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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 mentor 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.