January 9, 2019

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

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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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.

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