October 10, 2018

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

The Importance of a Business or Real Estate Investment Background

TTheo is back for his third installment of the new segment of our 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 on iTunes and leave us a review.

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Start Building Your Investment Background

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 syndicationschool.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.

What are the Real Estate Background Requirements for Syndicators?

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.

The Two Parts of the Investment Background Requirement

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.

Four Questions to Determine Your Real Estate Investment Background

Your Accomplishments

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.

Profitable Properties

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.

Investing Your Own Money

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.
Commercial Investments

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.

Your Business Background

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.

Four Questions About Your Business Background

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?

Business Performance

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.

Promotions and Recognition

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.

Feedback from Others

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.

Rating Your Business and Real Estate Investment 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 one through 10 for your successful track record in real estate and business. What does a successful track record mean, and what would a one versus a 10 be?

Those With Zero Experience

I’ll start with number one – 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 one – no real estate experience and not a very positive business experience.

Those With Some Experience

Next, we’ll say a rating of four-five – an example of someone who would give themselves a four or five 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 four or five.

Those With a Great Deal of Experience

Now, a seven or an eight, 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 seven or eight 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 two-three 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 seven or an eight.

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.

Joe’s Investment Background

Single-Family Homes

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.

Thought Leadership

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.

Business Experience

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 emails 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 four or a five. 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.

The Minimum Business and Investment Background

With that being said, when you analyze your real estate and business background, you’re gonna need a four or a five 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 three or four single-family homes that I’ve managed for the past four-five 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 six or a seven, 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.

Start Building Your Business and Investment Background

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 one through 10. One 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 five 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 four 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.

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