How to Make Money as an Investor Using the Ultimate Success Formula
Joe is a huge fan of Tony Robbins and has used a lot of his teachings in his daily life, which he says has propelled him to where he is today. Theo is breaking down what it takes to have the kind of success in the syndication business that Joe has, and this includes Tony Robbins’ ultimate success formula. If you enjoyed today’s episode, remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
Get the free annual income calculator that goes with this episode and that will show you how to make money as an investor.
Subscribe to our newsletter for the Best Ever Advice!
Best Ever Listeners:
If you need debt, equity, or a loan guarantor for your deals, I suggest contacting Marc Belsky from Eastern Union Funding and Arbor Realty Trust at 12-897-9875 or emailing him at firstname.lastname@example.org.
He’s helped me with agency debt and equity raise, and he’s also helped my clients with their real estate investment careers.
Applying the Ultimate Success Formula
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, Theo Hicks.
Each week, we air a two-part podcast series about a certain aspect of the apartment syndication investment strategy. For the majority of the series, we will be offering free documents or spreadsheets for you to download for free. All these documents and the previous syndication school series episodes can be found at SyndicationSchool.com.
This episode is part one of a two-part series entitled “Tony Robbins Ultimate Syndication Success Formula.” So, in these next two parts, we’re gonna be talking about goals and how to set goals as an apartment syndicator. By the end of this episode, you will learn first what the Tony Robbins Ultimate Success Formula is, and the episode will be focused on part one of the five-part formula.
And then we’re going to have a conversation about the money question, which is “How do you make money as an apartment syndicator?” We’re gonna talk about the different fees, and then go over an example… And then, lastly, you are going to set your first 12-month goal. In order to help you with that, we’re gonna provide you with a free calculator, where you essentially input your goal and it’ll spit out what you need to do to accomplish that goal, which we’ll get into a little bit later in the episode.
Defining the Ultimate Success Formula
First, as an introduction, what is the Tony Robbins Ultimate Success Formula? It’s a five-part formula, and as you all know, Joe is a huge fan of Tony Robbins. So, I wanted to have this episode follow his outline but apply it to apartment syndications and get really specific on the certain parts of the formula.
Part one is Know Your Outcome, which is gonna be the focus of this episode. Part two is Know Your Reasons Why, which will be discussed in the next episode, part two. And then the last three steps are to 3) Take massive intelligent action; 4) Know what you’re getting; and then 5) Change your approach… Which we’re not gonna be talking about in this episode, but in reality, that’s what the entire Syndication School is about – what type of action to take, tracking your action, and then ways to tweak your approach or different approaches you can take based off of your results.
Knowing Your Outcome is Key to Learning How to Make Money as an Investor
Part one is Know Your Outcome. Why is this important? Well, as Tony Robbins says, clarity is power. You need something to focus on, and it needs to be something that’s specific and quantifiable, and once you’ve set this specific, quantifiable outcome, then you’re able to reverse-engineer the process and take that massive intelligent action, which is step three.
So if you don’t know what you’re doing, you have nothing to focus on, and you’re kind of flailing around like a fish out of water, and you’re not taking intelligent action – maybe you’re taking massive action, but it’s not intelligent, because it’s not pushing you towards a specific outcome…
We have to set an outcome before we even start our syndication business but after we make sure that we meet the requirements from the previous series, which is your education and experience requirements. So if you haven’t listened to those episodes yet, those were last week’s episodes in the Syndication School series, and it can also be found at SyndicationSchool.com.
The Ultimate Success Formula Hinges on Your Monetary Goal
So, in order to know our outcome, and our outcome is gonna be a monetary goal, how much money we’re gonna make, you first need to know how the heck you make money as a syndicator. I’m gonna go over essentially all the fees that you could potentially make as a syndicator, and then mention which ones are common and which ones are uncommon, and then kind of how to think about which ones you should charge on your first couple of deals.
In total, we’re gonna go over eight different fees, and the first five are going to be the most common, and the other three, probably, you won’t be charging ever, most likely, but some people might be charging them at a later stage in their business.
A Profit Split
The first way you’re gonna make money is on the profit split. Typically, how you’re going to structure the deal with your investors is that you will offer them some sort of preferred return, which is a return on their capital, and then once that preferred return is distributed, all of the remaining profits will be split between you and your investors. So the split can be 50/50, or it can be as high as 90/10, with the first number going to your investors, the second number going to you. That will be 90% of the extra profits to your investors, and 10% to you.
Most likely, you’re gonna see something between 50/50 and 70/30. So the reason why you are able to charge a profit split is because it promotes alignment of interest with your investors, because if you just meet their preferred return, then you won’t get paid until you sell the property… Whereas if you exceed the preferred return, they make more money because they’re making either 50% (up to 90%) of that remaining profits, and then, of course, you’re incentivized to exceed preferred returns, because you yourself want to make money. If you’re able to exceed your return projections, that means you’re also increasing the value of the property, which also increases the profit at sale for you and your investors.
If you remember from the education series, the value of the property is based on the net operating income, which is the income minus the operating expenses, and the cap rate. So the higher the operating income, the higher the property value, which means the higher the sale price, which means more profits for you and your investors at sale. So that’s number one, the profit split.
An Acquisition Fee
Number two is an acquisition fee. An acquisition fee is the upfront fee that is paid to the general partnership (to you) for finding, analyzing, evaluating, financing, closing on the deal. This fee is gonna be a percentage of the purchase price paid to the syndicator at closing, and it can be anywhere between 1% and 5% of the purchase price, depending on the size of the project, the scope of the project, the experience level of you and your team, as well as the profit potential of the project.
Think of the acquisition fee as a one-time consulting fee for all the behind-the-scenes work you’ve been doing in preparation to close on the deal. So it doesn’t just start with you finding the deal, it also starts with you evaluating the market beforehand and picking the market. That’s also from you spending your time getting educated, putting the team together, things like that. All the behind-the-scenes work that you’re doing for maybe years will finally come to fruition with your first acquisition fee at closing. So that’s number two.
An Asset Management Fee
Number three is an asset management fee. This is an ongoing fee paid to the general partners for the ongoing property oversight. Making sure that the business plan is executed properly, maintaining occupancy, overseeing the property management company… All the ongoing tasks required to manage and operate the asset, you’re paid for that work through this asset management fee.
Now, the asset management fee could be anywhere between 2% and 3% of the collected income, or some syndicators will charge a per-unit, per-year fee of $200 to $300. This depends on the ongoing business plan. If it’s a very complicated business plan – a lot of renovations, and rehabs, and a distressed property – then you can charge higher, whereas if it’s a turnkey property and you’re just kind of maintaining things, then it’ll probably be at the lower end of the range.
Now, Joe and his business prefers the percentage of the collected income to the dollar/unit/year, because again, alignment of interests. If you’re just charging a flat fee, then if the property does really well or really bad, you get paid the same amount of money regardless… Whereas, if it’s based on the performance of the property, which the collected income is going to be performance-based, then there’s an alignment of interest because, the better the property performs, the better the syndicator gets compensated, therefore they’re incentivized to make sure the property performs.
Another way to promote alignment of interest – and you don’t have to do this, but this is something else that we also do – is to put the asset management fee in second position to the preferred return. What that means is the preferred return is paid out first, and then we collect the asset management fee. That means that, if we cannot achieve the preferred return, then we don’t get paid. So again, another added level of alignment of interests there. That’s number three, asset management fee.
A Guarantee Fee
Number four is the guarantee fee. This is the fee paid to the loan guarantor, who is the people that sign the loan and bring their net worth and balance sheets or their experience to help the syndicator qualify for financing. So if you eventually become the loan guarantor, because you’ve built up a large enough business where you no longer need to bring on a third party to help you qualify for financing, then you can collect a fee.
If you are the loan guarantor, it’s likely going to be a one-time fee, paid at closing, and it’s going to be based off of the principal balance of the mortgage loan, so whatever size of loan you get. This could be on the low end between 0,5% and 2%, or as high as 3,5% to 5% of the principal balance of the mortgage loan paid at closing. Now, it’s probably gonna be on the lower end if it’s you, and the higher end if it’s someone else.
Additionally, if you’re bringing on someone else to be the loan guarantor, like an experienced syndicator, then you’re likely gonna have to give up a percentage of the general partnership, as well. That can be anywhere between 5% and 30% on the high end. Now, where you fall in that range will depend on a few factors. Number one, the risk of the deal, so how complicated is the deal, but also, more importantly, how risky is the debt. So is the debt non-recourse, meaning that the loan guarantor is not personally liable unless certain carve-outs are triggered; if that’s the case, then it’s not as risky and they will likely accept a lower fee or a lower percentage of the general partnership. But if it’s a recourse loan, which means that they are personally liable if you were to default, then they’re gonna be on the higher end of the spectrum.
Also, experience. So if you’re less experienced, there’s more risk on the deal and they’re gonna want a higher chunk of equity and/or upfront free… And then, finally, how well do you know this person? If you have a good relationship with them, a good, trusting relationship, then you’re likely gonna be able to charge less… But if you don’t know who they are and you’re desperate for a loan guarantor, then, at the end of the day, they can probably charge whatever they want, because you wanna get the deal done.
Always remember that a smaller percentage of something is a lot better than complete ownership of absolutely nothing… So don’t be worried about having to give away equity to someone to help you qualify for the loan in the first few deals, because, in the long run, eventually you’ll be able to not only sign on the deals yourself but just getting your foot in the door. So that’s number four, the guarantee fee.
A Refinancing Fee
Number five is a refinancing or supplemental fee. This is a fee paid to the general partnership for the work that’s required to refinance the property or obtain a supplemental loan. Again, this is gonna be based off of the loan balance of the original loan or the new loan, depending on how the agreement is structured, and it’s gonna be between 0,5% and 2% of that loan balance. Now, sometimes, a hurdle might be involved, that is if you do not distribute a certain percentage of the LP’s initial equity, then you do not get to collect this fee.
For the example deal I’m gonna go over here in a little bit, the return hurdle is 50%. So we needed to return 50% or more of the LP’s initial equity at refinance in order to collect our refinancing fee. That’s five. And the same thing applies for obtaining a supplemental loan.
Now, those are the five common fees that you’re likely gonna see and that you’ll be able to likely charge on your first few deals. I guess I wanted to make you aware of their existence.
A Property Management Fee
Number six is a property management fee. We all know that the property management company, in return for their work, requires you to pay them a monthly fee. This fee could be anywhere from 2% to 8% of the collected income, depending on the size of the deal. The bigger the deal, the lower the fee is, typically… But let’s say, eventually, you start your own property management company to manage your assets; then you’re the one who’s gonna be collecting this fee. That’s number six.
A Construction Management Fee
Number seven is a construction management fee. This will be a fee paid during the construction or renovation period for big projects. Now, again, usually, if you have your property management company overseeing the renovations or the value-add business plan, then they might charge an additional fee during that period. It could be a percentage of the collected income that’s higher, but it’s most likely gonna be a percentage of the actual rehab budget, so 5% to 10% of your cap-ex budget will be paid to the property management company for managing the renovations.
And, again, if you, in the future, create your own property management company, then you will be the one who’s charging this fee. If that’s the case, then you would either do that upfront, 5%-10% of the rehab budget, or you could include it in your asset management fee. That’s number seven.
An Organization Fee
Number eight is an organization fee. This is a fee charged for putting the group together, so bringing together all the general partners and all the limited partners. Now, this fee could be anywhere between 3% to 10% of the equity raised, but typically this is included in the acquisition fee. Some people will charge extra for an organization fee, so I just wanted to make you aware of that fee.
Those are the eight fees. Again, the first five – the profit split, acquisition fee, asset management fee, guarantee fee, and the refinancing/supplemental fee – are the most common.
How to Make Money as an Investor by Applying the Above Fees
Now, how do you know what fees to charge? Well, you only charge fees if they 1) show alignment of interests, and 2) that you are actually adding value to that respective part of the process. If you are not doing a refinance, then you obviously are not gonna be charging a refinancing fee. If you are not responsible for the ongoing asset management, you’re not gonna be charging an asset management fee etc. Make sure that all the fees you’re charging are actually based off of things you’re doing, and then set those fees based off of what promotes the most alignment of interest with your investors.
A Real-Life Example
So what’s an example of how much money you can make on a deal based on these fees I just went over? Just to give you an idea of how much money can be made as a syndicator, as well as to give you an idea of how to set your goal in the later parts of this episode. We’re gonna follow a 250-unit deal that we purchased for 14.1 million dollars, with a projected hold period of five years. The fees we charged for this deal were actually the five common fees I mentioned above. One, we had an acquisition fee, which was 2% of the purchase price; Joe and his company were also the loan guarantors for that deal, so they also charged a guarantee fee of 0,83% of the loan balance, so those were the two fees that were paid to the general partnership at closing.
For the acquisition fee, 2% of 14.1 million dollars is $282,000. Add to that the guarantee fee, which was 0,8% of the loan balance, which was 11.7 million dollars. That comes to $97,110. So a little under $400,000 at closing to the general partners.
Now, they also charged an asset management fee, which was 2% of the collected income. The collected income for the first year was a little over 2.4 million dollars. Two percent of that was $48,946. That’s per year, so for the five-year hold period, that totals $244,000. That’s something that’s split up across the five years of the [unintelligible [00:21:13].28]
Next, they were able to add 5.5 million dollars in equity to the deal in less than one year because of their value-add program, as well as the price they bought the property at. Because of that, they were able to do a refinance and return more than 50% of the equity, because in the agreement they were going to collect a fee of 2% of the original loan balance, as long as they were able to return more than 50% of the LP equity… Which they did, so 2% of the original loan balance, which was 11.7 million dollars, is an additional $234,000 paid a little bit around the one year mark.
The fifth fee is the profit split. The profit split for this deal was 30% to the GP, 70% to the LP. But, for this particular deal, there was an internal rate of return hurdle that, once the deal hit 20% IRR to the limited partners, then the profit split went to 50/50. Usually, the IRR doesn’t exceed zero until sale, because that’s when the investors receive their original equity back… So the ongoing profit split, which was a 30% of the remaining profits, was $108,000 annually. Multiply that by 5 years, and it’s a little bit over 500k.
Then, also, the profits at sale are split. The total profit at sale for this deal was 6.6 million. After returning the investor equity, the remaining equity was split 70/30 until that IRR hurdle was hit, and then it was 50/50. In total, that equates to 2.2 million dollars to the general partner at sale.
Now, adding all five of those fees together, during a five-year period, for that particular deal, the general partner would earn 3.6 million dollars. That’s just one deal, a 14.1 million dollar deal, which is a pretty big deal, 250 units… But imagine that multiplied by five, six, seven deals. You’re talking about a lot of money. So that’s the profit potential to the GP for putting together an apartment syndication. That’s why we’re all here, right? To gain financial freedom through real estate.
Step One of the Ultimate Success Formula: Setting Your 12-Month Goal
How Much Money Do You Want to Make in the Next Year?
Now that we went over how you actually make money, you can set a goal. The first goal we wanna set is a 12-month goal. Each year, you wanna set a new 12-month goal, hopefully higher than the previous year, but since you’re just starting off, we’re gonna set our first 12-month goal… And we want this to be as specific and quantifiable as possible. We’ve got the specific, which is 12 months, and now we need to get to the quantifiable. So how much money do you wanna make in 12 months? That number might be small, it might be big… This depends on where you’re at in your life. But, for the purposes of this episode, we’re gonna assume that you wanna make $100,000 this year. So… Great! We’re done, right? Specific and quantifiable. Well, no.
What Do You Need to Do to Hit That Dollar Amount?
We wanna take it a level deeper and ask ourselves “Okay, so I wanna make $100,000 this year. What exactly do I need to do in order to hit that number?” Should you set it based off of the number of deals, or the number of units you wanna complete? Well, no, because — let’s say you wanna do one deal that makes you $100,000. Well, if that one deal loses you $200,000, you’re technically hitting your goal of one deal, but not hitting your quantifiable $100,000 mark.
Same thing for the number of units you wanna control. Say I wanna control 100 units, that cash-flow $1,000/year, to hit the $100,000 number. Well, that is possible, but you’re gonna be focusing on getting those number of units, and if you don’t hit that $1,000/year mark, then you’re technically hitting your number of unit goal, but you’re not hitting your actual quantifiable number goal.
Option One: Raise Money and Charge an Acquisition Fee
What you wanna do is you wanna figure out how much money you need to raise in order to make $100,000. There’s two ways to do this. Number one, the simple, straightforward approach is to ask yourself how much money you need to raise in order to make a $100,000 acquisition fee. That way, if you do a deal or multiple deals at that equity raise amount, then you will make that acquisition fee in 12 months. So if the goal is to make $100,000, and you’re assuming you’re charging a 2% acquisition fee, then the purchase price needs to be 5 million dollars, because 2% of five million dollars is $100,000.
But we’re gonna go even deeper than that, and we’re gonna say, “Okay, well how much money do I need to raise in order to buy a five million dollar property?” We’re gonna assume – and this is a good assumption – that, in order to take down an apartment community through syndication, you’re gonna need to bring 30% of the total project cost. That’s for the loan, as well as for the various other fees required – the financing fees, the closing costs, an operating account, things like that – in order to take down the deal.
So 30% of 5 million dollars is 1.5 million dollars. Now, you know that, in order to make $100,000 a year, you need to buy a five million dollar property, which means you need to raise 1.5 million dollars. Now, instead of focusing on a specific number of deals or a specific number of units, you wanna focus on raising 1.5 million dollars. If you raise that 1.5 million dollars, all the pieces are in place for you to make your $100,000 goal. That’s one way to set your goal.
Option Two: Base Your Goal on Profit Splits
Another way, a little bit more complex, is to set a goal based off of, again, making $100,000, but base it off of the ongoing profit split… Because, if you wanna make $100,000 year one – or actually probably to make $100,000 every year to replace your W-2 income, or that’s how much money you need to cover your expenses, or however you came up with that number, most likely, you don’t wanna make it just one year and then never make it again. So one way is to, of course, do a five million dollar deal every year, but another way is to figure out, “Okay, well, I’m gonna do that five million dollar deal, but how long until I’m able to make $100,000 a year without having to continue to do deals?” That’s where your free document comes into play, which is the annual income calculator.
What it allows you to do is you input your annual income goal (in this case, $100,000) the acquisition fee (in this case, 2%), and then you need to input the structure you have with your investors, in this case, 8% preferred return and a 70/30 split. Then you input the projected cash-on-cash return for your deals. If you’re offering an 8% preferred return, this number needs to be at least 8%, but ideally, it’s closer to 10%.
For this example, we’re gonna say that our income goal is $100,000 a year, we’re gonna charge a 2% acquisition fee, offer our investors an 8% preferred return with a 70/30 split, and the property that we buy is gonna have an annualized cash-on-cash return of 10%. The math is all done for you, so we’re not gonna go over it on here, but the calculator will automatically spit out your one-time acquisition fee, which we will get for doing this size of a deal, or your acquisition fees in total, for doing multiple deals of this size… And then they’ll tell you exactly what the property purchase price is, as well as the equity required to buy that property in order to make $100,000/year. That’s gonna be that 30% profit split you receive.
For the example that I just went over, in order to make $100,000 a year from that profit split, you’re required to purchase 52 million dollars’ worth of apartments, which requires raising 15.66 million dollars in equity. So, in order to make an acquisition fee of $100,000, you need to raise 1.5 million dollars in equity; in order to make $100,000 on an ongoing basis, you need to multiply that by a magnitude, so ten times as much equity. If you do that ten times, so you raise 1.5 million dollars ten times, or if you raise 15 million dollars one time, or somewhere in between, you will have your $100,000/year in income. So, in order to plug in your number, go to SyndicationSchool.com, or go to the show notes of this episode to download the free annual income calculator.
Learning How to Make Money as an Investor Requires an Affirmation Statement
Now, the last step after you’ve set your goal is to create an affirmation statement. You don’t wanna just set the goal one time, and then completely forget about it. You wanna continuously remind yourself of what that number is and how much money you need to raise so that you are subconsciously seeking out opportunities that will help you reach that goal, as well as in combination with the information you’re going to learn in part two of this podcast series.
Your affirmation statement, again, is gonna be specifically quantifiable, so we’re going to use the simple example of the $100,000/year goal from the acquisition fee for this affirmation statement. If you’re using the other approach, which is the ongoing $100,000, and this will be slightly different… But, for this example, the affirmation statement will be: “On the date (one year from today) October 17th, 2019, I have raised 1.5 million dollars in equity from passive investors, and I use that equity to syndicate 5 million dollars’ worth of successfully performing (10% or higher cash return) apartment communities earning me a total of $100,000 in acquisition fees.”
That’s your affirmation statement, and what you should do after you’ve set your goal and created your affirmation statement is write it out each morning for the next 30 days. If you do that, it will be hardwired in your brain, you’ll probably memorize it at that point, and, once you have it memorized, you will actively seek out opportunities to achieve that goal, since it’s hardwired into your brain.
That’s part one of the Tony Robbins Ultimate Success Formula, or what I’m calling the Ultimate Syndication Success Formula, which is know your outcome. In this episode, you learned how you make money as a syndicator, as well as an example of the money made on a 250-unit deal, just to kind of give you an idea of the possibilities. Then you set your own 12-month goal and determine exactly how much money you need to raise in order to achieve that goal, which again, is either based off of an acquisition fee or an ongoing fee from the profit split, which you can calculate using the free annual income calculator at SyndicationSchool.com Then lastly you create an affirmation statement and make a commitment to write it out 15 times each morning for the next 30 days.
That concludes part one. In part two, the next episode, we will discuss part two of Tony Robbins Ultimate Success Formula, which is “Know Your Reasons Why.” The next episode is gonna be focused on vision.
To listen to other Syndication School series about the how-to’s of apartment syndications and to download your free annual income calculator, visit SyndicationSchool.com, and if you enjoyed this episode, please leave us a review on iTunes.
Thank you for listening, and I will talk to you tomorrow.