July 8, 2019

JF1766: How To Secure Commitments From Your Passive Investors Part 6

Theo covers the last step to hosting a successful conference call with your passive investors to secure investments for your apartment syndication deals. 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’m your host, Theo Hicks.

Each week we air two podcast episodes, every Wednesday and every Thursday, that are a part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we will be giving away a document, spreadsheet, template, something for you to download for free.

All these free documents, and past Syndication School series can be found at SyndicationSchool.com.

Right now we are on a series about how to secure commitments from passive investors. At this point you have a deal under contract, and while you are securing  financing from the lender, as well as performing additional due diligence on your property, you are also going to begin the process of securing the financial commitments from your passive investors.

Now, if you haven’t’ done so already, I highly recommend listening to parts one through five of  this series, as we’ve covered the majority of the five-step process for securing commitments from your passive investors.

In parts one and parts two we went over step one of this five-step process, which is to create your investment summary. The free document for that episode is a free investment summary template that you can use as a guide to creating your own investment summary presentation. Then in part three we discussed how to create the email notification to your investor database. That’s step two of the five-step process. And right now we are still on step three of the five-step process, which we began to discuss in part four, where we went over parts one through five of the eight-step process to a successful conference call. This is when you actually are speaking directly to your investors.

Then in yesterday’s episode, or if you’re listening to this in the far out future, the episode directly before this one, we went over parts six and seven of the eight-step process to a successful conference call.

In this episode we’re going to discuss the last step to ensure that you put on a successful conference call, which is the Q&A section. Just really quickly, we’ll go over the eight parts of that eight-step process:

  1. Get your mind right before the call.
  2. Determine what your main focus is going to be on the call
  3. Welcome everyone during the call
  4. Provide an outline or a summary of the information you plan on presenting in the call
  5. Introduce yourself and your team
  6. Discuss high-level why this is a good deal, in a good market, that will be managed by a good team
  7. Go over your detailed business plan, which you go into more detail on why it’s a good deal, in a good market, that will be managed by a good team. That concludes the formal aspect of the conference call, and you should end with step eight, which is the Q&A.

As I mentioned in step two of the five-step process to secure commitments from your passive investors about when you were creating your email database to your investors, you wanna include information for the conference call in there. And when you were providing a summary of the conference call earlier – that was in part four, we discussed that you want to explain to your investors that you will have time at the end for a Q&A session… And we recommend that for your Q&A session you provide all of your investors with an email address to submit their questions to.

Then whenever questions come up during the conversation, or if they have questions that were prepared before they hopped on the call, they can send all those to you, just so that people aren’t interrupting you in the middle of your presentation to ask a  bunch of questions, because then the presentation would probably never end… Plus, you are gonna wanna have everyone that’s listening in mute themselves, because if you’ve got 100 people on the phone and they’re all unmuted, it’s going to sound like absolute chaos.

So rather than having questions be asked throughout the call, you wanna save time at the end to go over all of these questions. As you become more experienced, these Q&A sessions might last 5-10 minutes; for your first few deals, expect the Q&A session to last a little bit longer than that.

So we compiled a list of some of the most commonly asked questions that Joe has received on these conference calls. Since you know these questions beforehand, you can try to incorporate these into an earlier aspect of the conversation; maybe when you’re talking about your business plan, or some of the risk points of the deal, you can bring up some of these questions. But if you can’t hit them all or if you don’t know where to cover them, you can cover them during the Q&A session. You could even start off with a list of frequently asked questions if you know you don’t have any questions submitted from your investors… But it’s really up to you.

So these 30 questions – it’s not like on every single conference call all 30 of these questions are gonna be answered. Sometimes they might ask all those questions, sometimes they might not ask any of these questions. It really depends on you and your investors, but the more prepared you are for these calls, the better… So I’d just go ahead and prepare to answer all 30 of these questions. If they’re not all asked, great; but if they are all asked, you’re prepared and you can minimize the number of times you have to say “Hey, I don’t know the answer to that question. I will look that up and get back to you.” Which is fine to say; you’re being transparent and honest. But it’s better to have the answers right away, to seem more professional, more of an expert.

So I’ve broken these questions down into two categories. One is just going to be frequently asked questions that you can expect for any deal, and then the other category are gonna be property-dependent questions. So the FAQs are just gonna be general questions that most likely will be asked on every single investment offering call you host, whereas the other category, the property-dependent questions are gonna be questions that are unique to the deal itself. So dependent on the deal that you have under contract will determine whether or not all these questions or which of these questions will be asked.

The majority of the answers to these questions will be in your investment summary somewhere. Some of them might be related to current events, so you’ve gotta make sure that you’re constantly staying up with the news, and learning about the economy, or interest rates, or a new presidency, or some natural disaster in the area… But what we’re gonna do is I’m gonna go over each of these questions and I’m going to go over also how you should think about answering these questions as well.

So without further adieu, let’s hop right in, starting off with the frequently asked questions. Again, these are general questions that will most likely be asked on every single investment offering that you host.

Number one, what damage is covered by property insurance? In order to find the answer to this question you’re gonna have a conversation with your insurance provider, to understand what is and isn’t covered under your plan. You’re also gonna want to know if there is business interruption insurance. That is if the property were to come down, for some reason, will your insurance company cover the loss of income, which allows you to continue to distribute returns to your investors.

Does your insurance plan include wind, [00:10:35].13] and storm damage? And overall, what is and isn’t covered by your property insurance is what you’re gonna want to determine… And that is how you can formulate your response to that question.

Number two, is there any concern with this property from an environmental perspective? Again, as I mentioned, you should be well into your due diligence at this point in the process, and one of those due diligence items is the environmental survey. If you’ve already had your environmental survey, then you can explain what the results of that survey were, and if there are any concerns. If the inspection or the survey has not been completed yet, then you can mention that you are getting an environmental survey done, and that if any issues come up, you will adjust the business plan accordingly, as well as notify your investors of any changes via email.

Question number three, what is the flood history of the property? If you are investing near a coastal city, or a large body of water like a lake or a river, then there might be a history of flooding in the area. If you are in one of those locations, you’re gonna want to go ahead and determine if there’s been any past flooding that has affected your property in particular, or the area. If there’s been flooding at the property, you can mention that; if there’s been flooding in the area, but not at the property, you can mention that.

Then of course, if there is a flood history, you’re gonna want to go back to question number one about the insurance – [00:12:10].08] wind damage, flooding damage covered under your insurance policy?

Number four, when was the property built? Pretty straightforward. You can tell your investors when that property was built, and then let them know that all additional details about the property description can be found in the investment summary you provided via email, and inside of the private placement memorandum, which we will discuss probably either next episode or one of the next two syndication episodes when we go over that final part of how to secure commitments from your passive investors, which is to formalize your commitments by having them sign all of the different legal documents… One of which is the PPM (private placement memorandum).

Question number five, what is the compensation structure for how you (the syndicator) get paid? Is that compensation structure incentive-based?

At this point you can outline how you get paid on the call – what upfront fees do you charge, what ongoing fees do you charge, what percentage of the profits do you get on the back-end, and any other fees you charge on the back-end. Explain to them why you’re charging those fees, and then also let them know that all the information about how you get paid is in the PPM (private placement memorandum). If you don’t remember why you’re charging each of these, that is a previous Syndication School episode. I believe it was in the series where we discussed building your team and finding investors in the first place, because that’s likely a question they’re gonna ask when you’re initially interviewing investors (“How do you get paid?”). So some of these questions are gonna be repeat questions, some of these questions are gonna be ones that you’ve already answered on an initial call with the investors, but expect for them to come up again, just because they might think that something has changed. Maybe something has changed.

Okay, number six – how much did the previous owner pay for the property? Tell them what the previous owner paid for the property. In reality, they’re not really asking this question because they wanna know how much the owner paid; maybe they do wanna know how much the owner paid for the property, but from your perspective it doesn’t really matter how much the owner paid; you’re not basing your offer price, or the contract price was not based off of how much the owner paid. Instead, you looked at the net operating income, the market cap rate, and used your value-add business plan to determine the offer price. So if they ask that question, let them know how much the previous owner paid for the property, but also let them know why you don’t really care how much the owner paid for the property.

Number seven – why are the current owners selling? If you know why they’re selling, tell your investors. Maybe the seller is distressed, maybe they just reached the end of their business plan, maybe they are looking to purchase another property and they need the equity. Those are kind of the three main reasons why someone would be selling. Again, one, they’re distressed, for some reason. Two, they’ve reached the end of their business plan, or three, they just wanna buy another property and need the equity.

If applicable, you can also provide an example of why you or someone else on your team has sold a property in the past, either in addition to why the current owner is selling, or instead of, if you don’t really know why the current owner is selling, or if they reason that you’re provided with just doesn’t seem right.

Question number eight, what is the liability insurance policy? Who is liable on this deal? Again, you’re gonna want to have a conversation with your insurance provider to ensure that you can answer any and all insurance-related questions… But for this question in particular you’re gonna want to also talk with your real estate attorney to confirm that obviously your investors don’t have any personal liability in the deal… Which if they are limited partners, limited partners do not have any liability, whereas the person that’s signing on the loan might actually be personally liable if the deal were to go into foreclosure. Also, you wanna know if you have an umbrella policy under your insurance.

A lot of these insurance-related questions are because investors are afraid of the risks that come with real estate. “If this really bad thing happens, what type of things are in place to mitigate that risk or that financial damage?” and insurance is one of them… So you could also at this point, if you get a lot of questions about insurance, you can go over what you and your team are doing to mitigate the chances and to protect your investors from a negligent suit from a potential resident.

For example, you can say that you are doing certain things to eliminate trip hazards. During the inspection you’ve discovered some things weren’t up to code, so those are some of the deferred maintenance items you have in your business plan. Any maintenance issues that come up during the business plan will be addressed in a timely manner. You plan on maintaining the property overall, so maybe doing frequent inspections to make sure everything’s okay, and then if something were to come back, you are gonna go ahead and address that within 30 days, or whatever. Then maybe you put the property into an LLC too, which also mitigates some liability.

Question number nine – what happens if the property is wiped out completely, down to the foundation? In this case, you need to know if you have replacement coverage under your insurance, and then kind of explain what you would actually do if this were to happen. Will you sell the land, or will you actually rebuild the property and continue with the business plan?

Question number ten – can you provide details on the upgrades and the repairs? At this point you should have already done this, but if you forgot and someone asked you the question, you can provide an overview of any of the upgrades and repairs you plan on doing at the property, provide them with a cost, as well as what you expect to get in return for those upgrades. And of course, you can direct them to the investment summary and the PPM, which will have more details on the cap-ex projects and the cap-ex budget.

Question number eleven – what other offerings do you have in the pipeline in the next year? Maybe investors are thinking ahead and trying to plan for their current year, and their return goals, and they wanna know if you’ve got any other deals on the horizon. Or maybe this is a trap question where they wanna know if you’re trying to balance multiple deals at once and aren’t necessarily focusing all of your efforts on this one particular deal.

If this question is asked, your response should be something along the lines of the fact that your primary goal is to focus on your existing portfolio, so the deals you currently own, as well as this current deal. But if you happen to be in negotiations on another deal, you can feel free to mention that fact here. But just always let them know that “Hey, our primary focus is our existing portfolio and this deal. There are other people on our team who are maybe working on other deals, but right now this is what we’re focusing on.”

Number twelve – is this non-recourse or recourse debt? This is like a yes/no question; it’s either recourse or non-recourse. But either way, explain that the limited partners, the passive investors are gonna have no debt liability and no legal liability, whether it’s a non-recourse or a recourse debt. From their perspective, if it’s recourse debt or it’s non-recourse debt, it doesn’t change anything for them.

Question thirteen, what are the terms of the loan? Will they change throughout the course of the project? So what are the terms of your loan? Again, what type of loan is it? Is it agency debt or is it a bridge loan? Is the interest rate fixed or floating? What is the interest rate? Is there an interest-only period? If so, for how long? And then will there be any changes to the loan throughout the course of the business plan?

Is it a floating rate? If so, did you buy a cap on that floating rate, or will the interest rate rise indefinitely if the market interest rates increase? Is there a refinance or a supplemental loan planned in the future?

Question number fourteen – what are the pros and cons of the market, specifically in terms of industry and jobs? If you forgot to do this earlier, then at this point you’re gonna go over the overview of the market. A lot of the information should be in your investment summary. Essentially, go over what the major industries are, if they asked specifically about the industry and the jobs. Go over what the major industries are, maybe what percentage of that population is employed within that industry, and then discuss how stable or unstable those main industries happen to be.

And then the last question that we’re gonna address in this episode – and then we’ll finish off the remaining 15 questions next week – is what is the minimum investment. I guess this is a two-part question:

15.a) What is the minimum investment. If you have a minimum investment, explain what that is. Is it 50k, 100k, 25k, 5k? Maybe explain why you have that minimum investment amount. But then also explain to them that you also set a maximum investment amount (if you happened to do that), and the reason why is because if one person brings more than 20% of the equity to the deal, then the lender is gonna perform extra due diligence on that person, and not all investors wanna go through that additional scrutiny.

15.b) What is the typical investment? If you’ve done a deal in the past, you can tell them what the average investment size is. If you haven’t done a deal in the past, you can tell them what the average verbal commitment you’ve received is. If you’ve done a deal in the past, you can say “Well, the average investor on my past three deals have invested 250k, with the minimum obviously being the minimum investment amount, which is 50k, and the maximum being a million dollars.”

If you haven’t done a deal, say “Well, this is our first deal we’re doing together with this team. However, the average verbal commitment we have for this deal is 100k.”

We’re gonna stop there. Again, those are the 15 frequently asked questions to expect during that Q&A section. Again, what you wanna do is you wanna review these questions, have answers prepared, and try your best to actually cover those answers somewhere during the actual presentation. Then anything you left out or forgot – r don’t worry, your investors will let you know and they will ask those questions.

That concludes part six of the eight-part series now… I said it’d be a six-part series, but now it’s an eight-part series… Entitled “How to secure commitments from passive investors.” And then of course, listen to the past Syndication School episodes. All of those can be found at SyndicationSchool.com.

Thank you for listening.

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