January 10, 2019

JF1591: How To Raise Capital From Private Investors Part 8 of 8 | Syndication School with Theo Hicks

Yesterday Theo discussed 15 of 49 common questions you’ll get from your passive investors, and how to address them. Today, Theo will go over the remaining 34 common questions that you will get from investors. All of these questions are available in the document below. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Free documents for this episode:

http://bit.ly/2VdxYmn – Money Raising Tracker

http://bit.ly/commoninvestorquestions – 49 Common Questions


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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’m your host, Theo Hicks. Each week we air a two-part podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of these series we offer a document or spreadsheet for you to download for free. All of these documents, and the past and future Syndication School series can be found at SyndicationSchool.com.

This episode is part eight of an eight-part series entitled “How to raise capital from passive investors.” By the end of this episode, assuming you’ve listened to parts one through seven, you should know everything that you need to know about raising money from passive investors.

Reviewing what we’ve learned so far, you’ve determined your mindset towards raising money, if you have any fears or limiting beliefs, as well as how to overcome those fear or limiting beliefs. You also learned why someone will invest with you, which is trust. You learned the differences between a joint venture and a syndication, as well as the differences between a 506(b) and 506(c) investment offering. You learned 12 ways to find people to invest in your apartment syndication deals, from thought leadership platforms, to Bigger Pockets, to volunteering, to advertising, and everything in between. You also learned the next steps after finding a passive investor who’s interested in investing, which is to set up an introductory call and actually do the introductory call. You also learned how to overcome the “You lack apartment experience” objection before you’ve done your first deal; essentially, how to get investors to invest in your first deal without you personally having done a deal before; basically, how to overcome that catch-22.

Then we learned about the questions to expect from passive investors about your team and about your business plan. That was yesterday’s episode. We went over the 15 of 49 questions, and we’re going to jump into those remaining 34 questions right now.

  1. Why should I invest in apartments?

Again, these are questions that your passive investors will likely be thinking to themselves, and might not actually ask, or they might actually ask you these questions, so either way, you need to prepare to answer them… And if they don’t come up, you need to proactively answer these questions.

Why should I invest in apartments? Well, again, going back to that company presentation template that is available for free at SyndicationSchool.com, there is a list of reasons why I and you like to invest in apartments. As of today, which is the beginning of 2019, historically there is less risk and better returns with real estate investments overall, compared to stocks and bonds. That kind of says why we invest in real estate. But why we invest particularly in apartments in because there is decreasing home ownership, which means people are renting, and there is a decreasing apartment vacancy rate, which means demand is increasing, as well as an overall increasing in population.

On the other hand, if they’re asking “Why should I invest in apartments?” then they’re probably not going to invest in your deals at all, most likely, and they’re definitely not gonna invest in your first deal, because it’s gonna take them some time to get comfortable with the apartment asset class if they don’t know really anything about it. Fortunately for you, that’s where your thought leadership platform comes into play, where you’re gonna educate people about the benefits of passive investing.

So if someone asks this question, you respond with the historical risks and returns, and the population growth vacancy decreasing, and those things, but you’re also gonna wanna direct them towards your thought leadership platform, so they can learn more and get themselves educated before investing in your deal.

  1. Why did you decide to pursue the value-add business model? Why did you decide to pursue the turnkey, or the distressed business model?

For us (and for me), we do the value-add business model, and the reason why is because the value-add essentially offers the best of the turnkey and the distressed. For turnkey overall there’s gonna be lower risk, because all deferred maintenance is [unintelligible [00:07:24].08] property is up to market conditions, so you’re not gonna have to spend a ton of money on capital improvements… But at the same time, there’s a lot lower upside potential, because you’re not able to add value.

Distressed are on the opposite end of the spectrum, where there is a lot of upside potential, but there’s also a lot more risk, because if you’re buying a property that’s 50% occupied, if you are not able to increase that occupancy rate, then you’re gonna lose some money.

Value-add offers the best of both worlds. There’s lower risk, because you’re buying a property that’s already stabilized, but it also has higher upside potential because you’re gonna take it from a C to a B, for example. So if you’re doing value-add, you can explain why you do it. If you’re doing turnkey or distressed, then the answer is gonna be a little bit different.

  1. I want something that is low-risk, so what are the major risk factors in investing in apartments?

The three main risk factors when investing in apartments is the deal, the market and the team. We recommend that if someone asks this question, you explain what it is exactly you do to minimize the risks for the deal, for the market and for the team.

The answer is – for the deal, you want to make sure you’re conservatively underwriting deals. For the market, you want to make sure that you are properly evaluating the market, so you follow the market evaluation strategy that we discussed in the previous Syndication School series. And then for the team, you wanna make sure that you’re hiring qualified, experienced team members.

Then in addition to all of that, you want to make sure that you’re also following and aligning with the three immutable laws of real estate investing – a theme here – which we discussed in a past Syndication School episode. Just as a reminder, those are 1) Buy for cashflow, 2) Secure long-term debt, and 3) Have adequate cash reserves.

If they want to know about the risk factors, you can say “The deal, the market and the team are the major risk factors here. However, we conservatively underwrite deals by doing XYZ. We evaluate our target market across these ten factors, or these six factors, as well as we hired team members who have done X amount of deals following this exact same business plan. Then also we make sure that we’re buying for cashflow and not appreciation, we are securing long-term debt, and we have adequate cash reserves in place, just in case the market were to go into a downturn we’ll have ourselves covered.”

  1. Can you provide me with a worst-case scenario for the typical investment from an investor’s point of view?

Well, the worst case scenario is you lose all of the investor’s money, and then you have to do a capital call to try to turn the deal around, and then you lose that money, too. That’s probably the worst case scenario. Unlikely to happen, but this is an investment, and like all investments, there are risks. But again, in that previous question we discussed exactly what you’re going to do to mitigate those risks. You want to follow up with the strategies, and not just saying “Hey, we could lose all of your money, do a capital call, and lose all your money again. This is an investment, so things can happen.” You wanna also be like “But it’s unlikely to happen, and here are the policies and procedures we’re putting in place to make sure that that does not happen.”

  1. How long do I have to keep my money in the deal?

Being a passive investor, this is not liquid, so it’s kind of depending on your agreement, they likely are not gonna be able to pull their money out until the sale, unless they’re able to sell their shares to someone else, with the written consent of the general partnership. So just tell them that “Your money will be locked in for…” whatever your hold period is. For Joe and for me, that’d be five years.

  1. What happens if I want to use my invested money for something else? Can I pull it out?

The process for how or if an investor can pull their money out of the deal should be outlined in the private placement memorandum created by your attorney. Generally, the investors can sell their shares with the written consent of the general partnership. They must find a qualified buyer, and then that person must be approved by you. Or you can make it so that they’re not allowed to get out at all, or that only you can buy their shares… It kind of depends on how the PPM and the agreement is structured.

  1. How are you finding deals?

Now, at this point we haven’t gone over how to find deals yet, so I will briefly touch on this question, and we’ll definitely go into more depth on how to find deals in future episodes… But going into the future, you’ll know how you’re finding deals at this point, so  you’ll tell them exactly what you are doing. If you’ve done a deal in the past, you can also mention how you found that deal. Most likely, if you’re talking to investors now, and we obviously haven’t gone over how to find deals yet in Syndication School, we have plenty of blog posts on how to find deals, and you can also tell them, at least for now, that you’re working with this/these real estate broker(s) who are sending you deals on an ongoing basis. It’s more of the off-market strategies that we haven’t discussed yet, that you probably would not be able to answer to right now, but you will be able to in the coming months, once we’ve covered that in Syndication School.

  1. What markets are you currently focused on?

We’ve already selected our one or two target markets in a previous Syndication School series, so you wanna explain why you selected those markets. Go through how you narrow down the 19,000 U.S. cities to seven, based off of where you live and places you know, and places that were in top 10 lists, and then you evaluate those seven markets across unemployment, population, supply and demand, employment, job diversity… And then based off of those factors, these were the top one or two cities to invest in. Then you actually visit those properties in person to do a more in-depth analysis, and maybe you disqualified one and kept the other one, for example.

  1. Do I have to submit my financials to anyone?

If you remember, in the earlier part of this eight-part series we discussed the differences between the 506(b) and the 506(c). If you are doing a 506(b) offering, then they will not need to submit their financials to anyone, but if you’re doing a 506(c) offering, then they actually will, because they are not allowed to self-verify that they are accredited for 506(c). They can only do that for 506(b). So if you’re doing a 506(c), the answer is yes, and with 506(b) the answer is no.

  1. Who owns the property?

Typically, the property is going to be owned by an LLC that you set up, and then the investors are going to buy shares of that LLC, which means that the investors will not have any liability.

  1. Who manages the property? Is it a third-party management company, or do you do your own management?

This kind of depends on you, but if you’re just starting out, you likely are hiring a third-party, so you are going to want to tell them that, as well as talk a little bit about their background and give some statistics around that property management company – how many doors do they manage, how long have they been managing apartments, have you worked with them in the past… Things like that. Again, they wanna know that they’re in good hands.

Now, some experienced accredited investors might only invest in deals where the management company is in-house. Sometimes actually even sellers will only sell to people who have in-house property management companies, just because there’s that perception that if they have their own in-house property management company they’re more credible than someone who doesn’t, which may or may not actually be true; it’s just a perception thing. Again, this response depends on where you’re at, and whether or not you’re planning on doing your own management. If you’re just starting off, definitely get a third-party, because you probably don’t know how to actually manage an apartment, unless that’s your background.

  1. What happens if the project fails?

Similar to the worst case scenario question, “What happens if you lose all of your money?” Obviously, you want to begin by saying that you don’t expect the project to fail, but of course, the unexpected could happen, and with any investment there are going to be risks… And that for investing in any deal, they will be presented with all of these risks which are in the PPM, and that even though there are those risks, you will always proactively address them, remembering that the main risks are the deal, the market and the team, and you do so by conservatively underwriting the deals and performing detailed due diligence once the deal is under contract. You do that by qualifying the market using the six or seven factors, and you only partner with team members who have past syndication success and not failures.

  1. What types of reserves are typically established with each property to shield investors from any potential capital calls?

When we go over underwriting in Syndication School I will talk about the operating account fund, which is an upfront fund that you are able to fund using money from your passive investors. That money is used as essentially a contingency if anything unexpected were to happen… And rather than having to go back to your investors for money, you can pull from that fund.

So if there are unexpected dips in occupancy, if there’s some deferred maintenance issues that for some reason you weren’t able to find, things like that, you will be able to pull from that operating account fund to cover that expense.

  1. What are my responsibilities?

Again, this is one of those questions where if someone’s asking this, then they probably aren’t going to invest, because they don’t really know much about the process, but… This question might come up, and if it does, just tell them that really their only responsibility is to fund the deal. Then maybe they could be a loan guarantor if you needed help signing the loan, but… They’re called passive investors for a reason – completely passive, they have no active involvement in the deal.

Question 30 is a follow-up question:

  1. What are your responsibilities?

The answer is “Everything else.” You and your team are responsible for finding deals, reviewing and qualifying the deals, negotiating offers coordinating with professional property inspectors, making sure you find the best financing options, coordinating with your attorneys to create the LLC and different partnership documents, traveling to the property and the market to perform due diligence, hiring and overseeing the property management company, and then performing your asset management duties once the deal is under contract, including the money from the lenders to fund the renovations, making sure the business plan is executed properly, ongoing communication, distributions, evaluating the market, and then of course, at the end, selling the deal.

Again, those questions, 29 and 30, “What are my responsibilities?” and “What are your responsibilities?”, they are likely gonna know that already, unless they’re a family and friend who doesn’t have much experience with real estate or passive investing.

  1. How much of a role do you personally take in overseeing the acquisition and management of the asset?

The answer is “Entirely responsible for the acquisition and the ongoing management of the asset”, even if you’ve got a third-party management company.

  1. Do you guarantee a return?

The simple answer to this is no, you do not guarantee a return. The preferred return is not a guarantee. Don’t ever use the word “guarantee” when talking to investors, because they will hold you to that, and if you don’t provide them with that return, again, you’re gonna lose that trust factor.

A preferred return is offered, and if it’s hit, it will be distributed, but if it’s not hit, then whatever cashflow there is will be distributed. I guess this naturally leads into the next question…

  1. What happens if you can’t make the projected cashflow?

Ideally, your projected returns are higher than the preferred return to your investors, so if you’re honoring a deal and you want to offer 8% preferred return to your investor, then ideally the deal has a 9% return, so that you’ve got a buffer just in case you’re not able to increase the rent premium this much, or decrease the expenses as much.

If you aren’t able to distribute the full preferred return – if you won 8% preferred return, projected 9% cashflow but are only hitting 7%, then the process really depends on what was agreed to. Usually, the distribution will accrue until it can be paid out, and that might not be until the sale of the property. Of course, if the property loses money, then your investors won’t be paid out that profit.

  1. What does my money go towards?

Specifically, if you actually have a deal, there’s a list called “The sources and uses” section of the private placement memorandum, which will list out exactly where each dollar is going. These categories include closing costs, renovation costs, depending on whether or not they’re included in the loan… Your operating account fund, origination fee, the fees paid out to you as the general partner, as well as the down payment for the loan.

  1. How do you make money?

That will also be outlined in the PPM, and we also went over how you make money as an apartment syndicator in one the first Syndication School series. You’ll want to explain to them what types of fees you plan on charging, whether that’s an acquisition fee, ongoing asset management fee, the profit split… Just be very transparent and let them know exactly how you make money on the deal, and then explaining your alignment of interest as well.

  1. What is the minimum investment?

Again, this really depends on you. You probably don’t want people investing one dollar or $500. The juice is not worth the squeeze, so to speak. I know that for Joe his minimum is $50,000 for first-time investors, and then $25,000 for returning investors… But that is gonna go up, and that is the 506(b). If you’re doing a 506(b), you probably wanna have a minimum. For a 506(c), since you’re able to advertise for your deals, again, you could set a high minimum, or you could set a lower minimum and try to cast as wide a net as possible through advertising online and in print.

You could have investors who bring as little as 5k, and hope that they will grow over time. But again, if you are doing a 506(b) offering, which means you need to have a pre-existing relationship with your investors, you’re gonna want a minimum investment. That’s, again, gonna be due to the opportunity costs of building that relationship over time, whereas for the 506(c) you don’t need to know them at all, so  you can just send them one e-mail, or they can reply to an ad and invest 5k, whereas if you’re spending all this time working on a relationship and they only spend 5k, that time could have been spent on cultivating a relationship with someone who could invest 50k, or 100k, or 500k, if you get what I’m saying. But at the end of the day, if you need to raise that last 100k, 20 people investing 50k is better than zero people investing 100k.

  1. How does the process work after you find an investment?

Well, typically what happens is once you place a deal under contract, which means that you have a signed purchase and sales agreement, you will notify the investors about the new opportunity, and then you’re also going to want to include a link to the investment summary; this is a PowerPoint presentation that essentially looks an offering memorandum. It goes into extreme detail on the deal, but unlike the offering memorandum, it’s based off of your numbers and your analysis. Then you also invite them to a new investment offering call, which is either a conference call or a webinar, where you’ll actually present the deals to the investors, as well as answer any questions that they have.

Then after that call, the interested investors will be able to verbally commit to invest in the deal, and then eventually they will sign the required documents to officially commit to the deal, and then they will wire their funds and then we will close on the deal… At which point they will receive a closing e-mail, as well as information on what to expect on an ongoing basis.

  1. What are you doing about the market correction that’s coming?

That’s probably a question that you are definitely going to get from at least one investor, especially right now, since real estate seems to be on a hot streak… And luckily for you, we have a response to what happens in a down market, and that is the three immutable laws of real estate investing. As long as you follow those three laws, you really don’t care if the market is high or low… Because if you buy for cashflow, if you secure long-term debt and you have adequate cash reserves, you’re going to be able to at the very least survive a massive downturn, but more likely you’ll be able to thrive while others are pulling their hair out.

  1. What contingency plan is there for these properties if we go into another concession?

For that answer, refer to the previous answer, which is the three immutable laws of real estate investing.

  1. Are there any other asset classes that you focus on?

Most likely, you are focusing on just apartments, but if you’re focusing on other asset classes, like mobile homes, self-storage, single-families, just let them know… They might follow up by asking you what percentage of your time is spent on apartments, just to make sure that you are spending an adequate amount of time on apartments. If you say “Well, I’m only spending 10% of my time on apartments and 90% on mobile homes”, then they’re gonna probably be hesitant to invest… Whereas if you say “I focus on primarily on apartments, but on the side, in my spare time, I buy single-family homes every once in a while.”

  1. Is everyone notified at the same time when you have a new opportunity?

This will also depend on your strategy. Starting off, the answer is most likely going to be yes. On an ongoing basis, Joe and his company – they still notify all the investors on his e-mail list at the same time when a  new opportunity is under contract… Whereas other investors might just e-mail their returning investors first, and then they might e-mail people who haven’t invested in a deal second… Or they might have a list of a couple of preferred investors who might be able to cover the entire down payment, and anywhere in between. It kind of just depends on your preference and where you’re at in your business.

  1. Who will be my point person?

Ideally, the answer is you. Mention that – and hopefully this is true about you – you pride yourself on transparency and your communication timeliness, because one thing that we know for sure is that investors really appreciate timely communication. They really appreciate the monthly e-mails that are sent, and they also appreciate having their questions responded to a timely manner. If they ask a question, don’t wait a week or two weeks or a month to reply; the second you see it, take the time, take a couple of minutes to reply with an answer… And if you’re super-busy for some reason, then just reply quickly and say “Hey, I’ve got your question. I will reply to you this afternoon” or “I’ll reply to you tomorrow morning/night.” They will really appreciate that.

Of course, as you grow and get really big, and you’ve got hundreds of investors’ questions coming in, you can delegate some of that to an admin or an assistant or someone else on your team. If fact, you could just hire someone who’s strictly responsible for investor relations if you get big enough.

  1. Can I invest with an LLC?

Most likely the answer is yes. People will either invest in an LLC, or they’ll invest as an individual… But make sure you have them talk to their CPA on how to invest with an LLC or as an individual, and which one works best based off of their specific situation. In general, you don’t wanna give out any legal or tax advice. You can give out general information, but always direct them to their CPA or attorney for the specifics.

  1. What type of reporting do your investors receive?

What we do is we send out our monthly recap e-mails, and in those we include occupancy rates, we include the number of units renovated, as well as the rental premiums demanded by those renovated units. We provide information on the ongoing capital improvement projects, and then we’ll also discuss any relevant market updates, or companies moving into the area… And then we’ll also discuss any resident events that happen – Christmas parties, New Year parties, things like that. Then on a quarterly basis we send out the profit and loss statement for the last 12 months, as well as a current rent roll.

Again, that’s what we do; that’s covering all our bases. You can do all of that yourself, you can do part of it, you can add something else in there… It really just depends on what you wanna do, and your preferences.

  1. What other questions do you typically get from investors?

Well, I have just gone over 44 questions, so if they didn’t ask one of those 44 questions, which is highly likely, you can pick a few from there and answer those questions for them.

  1. From your perspective as an educated and/or experienced investor, what other questions should I ask that I haven’t already?

Similar to the last question, you’ve got a whole list of questions that are common, and you can pick a few from that list and answer those.

  1. If I want to talk to other investors or if I want to get references, is that something that can be arranged?

Again, it’s up to you, but we say yes. Be prepared to have a couple of handpicked investors that you know are willing to talk to interested investors about passive investing.

  1. If I want to invest, what would be the next steps?

The next steps are typically going to be adding them to your private e-mail list, and letting them know that once you have an opportunity, that they will be notified immediately by being on the e-mail list.

  1. Do you have any tips you can pass to me as someone who is investing for the first time?

One thing that you can say to them is to focus on risk mitigation and conservative opportunities, at which point you can go into the three immutable laws of real estate investing, which again, if you have them memorized by now, shame on you, but just to reiterate – 1) buy for cashflow, 2) secure long-term debt, and 3) have adequate cash reserves.

That concludes the 49 questions, 19 related 40 business plan related, that you should expect from passive investors. Now, all these questions are not gonna come up during your [unintelligible [00:30:15].00] conversation, right? This two-part series has taken over an hour, and you’re not gonna be having hour-long conversations with each investors… So if they don’t come up, that’s fine; they will eventually come up though. They might come up once you actually have a deal under contract, or in the FAQ section, they might come up after you actually have closed on a deal, but at some point you’re gonna have to answer all of these questions, which means that you’re going to want to make sure you write the answers out to all of them, so that you know you know the answers and you’re not able to answer those when they come up from an investor, because again, that will reduce the trust factor.

This concludes the eight-part series about how to raise capital from passive investors, which is a high-level overview of everything you need to know about raising capital. Now you should be able to go out there and start to generate verbal interest from investors.

That concludes this episode. To listen to the other Syndication School series about the how-to’s of apartment syndications and to download the free documents that we are offering for this series, as well as past series, all of that can be found at SyndicationSchool.com.

Thank you for listening, and I will talk to you tomorrow on Follow Along Friday.

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