of this episode for the partner and the mentor.

Another way to find potential team members is through other interview-based thought leadership platforms. For example, you could listen to this daily podcast, so there’s seven different real estate professionals every week, 365 every single year, so maybe one of those people could be your property management company, or a mortgage broker. Right now our sponsor is actually a mortgage broker, so that’s the perfect example of a way to find a potential team member. Listening to the other podcasts, watching the real estate YouTube channels, reading blogs…

The third way is to attend local apartment meetup groups; go there, network, talk to people, figure out who is doing what, and see if they could be a potential team member. I know at Joe’s meetup group, for example, there is a section of the meetup where people get to ask  a question, or have an ask… So if you’re at this point in the process, your ask could be “Hey, I’m looking for a mortgage broker. I’m looking for a real estate broker. Do you have any recommendations?” and build a list.

The fourth way is through Bigger Pockets. There’s millions of active real estate professionals on Bigger Pockets. You can use the search function… For example, me in Tampa, I’d say “Tampa Bay property managers”, compile a list of all the profiles, and reach out to them and ask them to set up a phone call to discuss a conversation about potentially bringing them on as a team member. Now, for the Bigger Pockets strategy, I recommend only contacting people that are actually active on Bigger Pockets. If their profile has been inactive for multiple years, or if they don’t have any posts, then that’s not as good as someone who’s actively posting multiple times per day, because that’s the indication of that person’s business acumen and work effort, and things like that.

Another way is simply just to use the internet. You can google the top property management companies in your market, top real estate brokerages in your market, compile a list of those, and reach out, give them a call. That’s actually how I found my real estate brokers and property management company – I use Google.

And then lastly, but most importantly, the best way to find prospective team members is through referrals. The main source of your referrals could be a mentor – we’ll get to that person here later in this episode. Once you’ve found a mentor who’s an active apartment syndicator, who has a track record of success, obviously they’re tapped into the market, they’re tapped into the industry, and they should be able to provide you with connections to the various team members that you need.

Another approach is to bring on a property management company first, or a real estate broker, or a mortgage broker, and all three of those people will work with all the team members that you would need to bring on, so you can ask all of them for referrals  as well.

Really, the best way to find these people is through referrals, and those first six steps, except for maybe with the exception of the internet, are kind of essentially referral-based. So that’s how you find these team members.

Again, there’s particular ways to find a certain team member that might not work for a different team member, but in general, those are going to be the top six ways to find your team members.

Now, let’s get into the meat of this series, which is the process for actually hiring these team members. In this episode, I’m going to talk about the partner and the mentor. First of all, not every single person is going to need a partner or a mentor. It really depends… For example, for the partner, if you want a business partner, it should be someone who complements your strengths and interests, first of all, and they make up for the areas that you are lacking in.

A few examples – for me, I have a strong operational background. I understand the acquisition process, I am very detail-oriented, and I have the strongest experience in underwriting, as well as managing deals in the back-end… Whereas something that I’m lacking in is access to private capital, the ability (or really the interest) to raise money. So what I did is rather than attempt to do all that by myself, I decided to bring on a partner for the specific outcome of raising money. So I didn’t find someone who also liked to underwrite or someone who also wanted to be an asset manager; I found someone who was hyper-focused in the one skill that I was lacking in. That’s what you need to do.

Starting out, that might be a little different for you, because you might have no experience, or no credibility or strength; you actually might think you do… But you’ve gotta be a little creative. Based off of your educational background and your experience background, what do you have to bring to the table? What is it exactly? It’s gonna be something that you are good at and want to do, and then once you’ve identified that, you want to find other people, other partners to complement what you’re able to do.

What do I mean by “do”? What exactly do you need on the general partnership side for the apartment syndication? Because you’ve got your passive investors who are investing in the deal, and you’ve got your outside third-party team members who are finding deals for you, they’re managing the deals afterwards, but at the end of the day, apartment syndication is a business and you’re gonna need to have a team of people who are actually fulfilling the roles of that business.

There’s actually five parts to the general partnership. The first part would be someone who funds the upfront costs. This is the person who funds the costs from contract to close, although they’re usually reimbursed; you’re gonna need someone on the team that does that. There’s also gonna be someone that does acquisition management; they’re gonna find the deals, underwrite the deals, submit offers on the deals, manage the due diligence process, secure the financing, oversee the closing process… Essentially, everything from start to close.

You’re also gonna need a sponsor, also known as a key principal or a loan guarantor. This is someone who meets the liquidity, net worth and experience requirements set forth by the lender, and they sign on the loan. There’s also going to be the investor relations person; they’re the ones who find the investors, secure the commitments once there’s a deal under contract, and is responsible for the ongoing communication with the investors.

And then lastly, you’ve got the person who’s the asset manager. They’re the ones who manage the business plan and the management company after close. All five of those could be done by one person. One person is gonna be responsible for each; it could be really a combination of those two. And usually, when you’re starting out, it’s probably going to be at least two GP’s.  For example, you might have one person that’s responsible for acquisition management and asset management; another person is responsible for investor relations, they’re a sponsor, and they fund the upfront costs… But more than likely, there’s gonna be a lot fo GP’s. You might have one person who’s funding the upfront costs, you might have multiple people who are finding and underwriting deals, so they’re responsible for acquisition management; you might have ten sponsors to help you qualify for that loan, and you might have ten more people who are helping you raise money for the deal, and then a few people doing the asset management.

For each of these parts, there is a general compensation or general percentage of the general partnership assigned to each of these, so that’s how you know how to compensate your partners, as well as how you’ll be compensated. If you remember, in episode 1513 we discussed all the different ways the general partner makes money; that essentially goes into a pot, and if there’s one GP, then they get 100% of that pot. If there’s multiple GP’s, then the percentage of the pot that they receive is based off of the role that they’re fulfilling.

For the person who is responsible for the upfront costs, they’re getting reimbursed; there’s a little bit lower risk, so typically they’ll receive maybe 5% of the general partnership, or there might be some other agreement that they make with that person, and then they’ll get any percentage of the general partnership. Maybe they get interest rate while the money is being held, or something like that.

For the acquisition management, that is obviously a much bigger role, because you’re finding the deals, offering the deals, managing due diligence, and so on. So that is typically around 20% of the general partnership. The sponsor, key principal, loan guarantor, that person who signs on the loan – that could be anywhere between 5% and 20%. Now, why such a wide range? Well, it depends on the risk level of the deal. If it’s a turnkey property, it’ll probably be on the lower end of the range, whereas if it’s a highly distressed business plan, then they’ll have to give them a little bit more, because the risk level is increased.

It also depends on the type of loan. For example, if the loan is recourse, which means that the loan guarantor is personally liable, then you’re gonna have to offer them a little bit more than if the loan was non-recourse, which means they aren’t personally liable, unless a carve-out is triggered.

It also will depend on your relationship with this person. If you have a personal connection, a trusting relationship with the sponsor, then they’ll likely charge you a little bit less, whereas if they have no idea who you are, they don’t know your abilities, they don’t know you personally, then you’re gonna have to give up a little bit more of the general partnership to bring them on.

Other examples of ways to compensate this person is you could just give them a percentage of the principal balance at closing. On the low end, that could be 0.5% to 1%, on the high end that could be 3.5% to 5% of the loan balance, one lump sum paid to them. That could be in addition to or instead of the percentage of the general partnership.

Next, the investor relations person. That is also, obviously, very important, and it could likely be multiple people. That could be anywhere between 30% to 40% of the general partnership. And then lastly, you’ve got the asset manager, who would get 20% to 35% of the general partnership.

Now, how do you actually qualify a potential partner? Here are a few things for you to think about when you are talking to either potential business partners, like straight up 50/50, breaking this apart 50/50, or when you are bringing on someone for a particular duty, like investor relations or as a sponsor.

Number one, you’re gonna want to know what their track record is, in real estate and in business, similar to why you need a track record in real estate and in business before becoming an apartment syndicator… And you’re also gonna want to get a little bit more specific and ask them what is their track record on the specific thing they’re supposed to do. If they’re supposed to raise money, what’s their track record on raising money.

You also wanna know how much time they have to spend on the business. Do they have a full-time job where they’re working 100 hours/week and they can only dedicate a few hours a week to their duty, or do they have a more flexible job that allows them to give their responsibility the attention it deserves?

At the same time, you wanna know, especially if you’re doing 50/50, if they have the same amount of time that you have, because that might bring up issues in the future, if they’re working 20 hours a week in the business and you’re only working 5 hours a week, or vice-versa.

You’ll also want to know if they have complementary skills to you. You wanna know what they’re good at, and what they’re bad at or inexperienced at, and see if you are essentially the opposite. So what they’re good at, you’re not good at, or experienced at, and vice-versa.

You also want to know if you have complementary personalities. Essentially, can you get along with this person, or are you both very stubborn, do you both need to be in charge, in control? Kind of on a more emotional, personal level.

And then lastly, what is your long-term goal? If your goals are too far apart, it also probably won’t work out. If you wanna make a billion dollar company and they only wanna do a couple of deals before getting out, then again, that might bring up issues down the road.

Now, for the person who’s just starting out – and if you’re a browser of Bigger Pockets, you’ll see a lot of people asking questions about wanting a partner because they are inexperienced… And if that’s the case, then obviously you’re gonna have to win them over. You’re gonna give them something to add value to them, or else why would they be working with you?

A few strategies on how to actually be presentable when reaching out to potential partners who you actually need in order to help you complete the deal, whereas they don’t actually technically need you… Number one is to have that strong business and real estate background. If you wanna know what that means, make sure you listen to episode 1499 and 1500, where we had a conversation about that. You also wanna make sure that you display your apartment investing expertise. While having a conversation with them, let them know that you know what you’re talking about, basically… Which means that you can answer their questions on what markets you’re investing in, your investment strategy… Essentially, the questions that you’re going to be asked by the property management company, real estate broker, other team members… We’ll go over that in the future episodes.

You’ll also wanna bring something that they need to the table. Figure out what they need, and help them with that. Maybe you have  a particular skillset that they need, or maybe you have money, but you need help with everything else… You need to bring something to the table, rather than just wanting to do a deal and that’s really it.

Also, try to form a personal connection. I know a lot of people have success wining and dining, going out to the bars for a drink, or at restaurants, playing golf, and kind of just building a personal trusting relationship with this person, so that they trust you and they’re willing to work with you.

The last option is just pay them. Pay them money to be your partner. In that case, they’re essentially going to be a mentor, which is a perfect transition to the next section or the next team member, which is the mentor.

The mentor is going to be a paid consultant, so I’m not talking about someone who is like a fatherly figure to you, who you aren’t paying; this is someone you’re actually paying. A lot of people have different opinions on whether or not you need a mentor, and I’m not going to say whether you do or don’t need a mentor, instead I’m going to talk about what to expect or what not to expect from a mentor, and when you are ready to actually hire a mentor… And then the decision is ultimately up to you.

Whether you need a mentor really comes down to your expectations of what a mentor will do for you, as well as why you’ll want to hire a mentor. The four things that you should expect out of a mentor is 1) an active, successful apartment syndicator; they’re currently doing it, they’ve been doing it in the past, they plan on doing it in the future, and they’ve been successful. 2) You should expect a step-by-step system, as well as the personalized help for you to navigate the grey areas. They should have a system for you to plug into to replicate their success, but you actually have to do the work… And things that aren’t covered by that system, you should be able to talk to them about those grey areas.

3) A mentor is an ally that you can call on selfishly about anything. Since you’re paying them, you don’t really have to worry about asking them about their day, or how things are going for them, because you’re paying them to just talk about yourself. And then 4) you should expect connections. Again, since they’re active and since they’re an apartment syndicator, they should have connections to the people that you need to help you create your team.

Now, the two things that you shouldn’t expect… Number one is a knight in shining armor. Don’t expect to hire a mentor and then magically have a multi-million-dollar apartment syndication business in a couple of years. Expect to go in there and actually have to do the work yourself. They’re just gonna give you a leg up. And lastly, don’t expect that done-for-you system. Again, you’re gonna be doing the work yourself; you don’t want them to do everything for you. Number one, they probably won’t be doing anything for you, and two, even if they did, you’re highly dependent on them and they’re never gonna be able to break off on your own.

Now, what does a mentor actually do for you, besides those four things to expect… 1) Providing you with a step-by-step system; helping you navigate the grey areas. 2) Being an ally to call upon. 3) Connections. 4) Them being the active, successful apartment syndicator… You will also have the ability to leverage their credibility when talking to team members and to potentially passive investors, as well… Because you’re gonna say “Hey, on my team there’s a board member who has done multiple millions of dollars in deals; they’ve been doing it for 20 years”, and then also you’ve got the potential for alignment of interests. Just the fact that they’re being on your team, you can leverage their credibility, but they also might have some sort of stake in the deal, whether it’s a sweat equity stake of actually working on the deal, or they have their own money in the deal. Those are the things that a mentor could do for you.

How do you know you’re ready to hire a mentor? And not everyone is at that point right now… The two things that you need to do in order to be ready to hire a mentor – number one is to have the accurate expectations, which now after listening to this episode you actually have those expectations. And number two is to have a defined outcome. What is it exactly you want to get out of the mentorship? You need to know exactly what it is. Is it to find deals, is it to bring on team members…? It just can’t only be an apartment syndicator; it has to be something specific, so that you can leverage that person accordingly.

If what you really want are connections, then the expectation is that the mentor should offer connections, so when you’re talking to mentors, ask them about their connections, and then once you’ve actually hired them, make sure that’s your focus, at least at first.

Now, how a mentor is compensated is really based on their compensation structure for their program… But I would expect to pay at least a few thousand dollars for a high-quality mentor. But again, since we’re dealing in a hundred-thousand, multi-million-dollar industry, what’s a few thousand dollars if you’re able to close on a deal?

Now, the thing to think about when you’re qualifying this person – number one, are they an apartment syndicator? Number two, are they still active? And three, do they have a successful track record? By successful – did they meet or exceed their return projections on their deals? You don’t want someone who just teaches apartment syndications, but hasn’t actually done it before or isn’t still doing it, because like everything, it’s an evolving industry, and if they were successful in the past, it might have been because something that happened in the future that didn’t affect them, because they were buying the deals at that point in time. So make sure that they’re actually an apartment syndicator, that they’re still active, and that they have a successful track record.

Now, I did say that the mentor is a paid person, so obviously, your way to win them over to your side is to pay them money… But once you’re actually in their program, there are still a few things that you can do to set yourself apart from the other people in the program, in order to hopefully get extra help from them, and ideally, have some sort of stake in the deal… And the best way to do that – and it’s very simple said, but harder in practice – is to actually make sure you remain active in their program and actually do the exercises. Once you get into the program, they’re gonna have some system for you, and it’s probably gonna start off by you getting educated, and then kind of going from there… Make sure you set time each day to actually perform those exercises. Don’t just pay the money and then disappear. Make sure you’re active, actively asking questions to show that you’re serious about closing on a deal.

And then lastly, you can listen to episode 1507, “How to break into the apartment syndication industry”, to learn another tactic for how to win over a mentor. In this specific strategy it’s technically not a mentor, because you’re not paying them money, you’re paying them in a different form… So I would definitely recommend checking out that episode, 1507.

That wraps up this episode, the part one of the four-part series about forming your apartment syndication team. In this episode you learned about the four core team members and the three secondary team members that make up your seven-man team, or seven-woman team, or seven-company team. You also learned the top six ways to find your prospective team members, and then lastly, you learned the process for hiring a business partner(s), as well as a mentor.

In part two, we will discuss the process for hiring a property management company. The fact that we’re dedicating an entire episode to just the property management company should tell you how important they are to your success.

Until then, to listen to other Syndication School series about the how-to’s of apartment syndications, and to download your free teambuilding spreadsheet document, visit SyndicationSchool.com.

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

JF1542: The Power Of Your Apartment Syndication Brand Part 4 of 4 | Syndication School with Theo Hicks

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If you haven’t listened to the first three parts of this series, I highly recommend you do so before listening to this episode. Those episodes were 1534,1535, and 1541. This episode is all about choosing and creating your thought leadership platform. How do you know which is best for you? How do you actually create it? Theo will cover those questions and many more in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

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

This episode is going to be part four of the four-part series entitled “The power of your apartment syndication brand.” I highly recommend that you listen to the first three parts before listening to this episode, because this episode is going to be an accumulation of those three parts and the ultimate, final component of the brand, which is the thought leadership platform.

In part one, which was episode 1534, you learned the primary benefits of creating a brand, as well as why and how to define a target audience for your brand, and then we discussed the first three components of the brand, which are the company name, the logo and the business card.

In part two, which is episode 1535, we talked about the fourth component of the brand, which is the website. We discussed how to create a website and ways to increase your website traffic and convert your viewers. Then in the third party, we discussed the fifth component of the brand, which is the company presentation. We outlined the purpose of the company presentation, how it’s used, and also the seven-part company presentation document, and we also offered a free document, which is a company presentation template for you to use as a guide to create your own presentation, which you can download at SyndicationSchool.com for free.

Now, in part four, as I mentioned, we’re gonna go over the sixth and final component, which is the thought leadership platform. By the end of this episode you will learn what a thought leadership platform is, how to select a thought leadership platform, the keys to a successful thought leadership platform, the process for developing a thought leadership platform, as well as addressing the objections you’ll likely have to creating a thought leadership platform.

Lots to go over in this episode, so let’s dive right in. What is a thought leadership platform? Well, the outcome of the thought leadership platform is to attract your 2,000 true fans, which is your primary target audience, which you defined in part one of this series, episode 1534. So if you wanna achieve massive levels of success in apartment syndication, then a thought leadership platform is an absolute must. As I mentioned in part one, about how important the brand is, the thought leadership platform is the foundation for your brand.

Specifically, what a thought leadership platform is – well, an example is you’re listening to one now, but specifically what a thought leadership platform is, is an interview-based online network where you consistently offer valuable content to your 2,000 true fans for free.

The five benefits of the thought leadership platform are the same five benefits of a brand as a whole, which are 1) credibility – with your thought leadership platform the goal is to become the go-to source for best investing advice and wisdom. If you are the go-to source, you’re a pretty credible person.

Next is education – you can use your thought leadership platform to create your own customized educational program.

Three is networking – you can create and cultivate new relationships with potential investors, team members and business partners, as well as reinforce existing relationships through your thought leadership platform. Four is contribution. By having your thought leadership platform, you’re also not only helping yourself in regards to education, but you’re also helping others with their education, and since your thought leadership platform is gonna help you grow your business, the investors who are investing in your business will also benefit by being able to find you for investment opportunities and achieve their investment goals.

Then lastly is the potential for cashflow through sponsorships. Now, we’re not gonna discuss this on the podcast, but if you go to SyndicationSchool.com or the show notes, you can download a free document for this episode, which is “How to structure sponsorships on your thought leadership platform.” It’s a guide to how to essentially monetize your thought leadership platform.

Overall, the purpose of the thought leadership platform is to stay top of mind with and be incredible in the eyes of your 2,000 true fans, your primary target audience, your passive investors, along with the secondary benefits of education, contribution and the cashflow.

So how do you select a thought leadership platform? We’ll just use Joe as an example. Joe’s first thought leadership platform was a podcast, which you’re listening to now, and then from there he expanded to other platforms, which are a meetup group, a newsletter, a YouTube channel, blog, conference, books, and a Facebook group. All of those are examples of thought leadership platforms, and we recommend that you follow the similar strategy of starting with on, and then focusing all of your attention on that, and then once that is a self-sustaining machine, you can grow and expand from there.

So pick one of these following thought leadership platforms – a YouTube channel, a podcast, a blog, a newsletter, or a Facebook group. How do you know which one is the best for you? Ask yourself what would you enjoy and prefer doing? Let’s say for example that you really like speaking, but you don’t like the prospect of being on camera or talking in person, because you get stage fright, or I guess video fright. Well, then your best option would be a podcast.

Well, let’s say you don’t like to speak, but you like to write; or let’s say that you enjoy speaking, but you’re afraid to do any sort of speaking or video thought leadership platform because of your full-time job, and if your boss finds out, he’s not gonna like how you’re spending your spare time… Well, then your best option might be a blog.

Or let’s say you enjoy speaking and you’re comfortable with being on camera, but you don’t wanna actually speak in person; then the YouTube channel would be your best. Or let’s say you enjoy speaking, you’re comfortable being on camera AND you’re comfortable speaking in person – essentially, you’re a rockstar – then the meetup group might be best for you.

Now, the last two – the newsletter and the Facebook group – you should do regardless, because those are places for you to post and share your content. Whether you enjoy or prefer doing those doesn’t really matter; you need to make a newsletter and a Facebook group.

Based off of Joe’s experience and my experience with having over 1,500 episodes for the podcast, that generates over 350,000 monthly downloads, as well as creating hundreds of blogs and YouTube videos, writing multiple books, hosting meetup groups for years, hosting two conferences, these are the five keys that we’ve discovered to creating a successful thought leadership platform.

Number one is it must be interview-based. Because remember, one of the main objectives of the thought leadership platform is to increase your credibility, to be perceived as an expert apartment syndicator, as well as to network with investors and team members. The only way to accomplish this is to actually do interviews. So from a credibility perspective, you are going to position yourself as a go-to resource for the best info, advice and strategies, because you’re going to be interviewing the most successful real estate professionals. As you do that, your audience will grow, as well as your reputation, which will allow you to attract even better guests. When you attract ever better guests, your audience and reputation will continue to grow even more, which will allow you to, again, have that credibility and expertise perception, which will allow you to attract more passive investors.

From a networking perspective, you’re able to speak with people who are active and successful, and in fact, as I mentioned in a couple of Syndication School episodes before, you’ll be able to network and speak with people that it would have been impossible for you to otherwise. For example, Joe has spoken to Tony Hawk, Emmitt Smith, Robert Kiyosaki, Barbara Corcoran, and the majority of those were before he had done many syndication deals. The reason he was able to do that was because he had a podcast that he posted consistently, that had a following of active real estate professionals.

If you think about it in the long-term, if you just do one interview per week for two years, that’s over 100 conversations with successful, active real estate investors. Look at that from many perspectives – from an educational perspective, you’re going to learn the best advice from over 100 people, and then also think about the networking opportunities from speaking to these 100 people, and then having access to people that they know, and it’s a runaway effect from there. So that’s number one – it must be interview-based.

Number two is you must consistently post content. Your audience needs to know when to expect new content. If you post new content sporadically, then you’re building less rapport, and therefore have less loyalty from your listeners, and it also comes with less credibility, because you’re not perceived as someone who is consistently posting content. So what you should do is pick a frequency – daily, a few times a week, maybe Tuesday or Thursday, weekly, bi-weekly, monthly, or even if it’s twice a year, pick a frequency and stick to that frequency no matter what, with the only exception being you increasing the frequency. If you started off by posting once a month, then you cannot go to posting twice a month. You must stick to at least once a month, but from there you can go to maybe bi-monthly, or weekly; then you go to bi-weekly and then you go to daily.

The reason why is because think about something that you really like – pick a TV show, or a movie, or  a sports team. Do they have their games or their TV shows just randomly posted, without the notice of the audience, or are these things scheduled months or years in advance? It’s the latter, not the former. They don’t have random basketball games that you don’t know when it’s gonna happen, and the reason why is because that increases the anticipation, because they know it’s coming, as well as their loyalty, because again, they know when this content is going to be coming, so they can plan to listen to it accordingly.

It’s going to be very difficult at first, and this depends on the type of personality you have, but it could be hard at first to stick to your frequency, because you’re not gonna have the momentum and the habits from doing it for months at a time, and you’re also not gonna have the motivation from having a large following, because when you first start out, you’re only gonna have a couple people listening to your podcasts or reading your blog… So that’s why it’s extremely important for you to actually create a schedule that’s at least a month out in advance (ideally two months) of the content that you’re going to create.

Essentially, you wanna create an editorial calendar for the frequency of content, as well as the topic. If it’s a blog, what are you gonna blog about? If it’s a podcast, who are you interviewing? Have that calendar.

For example, if you want to post a podcast once per week, then you want to have at least five episodes recorded before launching, so that means you have five weeks’ worth of content. Then as long as you record one new interview a week, then you always will be five weeks ahead of schedule. So you [unintelligible [00:16:13].07] then schedule out five weeks’ worth of episodes and then each week schedule one new episode, and that way you’ll always be five weeks in advance. Another benefit is that you’re increasing your chances of being featured on the New and Noteworthy section on iTunes.

If you want, you can actually release all five of those episodes once a day for five days, so you’ll have ten episodes pre-recorded, released five days in a row, and then do one weekly. If you do that, you’ll increase your chances of being on that New and Noteworthy section, which will give you a huge boost and a huge head start.

Overall, pick a frequency – daily, monthly, weekly etc. – and then create a content calendar that’s at least one month out in advance. So that’s number two, consistent content.

Number three is to tie into a large built-in audience. Don’t start from scratch. Start by tapping into a platform that already has a large existing audience, and leverage that audience. For example, Bigger Pockets has one million members. iTunes has 70 million monthly podcast listeners. YouTube is used by over a billion people. Various social media sites are used by over 80% of the population, and WordPress is the world’s biggest blog.

So rather than just simply posting content on your website, tap into these existing networks. But even though you are tapping into this large existing network, don’t expect to see quick results; don’t expect to really see any results for at least six months, and then to see some results that I guess put a smile on your face, expect to wait at least 1-2 years. Just like apartment syndications, building a brand is a long-term game, but once you’ve posted content consistently and followed these keys for a year, you are going to see results. And maybe even sooner, depending on how well you structure your thought leadership platform. So that’s number three, tie to a large built-in audience.

Number four is going to be uniqueness. Tim Ferriss says “Be unique before trying to be incrementally better.” What that means is focus on creating very unique content specific to you first, and then focus on how to grow your audience, rather than trying to focus on what are the best ways to grow your audience, and not focusing on what you’re actually good at and what your talents are. Because we all have a unique talent, we’re all unique – we have different backgrounds, areas of expertise, personalities, passions, interests… So you need to figure out what your unique talents are, and then figure out how to incorporate that into your thought leadership platform.

One way to determine your unique talents is to ask other people. There is a four-step exercise called “The Unique Capabilities Survey”, which is from the 80/20 Sales and Marketing book by Perry Marshall. The four-step process is to 1) create a list of five people that you’ve known for at least a year, that aren’t family members… Because our family members may not give us the best responses. So create that list. 2) Ask people on that list what is my unique ability and what do I do naturally better than most. 3) Categorize their responses based off of things that are mentioned by everyone, and then things that are mentioned by at least two people, and then based off of those categories, determine your giftedness zone. This giftedness zone are your unique talents, that were confirmed by others; you will use these to create your unique thought leadership platform.

For example, when I performed this exercise, my three responses that were either said by everyone, or said by a few people, was 1) I was funny, 2) I was very detail-oriented and 3) I was personable. So since I was personable, I decided to start a YouTube channel, and I tried my best to incorporate my humor into that YouTube channel, as well as getting into the weeds with the information I was discussing, so very detail and data-oriented. And again, I wouldn’t have known what I was best at without asking those people, because I would never have said that I was personable or detail-oriented. That’s just me. Maybe you know what you are objectively and don’t need to do this, but still, I recommend doing it just to confirm your assumptions.

Another strategy to either do instead or in addition to implementing and incorporating your giftedness zone is to incorporate your area of expertise into your thought leadership platform. For example, if you have a background in construction, then you can have a thought leadership platform that is about hands-on tips from your experience, and then you can extract what questions to ask others during the interviews.

Let’s say you have a background in direct sales. Well, you can create a thought leadership platform that focuses on sales techniques, and how that applies to attracting passive investors or team members or deals. Or let’s say that you are a marketing executive, or I guess a marketing manager; then you can do a podcast or a YouTube channel with marketing tips for finding deals, or finding residents after you have a deal under contract.

So those are two approaches, but overall the idea is to make your podcast or YouTube channel or thought leadership platform unique, based off of either your giftedness zone or your area of expertise… Or ideally both. That’s number four, uniqueness.

Number five, and lastly, is to educate while you’re entertaining. So who is more famous – LeBron James, or Mrs. Wrinkle. The answer is LeBron James, or your answer is probably “Who the heck is Mrs. Wrinkle?” Mrs. Wrinkle was my first grade teacher. She was a great educator, but the reason why she wasn’t LeBron James status, besides her (I guess) physique, was that she was not an entertainer. People prefer to be entertained more than they prefer to be educated, which is fairly self-evident, but still worth saying. So take this into consideration when you’re structuring your thought leadership platform and ask yourself “How can I entertain my listeners while also educating them?”

Let’s use Joe’s podcast as an example. Rather than just having a dry interview format that’s the same every single podcast, instead Joe has some engaging intro and outro music, he also has different types of podcast episodes each week. Obviously, there’s the Syndication School that you’re listening to, and then he has his Monday-Thursday interviews, where he just interviews regular guests, and then on Fridays we do Follow Along Friday, where me and Joe go over our business updates for the week. Then there’s Situation Saturday, where Joe has a conversation with an investor about a stinky situation that they were in and how they overcame it. Then on Sunday there’s Skillset Sunday, where Joe interviews someone to extract a specific skillset that that investor has, and how that applies to real estate.

Also, Joe concludes his episodes with the Best Ever Lightning Round, where he asks them questions about their favorite book, their best/worst deal. He also has a name for the listeners – the Best Ever listeners – which is what we use when we introduce each podcast. We’ve also incorporated a trivia question of the week into Follow Along Friday. So those are all podcasts, and then there’s another example – we’ve created a quick for the blog… An engaging quiz that allows people to test their knowledge, rather than just absorbing information.

Those are all just some examples of how to create entertaining content, educating at the same time, so brainstorm some ideas for your thought leadership platform… Either copy Joe’s exactly, which is probably what you don’t wanna do, but it could work; I recommend just using Joe’s as a guide, and then incorporating your giftedness zone and your area of expertise into how to make your podcast or YouTube channel or thought leadership platform entertaining, while educating.

A good question to ask yourself after creating content to determine if you’re actually entertaining people is to just ask yourself “Would my target audience love this content so much that they will feel compelled to share it with their friends?” Because if your audience is sharing it with people, that’s the ultimate validation of your content. Of course, you wanna track what content was shared the most in order to optimize your content on an ongoing basis.

Those are the five keys to success. Again, those are having an interview-based thought leadership platform. Number two, posting on a consistent basis. Number three, tying into a large built-in audience. Four, uniqueness, and five is to educate while entertaining, or entertaining while educating.

Now let’s get into the specifics on how to actually develop your thought leadership platform, which is a five-step process. Number one is ask yourself what is the goal. Well, the goal of a thought leadership platform should be to help you achieve your 12-month goal and long-term vision, which if you don’t know what those are, listen to episode 1513 and 1514. Based off of those goals, you wanna list out how your thought leadership platform will help you achieve those goals. For example, let’s say you believe your thought leadership platform is gonna help you find deals, build trust and a personal connection with your investors, as well as help you with your education. Well, then you want to create a mission statement that is specific and quantifiable about how it will help you achieve those goals.

For example, based off of those – finding the deal, building trust and personal connection with investors and education goals, my mission statement would be “I will research apartment owners in my target market, invite at least one per month to be an interview guest on my podcast, build a relationship with them and ultimately purchase their apartment communities in the future.” That covers goal number one.

By interviewing active real estate professionals once a week, including these owners, my target audience will get to know me faster, resulting in a higher level of trust and confidence in my ability to successfully invest their money. So goal number two – build trust and personal connections with investors.

When I stick to interviewing one real estate professional per week, which equates to 52 per year, I will grow smarter. In turn, this will help me execute my business plan. So goal number three, which is the education.

So that’s the first thing you wanna do – determine what the goal is and create a mission statement for how specifically and quantifiably you will accomplish that goal.

Number two is to ask yourself “Who is my target audience?”, which if you’ve been following the syndication school series in order, you should have already done. If you haven’t, go back and listen to episode 1534, where you will define your primary target audience, which is specific demographic information on the type of person you want investing in your deals, which more than likely will be your current circle of influence, so people that you already know.

But you also want to define a secondary target audience. We briefly hit on this during episode 1534, but your secondary target audience are people that you want to know, people that could be potential team members, or other people that you wanna attract. Let’s say for example your goal is to eventually have a consulting program; well, then your secondary target audience could be people who are interested in becoming apartment syndicators. Or maybe the secondary target audience is people who can bring you deals. Those are examples… Again, it depends on what you’re trying to get out of it on top of attracting passive investors.

Once you have your primary and secondary target audience, you want to add those to your mission statement. For example, Joe’s statement for this part would be “65% of my content is directed at my primary audience, who are 35-65 year-old males who are accredited investors. 35% of my content is directed at my secondary target audience, who are individuals who want to become apartment syndicators.” So that’s number two, who is the primary and secondary target audience.

Number three is why will they come? Because if you build it, they will not necessarily come. So questions to think about for this particular step in the process are “Why does your target audience need the information you will provide?” What solutions to their problems can you provide with your thought leadership platform? What’s in it for them? How will they benefit? Why will they become a loyal follower of your content and not the thousands of other real estate-related thought leadership platforms? And finally, what qualifications do you have that make you the go-to person for this information?

I recommend writing out a couple of sentences in response to each of those questions, and then take those answers and incorporate them into the description for your thought leadership platform, as well as the name. For example, “Joe’s podcast is the best real estate investing advice ever, because the reason why people will come is to learn the best advice ever from real estate professionals.” His description is “Are you ready for the best real estate investing advice ever? Welcome to the world’s longest-running daily real estate investing podcast. Join Joe Fairless as he talks to successful real estate professionals, as they give you their best ever advice with no fluff. Joe controls over 400 million dollars in real estate, but started with zero dollars in 2009. He went from buying single-family homes worth $35,000, and moved up to raising money and buying large apartment communities with investors. He has made mistakes, money and friends along the way, so click play now and see why this is one of the top investing shows on iTunes.”

If  you break down that description, it starts off with a question that they’re gonna respond with “Yes, I wanna know what the best advice ever is.” He also mentions that it’s the world’s longest-running daily real estate investing podcast, so again, that’s a qualification. He also talks about what the podcast is actually about, and what they’ll be getting out of it by listening to it, which is the best advice from real estate investors, with no fluff. He also discusses more qualifications as to why people should listen to him, which is that he owns 400 million dollars of real estate, and he started with zero dollars in 2009. And finally, he ends with some honesty where he says “I’ve made mistakes, money and friends along the way.” Again, all of that is to attract that listener and answer that question, which is “Why should I listen to this podcast?” Well, that’s covered by the title and the description.

That takes us into step four, which is what is the name of your thought leadership platform. Again, ponder those questions from the previous step, and create 3-5 names based off of the answers to those questions, as well as your goal and your target audience, and then ask for feedback from your target audience preferably, or just your circle of influence, and select the most popular name.

For help or guidance on how to create a name, if you’re stuck, I recommend going to iTunes and taking a look at the names of some of the most popular podcasts in the real estate investing industry, and using those for guidance.

Lastly, step five is how will the thought leadership platform flow? Some questions to think about are what will be the specific structure of your thought leadership platform? Will your content be your own, or will it be presented in interview form? …which you already have the answer to – interview form. How often will you create content, which you should know, when you picked and committed to your frequency. How often will you create content? How will it start and end? If you’re doing a podcast, how will it start and end? Will it be the same each time, or will it be different? How long will the content be? For a blog – are you gonna do 1,000 words, or is gonna be 15,000 words, if you’re feeling bold? Or how long will each podcast episode be? And will the content be unique, or will it follow a standard template  each time? For example, Joe’s got Follow Along Friday, Situation Saturday, and Syndication School, so it’s gonna be unique each episode… And the same thing for blogs. We’ve got blogs based off of interviews, we’ve got blogs based on a specific topic, we do picture blogs, we do blogs based off of questions in the Facebook community…

For example, the flow of a podcast – Joe’s podcast in particular, one specific type of podcast, it starts off by briefly introducing the guest, then Joe asks the guest to provide more information on their background and what they are focused on now; then the meat of the podcast is asking questions related to their given field. If it’s a real estate investor, Joe asks deal-specific questions. If it’s not a real estate investor, then he asks questions to extract skillsets that might be relevant to investors. Then he asks the money question, which is “What is your best real estate investing advice ever?” Once they answer that question, Joe goes into the Best Ever Lightning Round, and then concludes the episode by providing a summary of information provided by the guest.

What you wanna do is you wanna create a similar list of exactly how your podcast, YouTube channel or thought leadership platform is going to flow. One of the reasons why you wanna do this, besides the fact that you want to determine this information, is that you want to send this info to any interview guests, so they know what they’re getting into. As I gave that example structure, the interview guest would know beforehand that it’s gonna start off by them being introduced, and then they’re gonna have to give more information on their background, and they’re gonna be asked questions about their related field, answer the money question, as well as the questions from the Best Ever Lightning Round.

That’s the five-step process to actually develop your thought leadership platform. Number one is what is the goal, number two is who is the target audience, number three is why will they come, four is what is the name of your platform, and five, how will it flow?

Now, I know we’re a little bit over time here, but I still wanna go over this last section, which is addressing any objections you may have. The top three objections to creating a thought leadership platform are 1) I just don’t wanna do it, for whatever reason; most likely because it gives you anxiety, speaking or being on video, or speaking in person kind of gives you anxiety. 2) I don’t have the time to do a thought leadership platform, which is probably the most common, and 3) I don’t have the money to do a thought leadership platform. Let’s go over all three of those quickly, as well as what you need to do in order to overcome those objections.

In regards to not wanting to start a thought leadership platform for anxiety reasons or commitment reasons, well think about it from this way – regardless, you’re gonna have to commit to something, you’re gonna have to do something with your life, and do you want that to be a thought leadership platform that could potentially lead to you launching a multi-million-dollar apartment syndication empire, or do you want that commitment to be working a 9-to-5 job that you dislike? Now, maybe you like your job, maybe it’s some other reason why you don’t wanna do it, but overall, you need to keep in mind that the thought leadership platform is the key to your success, it’s the foundation of your business; it will help you educate yourself and other, it’ll help you build that credibility that you need when you’re first starting out, because you haven’t done a deal before, and it will help you and others achieve their financial goals.

So what holds a higher priority in your mind – those benefits, or the anxiety or the dislike, or whatever it is why you don’t wanna do a thought leadership platform. So which one would you rather have, one or the other? You’ve gotta choose. Do you want the benefits of a thought leadership platform, with the downside of the potential anxiety upfront, or would you rather not have that anxiety and continue doing what you’re doing right now? Ultimately it’s up to you.

The next objection is “I don’t have the money”, and the question to ask yourself for that one, as well as to ask yourself if you’re saying “I don’t have the time” is to ask yourself how have these similar excuses served you in the past? Think of something that you haven’t done in the past because you didn’t have the money or time, and what that outcome was. And to overcome both of those objections, what you wanna do is brainstorm ways to prioritize things in your life in order to accomplish the goal of starting a thought leadership platform. So if you don’t have any money, a potential solution would be to focus on using free tools for your thought leadership platform and your website. Or if you don’t have the money to shell out and buy a nice microphone, or some fancy video editing software, then just record your interviews with your cell phone or laptop, which you already have.

If your objection is “I don’t have the time”, well, it will take a maximum of 30 minutes a day to create a thought leadership platform if you’re doing weekly or monthly content, so ask yourself “How can I create 30 additional minutes per day?” Does that mean reducing the amount of time you’re on social media, or watching TV? Does that mean waking up 30 minutes earlier each day, or staying up 30 minutes later?

Now, if you have the money, another solution is to hire team members to reduce your workload. So maybe all you do is the interviews and have team members who set up the interviews, edit the interviews and post the interviews. Or you can forego all of that and just do all of the content creation on the weekend. So block an hour every Saturday morning, instead of sleeping in, get up an hour earlier and work on your thought leadership platform then.

These are just a few potential solutions, but ultimately it’s up to prioritizing your time, because everyone has 24 hours in a day – so it’s prioritizing those 24 hours to fit this thought leadership platform into your schedule. The reasons why are, again, because of all those benefits. It’s gonna be the key to your success; you need this thought leadership platform.

Again, I know we went a little bit overtime, but to conclude, this is part four of the four-part series about the power of the apartment syndication brand. In this particular episode you learned what the purpose of the thought leadership platform is, how to select a thought leadership platform, the five keys to success of a thought leadership platform, which is it being interview-based, posting content consistently, tying into a large built-in audience, making it unique, and educating while entertaining.

Then you also learned the five-step process to actually develop your thought leadership platform, and lastly, we went over some strategies to overcome any objections that you have. And of course, the free document for this episode was the guide to structuring sponsorships on your thought leadership platform, so eventually you will be able to monetize it with sponsorships, assuming you’ve grown your audience and have followed the five keys, and developed your thought leadership platform properly.

Thank you for listening. To listen to parts one through three, as well as the other Syndication School series about the how-to’s of apartment syndications, and to download all the free documents we have available, make sure you visit SyndicationSchool.com. Thank you for listening, and I will talk to you next week.

JF1541: The Power Of Your Apartment Syndication Brand Part 3 of 4 | Syndication School with Theo Hicks

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For part 3 of this 4 part series, Theo will be focusing on your company presentation. If you haven’t listened to Part One or Part Two we highly recommend you do so before listening to this episode. Those were episodes 1534 and 1535. Once you’re caught up, or if you already are, hit play and learn why the company presentation is so important and how to put together a really good presentation to present to your investors and other potential team members. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

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

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

 

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

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

This episode is part three of a four-part series entitled “The power of your apartment syndication brand.” So it’s focused on the branding aspect and the benefits of your brand towards apartment syndications. Now, I highly recommend that you listen to part one and two of this series, because we are going to grow off of those two episodes.

Part one was episode 1534, and in that episode you will learn the five primary benefits of creating a brand, which are credibility, networking, cashflow, education and contribution. You’ll also learn why and how to define a target audience for your brand, which is based off of the 2,000 true fans concept. Then lastly, you will learn how to create the first three components of your brand, which is a company name, a logo and a business card.

In part two, which was episode 1535, the focus was on the fourth component of the brand, which is a website, so you will learn how to create a website, as well as eight strategies for increasing your website traffic, as well as conversion.

Now, this is part three, and by the end of this episode you will learn about the fifth component of the brand, which is your company presentation. So we’ll be discussing the purpose of your company presentation, as well as how to create the company presentation, and since this is the Syndication School, you will also be able to download a free document, which will be a PowerPoint template that you can use as a guide to creating your own company presentation.

Now, what is the point of the company presentation? Well, what it’s not is it’s not a pitch book, or a sales tool. You don’t want to think about the company presentation as that. Instead, you want to think about the company presentation being a solution to your investors’ challenge, which is them making money, them making a return on their investment. So you’re not really selling them anything, rather you’re presenting them with a solution to their challenge and allowing them to decide whether investing in your deals will help them overcome that challenge.

Now, if you remember – or if you need a refresher, listen to episode 1534, which was part one of this series – I mentioned the five main benefits of creating a brand, and the PowerPoint presentation helps you accomplish all five of those, obviously, but the three main benefits of the company presentation as it relates to your brand are credibility, networking and education.

So in regards to credibility, this company presentation will be a passive investor’s first introduction to you and your business. Sure, maybe they listened to you before on the podcast, or they’ve filled out the Contact Us form on your website, but this is the first time that you are speaking directly to them. And what you wanna use this company presentation for is to attract the interest and obtain trust from your passive investors, because within your company presentation, which we’ll go over here later in the episode, you’ll have a chance to display your expertise and your team’s expertise, as well as experience.

So once the potential investor reads through your company presentation, they’ll know all about you and your team, and you will also include additional information in the company presentation, which will attract their interest in not only investing in apartment syndications, but investing with you in particular. So that’s where the credibility benefit comes into play.

Next, it is a great networking tool, and this is something we’ll go over in future episodes, when we begin our conversations about actually sourcing verbal interest from potential investors… But this is a presentation that you will send to them as a networking tool; it’s much better than just having a conversation with them on the phone, because they’ve already read through your company presentation and they have an idea about you, your business and your investment strategy… And at the same time, this is a good networking tool for team members. Again, rather than talking on the phone with a potential property management company and just explaining your background, instead you can send them this document before the conversation, so that they have additional information about you before the conversation, and also they can see information about you and your team’s background and expertise. So it’s a great networking tool.

And then lastly, it is also going to be educational. When you are first starting out, you are likely going to be raising money from people you already know, and they may not have a high-level understanding of the apartment syndication process, or investing in general… So the company presentation will provide them with a good introduction into the syndication process and why they should invest in real estate, and particularly in apartments.

Now, as you grow, this benefit of education will likely decrease, because as you grow, you’ll attract more experienced investors, who won’t need an explanation of how you find deals and data points like that, because they already know.

So those are three main benefits, but again, you also benefit from the cashflow aspect, because the company presentation is helping you attract investors, as well as contribution, because as you attract investors, they’re able to invest in your deals and meet their financial goals. So that’s the purpose of the company presentation.

Next, let’s go over the meat of the conversation, which is how to create a company presentation. As I mentioned in the beginning of this episode we will be providing a free document, which could be downloaded either in the show notes of this episode, or at SyndicationSchool.com. It’s gonna be a company presentation template, so it’ll be a PowerPoint including information that I’m gonna go over in this episode.

What you wanna do is download that company presentation, populate it with your specific information, and then I highly recommend hiring a designer on UpWork and asking them to design the PowerPoint and pretty it up a little bit. That’s what we did with our presentation, but we’re not gonna give you that one; we’re gonna give you the standard version, and you can design it to your liking.

So overall there are going to be seven components to the company presentation. The first, pretty simple – table of contents, where you outline the other six components of the presentation, which are going to be the Meet Your Team section, Why Apartments section, Investment Strategies section, Roles section, 7-Step Process section and then an example deal. I’ll go over what all those mean here right now.

The second section is going to be the Meet Your Team, or the Meet Our Team, or essentially the section where you put the bios of you and your team members. So it’s gonna be your bio, as well as the bios of anyone else involved in a deal that is relevant to your investors. For people just starting off, an important team member will be a sponsor or a board member. For example, if I were to create a company presentation, I would have Joe as a board member, because I personally don’t have experience doing a deal, but Joe does, so I’m able to leverage his experience in the eyes of my investors and team members.

And then also you might wanna put information in there about your property management company, since they’re gonna be highly involved in the business plan, as well as any partners that you have.

Now, what’s the difference between a good bio and a bad bio? Because not all bios are equal. Here’s an example of a bad bio, that you do not want to put in your company presentation… It’s as follows:

“Joe has invested in real estate for over three years. He is currently the host of a successful podcast, and in his spare time is involved in various extra-curricular activities in charitable organizations.”

You probably know why that’s a bad bio, but let’s break it down quickly. The first sentence, “Joe has invested in real estate for over three years”, the only information they’re getting about Joe’s  real estate business is how long he’s been doing it. They don’t know how much real estate he owns, how many deals he’s done, what type of deals he’s even doing, what type of real estate he’s investing in, so it’s not specific enough, or quantifiable, which you’ll see is gonna be a trend for a bad bio.

The next sentence, “He is currently the host of a successful podcast” – it doesn’t say what the podcast is, you don’t know how long he’s been doing it for, you don’t know what “successful” means… Is that number of downloads, is that just him doing it consistently? How is that success measured? And they also don’t really know what the format is – is it interview-based? Is it Joe just talking about his day? What’s the podcast even about?

And the third sentence, “In his spare time, he’s involved in various extra-curricular activities and charitable organizations” – again, what does this mean? What are the extra-curriculars? Is Joe just considering staying home and playing video games as being extra-curricular, or is he talking about something else? How long has he been involved in these organizations and what are they, and how many?

All of those are addressed in a good bio, which is as follows:

“Joe controls over 400 million dollars worth of real estate in Dallas-Fort Worth and Houston. He is the host of the world’s longest-running daily real estate investing podcast, Best Real Estate Investing Advice Ever, which generates over 350,000 monthly downloads. Joe is also on the Alumni Advisory Board for Texas Tech University, and on the board of directors for Junior Achievement, as well as created his own charitable organization, Best Ever Causes.”

Huge difference. Joe is explaining exactly how much real estate he owns, as well as where he owns his real estate, so he’s measuring the success. He’s also explaining how long he’s been running his podcast for, what the podcast is actually about, as well as how many downloads he is generating, which is the gauge for success.

Then lastly, he explains exactly which extra-curricular activities and charitable organizations he’s involved in, rather than just saying he’s involved in some unknown activities. Based off of that explanation, go ahead and create a bio for you and your team; a good approach is to just list out all of your stats – how much real estate you own, how long you’ve been in real estate, things like that. Then do the same thing for your property management company, your partner, as well as your sponsor, and add that to the Meet Our Team section in the company presentation template.

The third section is gonna be — the company presentation you’ll see is titled “Why apartments?”, but essentially, this is a section where you want to prove why apartments are the best asset class for your investors to park their money in order to receive solid returns.

In this section, essentially what we have is different metrics that we measure for apartments versus other asset classes, and just any metric related to apartments. We include graphs and charts and data tables to get that point across in a visual form.

The first slide that you’ll see is an explanation of the risk versus returns. Essentially, what you wanna determine is how does real estate as a whole returns compare to other investment vehicles, like stocks, bonds, mutual funds, retirement accounts, REITs, things like that, as well as how do apartment returns compare to other real estate investment vehicles, like industrial, office, retail, hotel.

For the first one, real estate versus other investment vehicles, we have a data table that shows the number of down years or negative return years, compare to the number of up years or positive return years for real estate, stocks and bonds, and as you will see, there are many more years of up years for real estate, as well as much fewer down years for real estate compared to stocks and bonds. So it gets that point across.

And then next, we have a data table that shows how the average apartment returns compared to other commercial property types – industrial, office, retail and hotel – and at this point in time, apartments have the highest average return over the 3, 5, 7, 10 and 15-year periods. For all of these, you’re going to want to make sure you’re staying up to date on the current data, because some of the things that I’m gonna explain right now might not hold true in five years, so those are things that you wanna either remove, or address differently. Also, there might be other data points that are not included or are not discussed, that are relevant in five years from now and aren’t necessarily relevant now. So this is not something to be copied exactly, just to give you an idea of the types of things to include in this “Why apartments?” section.

Another section is about taxes. Typically, passive investors who invest in apartment syndications, the distributions that they receive are less than the actual depreciation that’s passed on to them, so most likely they won’t have to pay taxes on their ongoing distributions, and they won’t have to pay taxes at all until the sale of the property. But depending on the syndicator, and you and your investment strategy, you might be able to delay taxes even longer by doing a 1031 into a new deal.

Essentially, in this new section any tax benefits as it relates to your passive investors investing in apartments should be referenced in this section. Next, we discuss the home ownership rates, so you wanna determine if home ownership is low and decreasing, or if it’s high and increasing… Because the lower the home ownership rate, by default, the higher the rental rate is, which means more customers for you and your company.

For this, we have it represented by a graph that shows the rate of home ownership over time, and as you’ll see if you’re looking at the company presentation, the home ownership peaked around 2005, and has been decreasing ever since.

Similarly, you want to also take a look at the population. This is gonna be just kind of the overall snapshot population of the country; is the population increasing? Similar to the decreasing home ownership, if the population is increasing, then that means there’s more renters, which means, again, more customers for your business.

Then lastly, of course, you want to actually look at the rate of rental occupied units to determine if that number is increasing, because again, if it is increasing, there’s more renters, and therefore more customers. For this, it’s represented by the number of renter-occupied housing units over time, and it’s been steadily increasing since the early 2000’s.

Something else that you want to take a look at is demand data. One data point would be the vacancy rate… So how is the vacancy rate for the renter-occupied units changing over time? ideally, it is going to be trending downwards, because the lower the vacancy rate, the higher the demand, which is going to be a benefit for apartment investors. We have this represented by the vacancy rate over time, and the vacancy rate peaked around 2011, and has been steadily decreasing over time.

Another demand factor to take a look at is the supply, so how many units need to be constructed to keep up with the future projected demand? More than 4.6 million new apartment homes are expected to be built by 2030, and there are nearly 39 million people living in apartments, so the industry is quickly exceeding the capacity, so it’ll take building an average of at least 325k new apartment homes every year to meet the demand. But on average, just 240k apartments were delivered from 2012 to 2016. So from a demand perspective, based off of this data, there are more people than there is supply, which is gonna be a positive benefit for apartment investors.

Also, something else you wanna take a look at is the economic impact of apartments, so what is the total number of renters, how much money are they contributing to the economy through their rental payments, and then how many jobs are actually generated by apartments? So apartments and their 39 million residents contribute 1.3 trillion dollars to the U.S economy, and generate about 12.2 million jobs annually.

Then finally, you wanna take a look at other demand drivers, for example changing lifestyles. Today, people are delaying both marriage and starting families, and the data to support that is 19% of U.S. households are married couples with children, compared to 44% in 1960. So a huge drop. And there’s 75 million people between the ages of 18 and 34 who are entering the housing market, and the majority of them are entering as renters. From that, you know that the demand for rentals are not going to be going down, because people who are delaying marriage and starting a family are more likely to rent than buy.

You also wanna take a look at any interesting demographic data. Currently, ages 55+ account for more than 30% of rental households, and more than half of the net increase in renter households over the past decade came from the 45+ demographic. So historically, the older you are, the less likely you are to rent; however, that seems to be changing, because there is a large percentage of people who are renters that are within that 45+ age demographic.

Then another demand driver to take a look at would be immigration growth. International immigration is expected to account for 51% of all new population growth in the U.S., and immigrants have a higher propensity to rent and typically rent for a longer period of time.

Those are just three examples of demand drivers, but again, that might change based off of the current economic climate in five years.

Essentially, in this “Why Apartments?” section, think of any other timely data point that’s relevant to the current apartment conditions, and make sure that you’re focused on continually updating this section. So that’s section three.

Section number four is going to be titled “Our Investment Strategy.” In this section you wanna give an overview of your investment strategy. We are value-add investors, so I will be using that as the example for this section. First, you wanna talk about your target market, so what metrics are you using to select your target market, and what are your actual target markets? In regards to the metrics, we have six things in this presentation. Number one are employment drivers. We wanna see a low or decreasing unemployment, new businesses, increasing jobs, the job diversity, and things like that, because those provide stable income and lower the risks of apartments by keeping the occupancy levels high. So those are the types of markets we look at in regards to employment.

For supply, we wanna look at the absorption rate, which is the ration of the number of rental units coming online, to the number of units rented in that same period. That rate is used to determine if supply is keeping up with the demand. You also wanna take a look at future population growth, and that should be sufficient to absorb the scheduled future supply. In other words, you’ve got a certain number of apartments available and a certain number of people that are wanting to rent, and there should be a balance between those two numbers, and ideally, there is more demand than there is supply.

Third is the GDP growth. We avoid markets that are nearing a potential bust, which we determine by decreasing GDP, and we also avoid markets with abnormally low cap rates.

This brings us to number four, which is cap rates. In order to achieve our projected returns to our investors of at least 8%, we wanna see that the class B cap rates are not below 5%.

Fifth, our rental trends. We want to see an increase in rent, because that indicates a healthy, stable economy, with lower risks.

Six is occupancy trends. Again, we wanna see a healthy occupancy rate, ideally above 95% in that market, which indicates a growing population that’s outpacing current supply. I guess there’s actually seven points to this section, not just six, because the last thing you wanna have is a map of your target markets. As you’ll see in the company presentation template, there’s a map of the U.S. with different points denoting different markets that we target, as well as their respective cap rates.

Another component of the investment strategy are the types of deals that we look at. For this section, since we are value-add investors, we give some examples of the types of value-adds that we do. On one slide we have a before and after picture of an interior, with a list of the types of unit upgrades. For example, “New vinyl plank flooring throughout the unit. Stainless steel appliances. Granite countertops. Tile backsplash. Updated hardware and lighting packages”, things like that.

Similarly, we discuss some of the exterior value-add strategies that we implement – renovating the clubhouse, rebranding with new signage, a dog park, fitness center renovations, adding a movie theater, things like that.

Also, we discuss not only what types of deals we do, but how we source these deals. We explain the process, which is the 100/30/10/1 process. Essentially, what that means is for every 100 deals sources, 30 are underwritten; of those 30, we submit offers on 10, and of those 10, we actually close one. That’s an explanation of the funnel and how many deals we look at, and how long it takes to go from looking at 100 deals, to actually closing on one of those deals.

We also discuss how we actually analyze those deals, which is through our comprehensive underwriting process. First, we select a submarket location, next we look at the history of the property, so we wanna look at the age of the construction and the current demographic, as well as the ownership history. We’ll take a look at the T-12 and the rent roll and plug that into our cashflow calculator. Then we take a look at the condition of the property, so we look at deferred maintenance and the quality of the interiors in order to determine an exterior and interior renovation budget.

Next we look at the competition, so we perform a rent comp analysis, as well as a sales comp analysis, to determine what the new rents will be after we’ve implemented our value-add program. And then lastly, we will set our business plan, so we will have a detailed explanation of the types of interior and exterior renovations we will do, the new demographic we expect to attract, as well as our rebranding in order to rebrand the apartment community and the market.

Then lastly, we also do a brief overview of how we structure the deals and our investment targets. We look at deals that are at least 100 units, we will secure debt at 70%-75% loan-to-value; the deals must have annual returns that are greater than 8%, and a five-year IRR that’s greater than 15%, and we project to hold on the property for 5-10 years, depending on the business plan.

Section five goes over the roles, and if you remember, as I mentioned earlier, as you gain more experience, you could probably remove this section, because your investors will have enough experience to know what their role is and what your role is. But for now, the two groups that are discussed are the investors and the general partners.

The investors – their responsibility is to fund a portion of the equity for the project, whereas the general partner is responsible for everything else – finding deals, reviewing deals and determining which ones to make offers on, making and negotiating offers, coordinating with professional property inspectors, finding the best financing methods for the property, coordinating with the attorneys to create the LLC and different partnership agreements, traveling to the property in person to perform due diligence on both the property and the market, hire and oversee the property management company after close, as well as perform additional asset management duties, including lender conversations, overseeing the business plan, and ongoing investor communication. Again, you can probably remove that as you gain more experience, but for now that will be a good overview for your newer investors.

Section number six is gonna go over the actual process, what the overall process is for buying apartments – similarly, this could be removed as you gain more experience, because your investors are gonna know the process already… But the seven-step process that we include in our company presentation template is 1) our team finds a property that projects to meet the goals of our investors; 2) our team makes an offer and negotiates a sales price; 3) the offer is accepted and the deal is shared with the investors; 4) our team performs more detailed due diligence on the property; 5) our team renegotiates the offer based on due diligence (if applicable); 6) legal documents are created by the attorney and signed by both the general partnership and the investors; 7) finally, the deal is closed.

Now, the seventh section – you might not be able to make this right away, because you won’t have a deal, but once you’ve done a deal, or if you have a sponsor or a board member who’s done a deal, you wanna include an example of what your investors can expect. For example, you want to essentially include all the information that was included in the investment summary you created when presenting that deal, which we’ll go over in future episodes… But essentially, you wanna include a property description, as well as the unit mix information. You want to include the equity, the amount of money that would be returned at the sale of the property – the projected sales proceeds, or the actual sales proceeds if the deal was sold, as well as yield projections for the entire project.

You want to include an operating income and cashflow statement, as well as a data table showing the returns for a sample investment of, say, $100,000. Then lastly, you can toss in the actual five-year proforma of the rental income and expense line items. Then you can conclude your presentation with your contact information.

Now, make sure  you go to SyndicationSchool.com or the show notes to download the free company presentation template, which is what I discussed during this episode, and include all of those seven sections. Again, you want to download that and put your data, and then have someone professionally design it. The purpose of this company presentation is to build that trust and personal connection with your passive investors before you hop on a phone call with them. Again, we’ll go in a lot more detail on how to actually use this company presentation in the future, but for now, I wanted to discuss how to actually create this, so you have it done and you’re able to use it to the best of your abilities.

That concludes part three, where you learned the three primary benefits of the company presentation, which are credibility, networking and education, and you also learned the seven-section company presentation, and you have  a free document to download that goes over all of that as well.

Now, in the fourth and final part, which will be released tomorrow, we will discuss the sixth and final component of the brand, which is the thought leadership platform. To listen to all other Syndication School series about the how-to’s of apartment syndications, and to download your free company presentation template document, visit SyndicationSchool.com.

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

JF1534: The Power Of Your Apartment Syndication Brand Part 1 of 4 | Syndication School with Theo Hicks

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When raising money, which apartment syndicators are constantly doing, having a recognizable name or brand could make your job easier. Imagine having such a brand that people actually come to you offering to give you their money to invest in your deals. That is 100% possible when you have a highly recognized brand. How do I know it is 100% possible? Because I work for a guy that has done exactly that with the Best Ever brand. Hear Theo’s and Joe’s tips on how to build a powerful apartment syndication brand. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Free document for this episode:

http://bit.ly/brandingresources


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

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

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


TRANSCRIPION

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 podcast 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 a two-part podcast series focused on a specific aspect of the apartment syndication investment strategy. For the majority of the series, we are offering documents or spreadsheets that are available for you to download for free. All of the documents and Syndication School series can be found at SyndicationSchool.com.

This episode is part one of a two-part series entitled “The power of your apartment syndication brand.” Now, actually it’s going to be a four-part series where we will be focusing in the first two parts on the power of the brand, and in the second two parts we’ll be focusing on the two large components of the brand, which is your company presentation, and your thought leadership platform. But to start off, we’re going to do an introduction into why you need a brand, and how to select a target audience, as well as the first three components of your brand in this episode. Those are the three things you will learn by the end of the episode.

Now, to explain how powerful and important a brand is, I will start off by going over two examples, because what better way than to discuss real-world examples. Probably the most popular brand out there is Apple, but it used to not always be as popular as it is today. In the early ’90s they were losing market share to a company called Wintel, which is a partnership between Microsoft Windows and Intel which no longer exists; at the same time, Apple had also tried a new project called the Apple Newton, which obviously doesn’t exist, because it failed… And it was a multi-billion-dollar project. The combination of those two things had the company overall struggling, and in order to turn things around, they didn’t focus on products, they actually focused on their brand.

In 1997, as you are probably aware of, they initiated their Think Different campaign, and that campaign in combination with the return of Steve Jobs allowed them to reverse the brand’s negative trend, and now today Apple is worth over one trillion dollars. But there was a moment in time in the ’90s where Apple almost went defunct, and they focused on improving their brand through that Think Different campaign, as well as bringing back the face of the company, which is Steve Jobs, and they were able to turn things around, and now I’m recording a podcast on an Apple computer, and you’re probably listening to this podcast on an Apple phone. That’s one example of how focusing on your brand can turn around a company in this create a trillion-dollar company.

An example of it closer to home would be Joe’s Best Ever brand; I’m not sure if you know the story, but he actually didn’t initially start the podcast to create a brand, he actually did it just to make money. At the time, he owned a handful of single-family homes, and he had completed his first syndication deal, but he left his six-figure corporate job and the income that was coming in from those single-family homes and that first syndication weren’t enough. So he brainstormed ways to bring in additional income, and also at the same time he brought on the famous Coach T, Trevor McGregor, who as you all know is Joe’s business coach and life coach. Together, they came up with an idea for a podcast.

The thought was if Joe could build a loyal following, then he could attract advertisers to sponsor the podcast and bring in an additional income stream. Now, [unintelligible [00:08:05].07] the Best Ever brand has blown up to being more than just a podcast. It’s got a blog, a newsletter, conferences, meetup groups, and Joe definitely attributes the success of his company and his ability to control over 400 million dollars in apartments to this point in time where he decided to launch his podcast.

Those are just two examples of how focusing on building a brand can result in building a massive company – in one case a trillion dollar company, in another case a 400-million dollar company and growing.

More specifically, based off of those two examples and other examples of powerful brands, why do you need a brand as an apartment syndicator? Why can’t you just focus on finding deals and raising money and asset managing? Why do you need to incorporate an entirely seemingly different aspect of a business, which is a brand? Well, first is the brand will bring you credibility as an apartment syndicator. Using Apple as an example, they lost credibility due to the failed Apple Newton project, and that credibility was in a sense transferred to that Wintel partnership… But they focused on their brand and were able to bring back Steve Jobs, increase their credibility and reverse that negative trend.

Similarly for you, you’re not gonna have an existing company that you need to repair the brand for, but as a new syndicator who hasn’t completed a deal, one of the main challenges you’re going to face is a lack of credibility. You’re gonna have a credibility problem in the eyes of different team members you talk to, you’re gonna have a credibility problem in the eyes of passive investors… Why would a broker send you a deal if you’ve never done a deal before, or why would a passive investor invest with you and not someone else if you’ve never done a deal before? But having a powerful brand in place before you start to reach out to these team members and before you start to have conversations with passive investors will allow you to go from being perceived as an unknown newbie to a known expert. So you’ll go from no one knowing who you are, and when they first talk to you they don’t know about your background, or they know that you haven’t done a deal before, to becoming someone who is hopefully known to them before you actually talk to them, and you’ll also be perceived as an expert.

An example would be if you were to google “Joe Fairless” – you wouldn’t just see Joe’s LinkedIn page, or a Facebook profile. Instead, if you google Joe’s name, you will come across endless pages on Google of his brand. If you think about it, if you put yourself in the passive investor’s shoes, if you Google someone’s name and all you see is a LinkedIn profile, and then you google someone else’s name and you see a LinkedIn profile, but then you also see a website, a podcast, a blog, in-person events, who is perceived as more of an expert? Even if the person that only has a LinkedIn profile has done a deal before, the fact that you have such a presence online will give you that extra level of credibility that you would not be able to have otherwise.

So you google Joe’s name and you see that he’s someone who has posted content for over 1,500 days in a row, which is his podcast; they see that he’s someone who is consistently producing and performing. They also see that he hosts in-person events with his meetup and his conference, which gives even more credibility than someone who solely has an online presence… And they’ll also see a variety of other educational content; they see that not only is he successful, but he’s attempting to help other people be successful as well. All those things hold extra weight in the eyes of a potential team member or a potential investor. So credibility is huge.

Number two, having a brand allows you to have extra networking abilities. For example, with a podcast you have the ability to network and form personal connections with your listeners that you’ve never met before, and you’re doing this while you sleep. So you record a podcast episode one time, and someone on the other side of the planet who is listening to it during the day while you’re sleeping, that you’ve never met before, who might be a potential passive investor, is listening to your podcast, getting to know you and getting to see you display your expertise.

Also, the brand allows you to meet people that could potentially be future team members. For example, if you create an interview-based podcast, or an interview-based blog, or an interview-based YouTube channel, then you get to go out and pick — rather than calling up a broker and having a regular conversation with them about your goals of buying the deal, instead you can invite them on your podcast, which gives them exposure, and before or after the podcast you can talk to them about your business.

An added level to that is that you’re able to leverage your brand to meet people, in person or just via Skype and having a conversation, that you would not have been able to meet otherwise. For example, in Joe’s first 200 podcasts he interviewed Robert Kiyosaki and Barbara Corcoran. Without a brand, how would he have met those two individuals? It would have been very difficult. It’s possible, but it would have been very difficult. Instead, he has an in, which is his podcast, that he mentions how many people listen, and that is focused on real estate, and invite them on. They usually say no, but in this case they said yes.

More currently, Joe has been able to talk to other famous people like Emmitt Smith, Terrell Fletcher, which he actually spoke to and who actually spoke at his real estate conference, and Tony Hawk among other people. Again, without a brand and without the podcast aspect of that brand, how would he have gotten to talk to Emmitt Smith? How would he have ever had a chance to talk to him unless he ran into him at a grocery store?

In other words, the brand is the most time-efficient networking strategy that has ever existed, because again, you can network with people across the planet while you’re sleeping, and at the same time it’s also powerful because it allows you to interact with people that it would be impossible to do otherwise. So that’s number two, the networking advantages of a brand.

Number three would be direct and indirect cashflow. For Joe, when he started his podcast, the goal was to get sponsorships, so that’s a direct line of cashflow from the podcast. Other examples of more indirect things that come from having a brand would be money made from things like conferences, book sales or consulting programs… Because if you have a large brand and you have a large following, then there are things that you can sell to them, that add value to their business, and it makes you money as well.

And then of course, since we are apartment syndicators, we make the majority of our money from actually doing deals, so indirectly, we benefit from our brand by doing more deals. We are able to bring on more passive investors, more team members, more partners, find more deals than we would have been able to do without our brand and the credibility and networking and exposure that comes from it. So that’s number three, direct and indirect cashflow.

Number four is education. If you listened to the previous Syndication School series, you will remember that two of the requirements to becoming a syndicator is education and experience, and one way to gain education – which also has other benefits as well – is your brand. Again, if you have an interview-based podcast, then you’re able to bring on different real estate professionals who are active and successful, and have conversations with them, and ask them really any question you want. So if you have a particular question about a specific aspect of the syndication investment strategy… Let’s say you wanna know what’s the best way to put together an offering from a legal standpoint, then rather than just calling up a lawyer and asking them those questions, which they’ll probably answer, but an extra level of connection would be to bring them on your podcast and also ask them that same question… Because again, you’re gonna get the answer, people listening are gonna get the answer, and you’re gonna form a more personal connection with that person, and you’re giving them more exposure for their business as well.

That brings us to the fifth point, which is contribution. The first four are more for you, how you’re gonna benefit, but at the same time by building a powerful brand other people are going to benefit as well, because – I’m gonna keep using the podcast as an example throughout – if you have an interview-based podcast, not only are you getting the benefits of credibility, networking, potential cashflow and your education, but people listening are also going to learn if they likely have similar questions that you have, and by you asking them, they are learning things that will help them achieve their business goals, and at the same time, since the brand will help you achieve your business goals as well, the people involved in your business – your team members, your passive investors, partners, any clients you bring on, people that go to your conferences, anyone who benefits from your brand will also have the ability to grow their business, as well.

So those are the top five. There are plenty of other reasons why brands are powerful, but the top five reasons are that credibility factor, the ability to network with people you don’t know, while you sleep, and connect with people that you would likely never meet otherwise. Three is the ability to create a line of direct and indirect cashflow. Four is the education benefits to you, and five is the ability to contribute to other aspiring investors, in this case the syndication niche… But really, these concepts discussed in this podcast and in the next three syndication school podcasts can really be applied to any business strategy, not even just real estate.

Now, there is one thing that Joe wishes he would have done differently starting out. Obviously, everything’s worked out perfectly fine, but one of the things that he wishes he would have done differently starting out was to have focused his content more. The mistake was not defining a specific target audience; instead, he focused on trying to bring in as many listeners as possible. One of the reasons why he came to this conclusion was after reading Tim Ferriss’ — I don’t know if his most recent book, but it’s his book “Tools of Titans.” In one of those chapters he interviewed an economist who brought up the concept of “2,000 true fans.” Now, essentially, there are two different types of fame; there’s general fame, and there’s selective fame.

General fame is essentially the type of fame where you are known by everyone, you are recognized by everyone. That would be like a rockstar, or a rapper, or a very famous actor/actress, or a very famous sports star/athlete. I guess another example would be a politician, as well. Now, the benefits of this type of fame is, of course, lots of money, but there are also liabilities, because if you are generally famous, you can’t really do much without being recognized or bombarded by paparazzi or fans, and while that sounds nice to us right now, I’m sure after a couple of weeks of everytime you go to get a burrito from Chipotle, the cashier, the people working there, everyone in line is starting at you and asking for autographs – I’m sure that would get annoying pretty fast. Overall, general fame is pretty overrated, and it’s something not many people accomplish anyways.

The other fame is the selective fame, and per the name “2,000 true fans”, selective fame is when you are famous to 2,000 to 3,000 hand-picked people. With this type of fame, you’re able to maximize the financial upside while minimizing that downside and the liabilities that come with the general fame… And the reason why this aligns really well with apartment syndications is because you don’t really need hundreds of thousands or millions of people investing in your deals. 2,000 passive investors would be enough. You don’t even need that many, but having 2,000 who are loyal to your brand and loyal to your company will allow you to do any deal you want and raise money for any deal that you want.

That’s why you want to select and define a specific target audience, and these will be the people who will be your 2,000 or so true fans… Because at the end of the day, the best brands are the ones that only attract the ideal customer, rather than attracting everyone. An amazing brand would have 1,000 people who will buy anything that they create, whereas a brand that has 100,000 followers that only has 1% of people buying some of the things they make is not as effective, is not as good.

So who are the 2,000 true fans for apartment syndicators? Well, for example, obviously your “fans” are gonna be the passive investors who are investing in your deals primarily. For Joe, his target audience is, again, defined very specifically, and it is people that are between the age of 35 and 65 years old, that are male, living in or near a large city, and are employed as a business owner, executive, doctor, dentist, engineer, or a real estate investor who is interested in being a passive investor, and they are accredited.

Now, these criteria are based on Joe’s existing investor database. As I mentioned, he did not have a specific target audience in mind initially, so once he had done a couple of deals, he went back and analyzed his investor database to figure out what was the common thread amongst the majority of the investors. That doesn’t mean that he won’t take money from people under 35 years old or over the age of 65, or he won’t raise money from females, or people that live in small cities, or have different jobs… But they have to be accredited. The point is that this is what he focuses on, because this is his demographic of the majority of the investors… But again, he does have larger investors that fall outside of this criteria, and of course he wants to attract these types of individuals, and if they reach out, he will help them invest in his deals.

But initially, his target audience was, again, undefined, but when his thinks about it, it was advertising professionals, because at this point he had not done a deal yet, and for syndicators that have not done a deal yet, the majority of their investors will come from family, friends and colleagues. For Joe, since he had worked in the advertising industry for many years, those were the types of people he was focusing on in the beginning.

Now, Joe also has a secondary target audience, who are aspiring apartment syndicators, hence the Syndication School. This is targeted towards people who want to become apartment syndicators, to help them out along the process. 65% of our content is directed towards that primary audience of passive investors, and 35% of the content is targeted towards the secondary target.

Now, who are your 2,000 true fans? You don’t wanna just copy Joe’s… You can if you want to, but you want to make it more specific when you are first starting out, because you aren’t going to have access to such a large demographic of investors, because Joe has done many deals, whereas you haven’t done any deals at the moment. So instead, you want your primary target audience to be hyper-focused based on the networks you already tapped into. This could be your current job, it could be if you are tapped into your college alumni group, if you play [unintelligible [00:25:07].29] sports, it could be people that go to your gym, friends and family are pretty obvious, maybe there’s a charity that you volunteer at… Essentially, ask yourself what networks you’re currently tapped into, and based off of the demographic of people, define a target audience with age, gender, location, what they do for work, things like that.

Now, if that primary target audience isn’t big enough, then you can define that secondary target audience, and rather than it being the same as Joe, which is aspiring apartment syndicators, because you likely don’t have a consulting program or the expertise to teach people how to do apartment syndications, instead it should be defined as an audience that you want to know. So who are people that you don’t know right now, but you want to know, and your brand will be a good way to tap into that network. Overall, at this point you should be able to define exactly who it is you’re targeting your brand at.

Now, we’ve talked about what a brand is and where you should target your brand at, but what the heck is the actual brand for apartment syndications? Well, there are six main components of the brand. Number one is a company name. Number two is a logo. Number three is a website. Number four is business cards. Number five is a company presentation, and number six is a thought leadership platform.

In the remaining minutes of this episode we’re gonna focus on those first three – the company name, the logo and the business card. In the next episode, tomorrow, or if you’re listening to this in the future, the episode after this episode, we will focus on number four, which is the website, and then next week we’ll focus on those remaining two, which are the company presentation and the thought leadership platform.

We will also be offering a free document with this episode, which is a branding resource document which offers tips and links for creating all six of the main components. But we’ll go over most of the tips and I’ll explain which companies you wanna use, but I would definitely use that resource, because you can click on all of the different providers and examples that are listen on there.

Number one is the company name. When creating a company name, you have the decision to either incorporate your name or not incorporate your name… Your name being “Theo Hicks” or “Joe Fairless.” For example, Joe started off with a company called Fairless Investing, but eventually he transitioned to Ashcroft Capital.

There’s pros and cons of each, and it’s really up to you to decide which option to go with… But when you’re including your name in your company name – Fairless Investing, for example, or Hicks Acquisitions – the reason that’s beneficial is because your investors are not investing in a company, they are investing in you; so by incorporating your name, they’re investing in you AND the company, and it will give the people that look up your company name an understanding right away of “Okay, this is Joe’s business” or “This is Theo’s business.” Whereas if you have a name that doesn’t incorporate your name, they’ll have to do a little bit more investigating to determine whose company it actually is.

The downside of including your name in the company name is that the business is going to be dependent on you forever, which is eventually going to become a problem, which is why Joe transferred from Fairless Investing to Ashcroft Capital. If you have a podcast, you’re doing conferences, and blogs, and you’re obviously doing your syndication deals, and you have meetup groups, and newsletters, it’s gonna be difficult for you to do all of that. If your name is in the company name, then if you’re not the face, people expect you to be the face.

If you don’t wanna be the face of the company for everything, then you don’t wanna include your name. The advantages of that is that you are essentially tapped into a larger team. At Ashcroft Capital there’s partners, there’s underwriters, there’s analysts, there’s directors, and everyone comes up under the Ashcroft Capital name, whereas if it was called Fairless Investing, that would be a little strange for the other people who have important duties and roles in the company. And of course, the company will not be dependent on you forever, it will not be dependent on you being the face for everything.

Again, pros and cons for each. It’s really up to you. The ideal strategy is probably either to start off with your name in the company and then transition, or to just pick one and use that indefinitely.

The last thing you wanna know about your company name – it’s probably pretty obvious, but it’s gotta be easy to pronounce and easy to remember. If you have a very complicated name that is hard to pronounce, then you probably don’t wanna include it, because if people can’t pronounce it, then people aren’t gonna be able to talk about it and refer to other people. It’s gonna be hard to say “Hey, I’m investing in this company… I can’t really pronounce the name, but it’s a great company.” It’s not gonna sound as good as “I’m investing in Ashcroft Capital, that’s run by Joe and Frank.” So that’s number one, the company name, so you’re gonna work on that.

Number two is the logo. After you have created your company name, you can create a logo that incorporates that name. I highly recommend outsourcing this to a designer. You can go to LogoGarden or Fiverr or UpWork to find a designer to create your logo. The process is to obviously have your company name and have a few design ideas of what you wanna incorporate, and if you wanna incorporate a microphone or if you wanna incorporate apartment buildings, have that in mind and tell that to them. Also have 2-3 color schemes, so red-white-blue, black-green-grey… Have a couple color schemes in mind, and then also fonts as well. Send that information to the designer and ask them to mock up a handful – maybe five – different logo types. Then once you have those preliminary designs, ask for feedback; post them to social media, LinkedIn, maybe print them off and bring them to meetup groups, to anyone else who has a good eye for these types of things, and ask them “Hey, I’ve got these five logos. Which one do you like the best?” Then based off of their feedback, pick the best one.

Once you have your logo, then the design and the color scheme should be consistent across your entire brand. For example, Joe’s is red, white and blue, and that is consistent across the entire Best Ever brand: books, meetup groups, podcasts, blogs, newsletters… They all have that red, white and blue color scheme. So that’s number two, the logo.

Number three are the business cards. Before you create your business cards, you also wanna have a website, which we’ll talk about in the next episode, so that you can include that on your business card… But you want to include your company name, your logo and your website on these business cards, and if you can get business cards from LogoGarden or Vistaprint, and they usually will have a whole slew of designs to choose from, and you can incorporate your logo in a custom design.

One thing to think about is the title to put on the business card. People have different opinions on this, but you can put the owner, or principal, or syndicator… Really, I guess the title is more so for people who are actively involved with residents. For example, for my business card for my properties that I manage I didn’t put the owner, because I didn’t want to be perceived as the owner; instead, I put Project Manager, that way if I gave my business card to anyone, whether it be a tenant or a vendor, they didn’t look at me as the owner, they looked at me just as someone just like them, who’s working for someone else. That way, if they have any questions or pushback, I could just say “Oh, well, it’s not my decision. I’m just working on behalf of the owner.”

In fact, I actually had my wife be the owner, so whenever we had issues with tenants and they asked to talk to the owner, I would just send them to my wife, and we’d be sitting in the same room, listening to them on speakerphone and  giving her pointers on what to say. But anyways, those are the first three components of the brand, which are the company name, the log and the business cards.

So in this episode you learned the five primary benefits of creating a brand. You learned the one thing that Joe wishes he would have done slightly differently starting out, which is to define a target audience, and to do so, we introduced the 2,000 true fans concept, and told you exactly how to select your primary and maybe even your secondary target audience. Then lastly, we’ve just been over this, which is how to create a company name, logo and business card. For those three components, make sure you check out the free document which is available at SyndicationSchool.com, or in the show notes of this episode, so that you can click on the links to the different providers who will help you create your logo and business cards. That concludes part one.

In part two we’re going to focus exclusively on the fourth component, which is the most important component of your brand, which is the website. To listen to other Syndication School series about the how-to’s of apartment syndications, and to download your free document and all previous free documents, visit SyndicationSchool.com.

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

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

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

 

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TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless and Bryan Chavis

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

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

 

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Bryan Chavis Real Estate Background:

  • Multifamily investor and property manager
  • Author of Buy it, Rent it, Profit
  • Syndicated almost $5M worth of multifamily properties
  • Based in Tampa, FL
  • Say hi to him at www.bryanchavis.com
  • Best Ever Book: Bible

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com


Best Ever Listeners:

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

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

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

Joe Fairless: Bravo! That is pretty cool.

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

Joe Fairless: How did you get in with them?

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

Joe Fairless: The baseball player?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless: How much are they, usually?

Bryan Chavis: I just bought one for $349.

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

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

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

Bryan Chavis: Cash.

Joe Fairless: All cash, no debt?

Bryan Chavis: No debt.

Joe Fairless: What was the purchase price?

Bryan Chavis: 2,6 million.

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

Bryan Chavis: Syndicated.

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

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

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

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

Joe Fairless: For this one in particular.

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

Joe Fairless: Was there a pref on this one?

Bryan Chavis: No, sir.

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

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

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

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

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

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

Bryan Chavis: Let’s do it!

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

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

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

Bryan Chavis: The Bible.

Joe Fairless: Best ever deal you’ve done?

Bryan Chavis: Park Plaza.

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

Bryan Chavis: Being too eager.

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

Bryan Chavis: Education, training.

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

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

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

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

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

Syndication success with Theo Hicks

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

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

 

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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

syndication school by Theo Hicks

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

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

 

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TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Best Real Estate Investing Crash Course Ever!

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

 

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TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1) Get a strong business background

2) Get a strong real estate investing background

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

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

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

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

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

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

Theo Hicks' syndication education

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

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

 

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TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

becoming a syndicator

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

Listen to the Episode Below (26:34)
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Theo is back for his third installment of the new segment, Syndication School. Today he’ll be discussing the experience that you need to have before attempting an apartment syndication. You may be surprised at the level of experience you need when starting out. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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

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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of the Syndication School series, which is a free resource focused on how-to of apartment syndications. I am your instructor, Theo Hicks. Each week we will be airing a two-part podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of the series, we will offer a free document or a spreadsheet for you to download as well.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

apartment syndication school with Theo Hicks

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

Listen to the Episode Below (33:13)
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Theo is back today with part two of his mini-series, Why Apartment Syndication. Theo has worked for Joe for a long time and has been a part of the many projects that Joe has done in that time, so he’s more than qualified to teach us about apartment syndications. Tune in and learn why apartment syndications are the preferred investing method for many successful investors. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Best Ever Listeners:

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

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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. This is your host of the Syndication School, Theo Hicks. This episode is part two of the “Why apartment syndication” series.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

self-directed IRA and Scott Maurer

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

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

 

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Scott Maurer Background:

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

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

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

-Scott frequently gives seminars and webinars on the subject.

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

-Based in Tampa, Florida

-Best Ever Book: Grapes of Wrath

 

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TRANSCRIPTION

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

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

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

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

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

Joe Fairless: What are some of those things?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless: What’s your role with Advanta?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Scott Maurer: Sure.

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

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

Joe Fairless: Best ever book you’ve read?

Scott Maurer: Grapes of Wrath.

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

Scott Maurer: Not always seeing the opportunity for growth.

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

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

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

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

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

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

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

Scott Maurer: Thanks, Joe.

Dave Sobelman and Joe Fairless

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

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

 

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Dave Sobelman Background:

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

 


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TRANSCRIPTION

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

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

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

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

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

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

Dave Sobelman: Maintenance.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dave Sobelman: That’s it, thank you.

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

Dave Sobelman: Well summarized.

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

Dave Sobelman: Very fair, yes.

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

Dave Sobelman: Thank you very much.

JF1230: Find An Asset Class With Less Competition And Dominate It #SkillSetSunday with Tyler Sheff

Listen to the Episode Below (24:32)
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When Tyler is looking for deals, he loves to find 5-50 unit deals. This is an interesting space because it cuts out the smaller investors who are intimidated by multifamily, simultaneously you cut out the bigger investors because the deal is too small for them. The biggest contributor to Tyler’s success he says is not assuming anything anymore, rather always asking questions. We get to hear great tips on how Tyler negotiates hs deals, be ready to take notes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Tyler Sheff Real Estate Background:

Founder & CEO of CashFlowGuys.com & CashFlowGuys Podcast

-Commercial Real Estate Broker, Investor and Syndicator

-Over 16 year’s experience in real estate

-Based in Tampa, Florida

-Say hi to him at www.cashflowguys.com

 


Made Possible Because of Our Best Ever Sponsors:

Are you looking for a way to increase your overall profits by reducing your loan payments to the bank?

Patch of Land offers a fix-and-flip loan program that ONLY charges interest on the funds that have been disbursed, which can result in thousands of dollars in savings.

Before securing financing for your next fix-and-flip project, Best Ever Listeners you must download your free white paper at patchofland.com/joefairless to find out how Patch of Land’s fix and flip program can positively impact your investment strategy and save you money.


TRANSCRIPTION

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

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

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

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

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

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

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

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

Tyler Sheff: Absolutely.

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

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

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

Tyler Sheff: Of the annual income.

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

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

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

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

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

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

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

Joe Fairless: Yes, absolutely.

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

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

Tyler Sheff: Absolutely.

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

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

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

Tyler Sheff: Absolutely.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless: Of course, yeah. Everyone does.

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

Joe Fairless: Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tyler Sheff: Yes, they do.

Joe Fairless: Any thoughts on that?

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

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

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

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

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

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

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

Tyler Sheff: Absolutely.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Real Estate Investing Advice Ever Show Podcast

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

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

 

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Dave Sobelman Background:

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

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TRANSCRIPTION

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

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

Dave Sobelman: I’m doing great.

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

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

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

Joe Fairless: For anyone not familiar with what you mean when you say single-tenant triple net lease, will you just quickly define that?

Dave Sobelman: The stereotypical example of a single-tenant commercial triple net lease property is your average neighborhood Walgreens drug store. Most people know what that means. There is one parcel of land, there is one building, the building was built specifically for Walgreens in this instance, there’s one lease — a lot of people don’t know that Walgreens in this case doesn’t own a lot of their real estate, they lease it from people who build these buildings for them, and the leases are very long. In their case, they’re 75 years. They have options to terminate after 25 years, but even 25 year is a long time.

Walgreens is a big public company, and they have what’s called an investment-grade credit rating, meaning that they don’t have a lot of debt and they’re a strong and sound, credit-worthy company. Putting these factors together – real estate, good credit tenants, long-term leases, and you get the makings of a good investment.

Now, why are they called triple net leases is – and this may be strange for people to hear, but the three nets are taxes, maintenance and insurance. Those three attributes of the operations of the property are the tenants’ responsibility, not the landlord.

So the landlord in essence is passive from a day-to-day operational perspective. So these triple-net leases are actually very common around the country, and a lot of people don’t know that, but you can be a (somewhat) passive landlord – I put parentheses around ‘somewhat’ because no real estate is passive altogether, but this takes away changing light bulbs and fixing toilets and so on.

Joe Fairless: Ideally, we’re all doing that, not changing light bulbs… Ideally, we all have triple net lease tenants. The perception that I have – and I know you’re gonna educate me otherwise – is that there’s not as much money in buying these types of properties, because they’re… And again, you’re gonna probably punch me in the face when I say this – it’s easier to do triple net lease, to buy them, and you’re not gonna make as much money. So what did I just say that was incorrect?

Dave Sobelman: There’s definitely a stigma on the properties that when you have lower risk, lower amount of responsibilities, that your yield is lower. In some cases it’s very much true, so I wouldn’t disagree with that at all. When you’re getting into higher risk properties, let’s say buying vacant buildings or vacant land that you have to develop, your returns will be higher, but you are taking more risk. So these are probably one of the best risk-adjusted returns that an investor can get, real estate or otherwise.

Let me quantify that for you somewhat. Let’s just continue using our Walgreens example. If you were to purchase a Walgreens drug store as a triple net lease real estate investment, your return today would probably be around six; maybe a little bit lower, maybe up to seven, and that’s a percent return. If you’re getting that 6% return, you have Walgreens as your tenant for 25 years, you get the appreciation of the building, if you have a loan you get to deduct the interest expense on that loan… Now, let’s say you want to buy a bond. A lot of people know that bonds are very conservative; bonds are based on the guarantor of that bond… So let’s say we buy a Walgreens corporate bond. Today, that bond is still guaranteed by the exact same company that’s occupying the Walgreens drug store. The term could be the exact same, 25 years, and obviously the credit of the company is the exact same as the tenant who is occupying that building. But if you were to buy that bond, you are probably getting a 3% or 3,5% return.

So you have multiple hundreds of basis points difference in buying a net lease property versus their corporate bond. Now, if you’re comparing it to higher risk real estate investments, yes, they are on the lower end of things. But from a risk-adjusted basis, they are actually tremendous investments.

Joe Fairless: With your REIT, is your — I hate to say elevator pitch, because I don’t pitch things and I know you don’t either, but your short and sweet value proposition basically that? It’s “Hey, you’re likely gonna get a better return than buying a bond, and you have a collateralized asset?”

Dave Sobelman: No, that’s not my value proposition at all, because having a public REIT – there’s a tremendous amount of disclosure and transparency. That’s one of the things I like about the REIT – just telling the public everything. One thing I like to say is that my REIT Generation Income Properties is not a new concept. I’m not the first triple net lease REIT. In fact, there are 14 other triple net lease REITs that are currently trading all on the New York Stock Exchange.

Now, each one of those REITs has their own strategy within this niche product type. Some people say “We’re strictly gonna buy retail properties” or “We’re strictly gonna buy net lease office properties, or industrial properties.” Some other REITs will say “We don’t wanna buy any credit-worthy tenants whatsoever, so we will never have a Walgreens using that example in our portfolio. We only wanna buy much higher risk credit tenants, because our returns are higher”, and then different variations on everything I just said.

Joe Fairless: Okay.

Dave Sobelman: So the difference between Generation Income Properties and the other 14 net lease REITs is that GIP focuses on the real estate. Now, let me tell you what that means. When someone goes to buy a net lease property, typically they’re looking at the credit of the tenant and how long the lease is, because they want to make sure that their investment can actually pay them income, pay the rent for as long a period as possible, and that’s great. But you are buying that Walgreens that we’re using as an example in midtown Manhattan or in Dubuque, Iowa. With all due respect to Dubuque, Iowa, there’s probably a drastic difference in the valuation of the real estate than midtown Manhattan.

So Generation Income Properties puts the real estate underwriting first, because what we wanna do is increase the value of that real estate during our ownership, and ultimately what that means is not only do we get paid this rent from these investment-grade credit tenants with long-term leases, but there’s a much higher probability of that property appreciation during our ownership, and being a public company, if you do have appreciation of your assets, then the assets or net asset value of the entire company increases, and ultimately what happens is the stock price increases along with it. So I’m treating Generation Income Properties as a growth company, much more so than just a dividend machine, which all the other net lease REITs provide. They wanna tell their shareholders “If you invest with us, we will pay you a 4% return and we’ll pay you every quarter or every month, however it is.” A lot of people like that consistency, but I also provide that same market dividend, but I’m also giving the shareholders a much higher probability of increasing the stock price by buying only in the top 20 highest density cities in the country, like New York, L.A., Atlanta, Washington DC and so on. And they’re all listed on my website, the top 20 cities.

Joe Fairless: How do you increase the value of a triple net lease property?

Dave Sobelman: Just as I stated – by buying good real estate. Because most people derive the value of a net lease property from the credit of the tenant, and the length of the lease. What ultimately happens is the price is derived based on a return, which is called a capitalization rate (cap rate). When I mentioned the 6% return from the Walgreens earlier in the conversation, that’s what people like to see. “I’m gonna get a 6% return on my money, and I’m comfortable with that.” And that’s just based solely on the income, and they’re not really looking at increasing the value of the real estate, and that’s done strictly through higher density, better demographics, tough to invest markets, and just what we call barriers to entry, and that’s what we focus on… Because history has proven that you can quantifiably increase the value of a property by buying in these poor markets.

Joe Fairless: Okay, so you’re not doing anything to the property; you’re identifying the right place to buy the property, and then based on historic data, the property will appreciate because of the area that it’s in.

Dave Sobelman: Very much so. Our very first asset was purchased in Washington DC, just North of the White House. The tenant is 7-Eleven. Not super sexy, not exciting; most people will go get their Slurpee or their hot dog or their drink from there, but they have a AA- Standard & Poor’s credit rating. It’s one of the highest credit ratings there is. The Federal Government, by comparison, is AA+, so they’re not too far off from a credit perspective. This property was a brand new construction, it was the ground floor commercial condominium of a brand new construction, residential condominium building. It’s in the middle of everything, it took them four years to build this property, just because it’s so difficult to build in Washington DC. 7-Eleven has a ten-year lease (triple net), and not many people would have the opportunity to buy this. In fact, this didn’t even go on the market because the seller contacted me directly.

Another value proposition for the REIT is just my reputation in the industry allows me opportunity or access to different properties that most people wouldn’t. So that property is a great example of buying in the middle of everything, and it’s hard to buy in Washington DC. We have properties under contract in Tampa, Florida, about to be Atlanta, Georgia… Just very core markets that typically appreciate in value much faster than secondary and tertiary markets of the country.

Joe Fairless: Other than the 20 highest density cities, what are some specific benchmarks that you look for in demographics for where you buy?

Dave Sobelman: The easy ones to look for are just income, number of people, I look at the trends as well – are the trends going up or down? And then I actually visit each property I go to, to get a feel of it. Let’s take this Atlanta property that I just mentioned – it’s occupied by SunTrust Bank, which if some of your listeners don’t know, it’s a public company, Standard & Poor’s credit rating of A, and they’re headquartered in Atlanta. So this is a prime site for them.

I actually went to the site, I lived just above another commercial condo, triple net leased to SunTrust; I rented an apartment that’s just above this building and I actually embedded myself in the community for a period of time, so I can see…

Joe Fairless: How long?

Dave Sobelman: One night, two full days.

Joe Fairless: [laughs] You made it sound like six months or a year.

Dave Sobelman: No, for sure… I still want my wife to like me.

Joe Fairless: Alright, so you spent the night there, okay.

Dave Sobelman: But seeing the property at different points of the day is really important, because a lot of people go to a property one time, they drive by it, they don’t go inside, they just see “Yes, it does exist”, and they’re comfortable from that point on.

I take a much different approach, where I like to see it during morning hours, during lunchtime traffic where people are out getting their lunches; in the evenings, after they’ve left work, what’s the nightlife looking like? And so on.

There’s lots of different ways to diligent a property from a physical perspective, and that’s something that I take very seriously.

Joe Fairless: Drill in a little bit deeper on specifics  – you said you look at the income, the number of people, trends going up and down… Can you give us some specifics as far as what income do you look at, what number, how many people – 20, 5 million, 300 thousand? And what specific trends?

Dave Sobelman: I don’t have specific numbers, because every market is different. Washington DC actually has higher density than Atlanta, Georgia, and I’m not talking about the suburbs of Atlanta either, I’m talking about Atlanta proper, downtown Atlanta. So the densities are just different. So I don’t have threshold numbers, we take up to 100 different variables into account in any one property.

Joe Fairless: Are all 100 weighted equally?

Dave Sobelman: No.

Joe Fairless: What’s weighted the most?

Dave Sobelman: Just appreciative value. So “What is the potential to appreciate the value of this site?”, that’s the most important variable. But if we’re getting into the minutiae of underwriting, then we can look at “Is the property on a corner, or is it mid-block? What’s the access to the property? Is it good or is it bad? Does the property have parking?” If it doesn’t have parking – like a lot of these dense properties, they don’t have parking at all – then how do people access this property and how do they get to this property? What can we reuse this property for? Even though I’m telling you a great story right now that we’re buying properties occupied by these tremendous companies, I’m always looking at the asset from the worst-case scenario, because what we’ve learned during the last recession is even great companies go out of business.

Kmart used to be a great company, Circuit City used to be a great company, Blockbuster was a great company… And what we learned is even though they were a great credit-worthy company, we had to start learning how to reuse their real estate. In a lot of cases, that’s happening. Blockbuster is probably the best-case scenario on that. Even though they went bankrupt and vacated all of their thousands of locations around the country, a lot of them were in great locations. Those landlords who owned those assets were able to either sell them, or completely reposition them with different tenants, maybe retrofitting them for a different use or allowing the tenant to retrofit them at their own expense for a different use.

So there’s just so many different ways to look at an asset, and you really don’t do that unless you’re spending a decent amount of time there.

Joe Fairless: Based on your experience, for a Best Ever listener who’s listening to this and thinking “Well, I like what you’re saying and I wanna get in on some triple net lease single-tenant properties”, what’s your best advice ever for them as a startup?

Dave Sobelman: Well, first of all, they’re expensive. So if you’re gonna buy a property for yourself or a small partnership, I wouldn’t recommend just throwing a few dollars together. I would recommend waiting and kind of saving those dollars until there’s a substantial amount. That substantial amount could be 2-3 million dollars.

If you wanna get into the net lease business and have some exposure in your account to net lease properties, that’s what REITs are set up for, where you can buy shares of the REIT that’s focused on the net lease properties themselves, and then you can have your exposure that way.

Typically, if someone approached me during a brokerage transaction where they wanted me to represent them to purchase an asset and they said — let’s say I have $500.000, which you and I both know the value of a dollar, we both know that that’s a tremendous amount of money, but in the scheme of a net lease investment it’s a very low dollar amount. So the quality of the asset that they would be purchasing at those low dollar amounts would not be worth the risk that they would be taking.

So I would either encourage them to put a lot of people together at $500,000 each, or to kind of spread their risk and get the diversification of a REIT that’s focused on this.

Joe Fairless: Are  you ready for the Best Ever Lightning Round?

Dave Sobelman: Let’s go!

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [[00:20:54].11] to [[00:21:51].26]

Joe Fairless: Best ever book you’ve read?

Dave Sobelman: Shoe Dog, by Phil Knight. It’s essentially my life story.

Joe Fairless: Best ever deal you’ve done?

Dave Sobelman: Probably a 17-property portfolio occupied by Havertys Furnitur