July 10, 2019

JF1772: How To Secure Commitments From Your Passive Investors Part 7


Part seven of this Syndication School Series will be covering more Q&A and how to follow up after you hold a successful conference call. Tomorrow Theo will cover sending proper documentation after the call. 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 that are 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 offer some sort of document, resource, spreadsheet, template – something for you to download for free. All of these episodes, all of these free documents can be found at SyndicationSchool.com. If you’re watching this on YouTube, you’ll notice that this is the first time we’re doing a video-based Syndication School series. Moving forward, you can watch the Syndication School episodes on YouTube, or you can just listen to the audio on the podcast.

Right now we’re in the middle of an 8-part series entitled “How to secure commitments from your passive investors.” Two more episodes to go, today and tomorrow, or if you’re listening to this in the future, this episode and the one directly after this one.

Just to catch you up to speed, so far we’ve discussed the first three, and then a part of step four of the overall five-step process for securing commitments from passive investors. So if you haven’t done so already, you really need to listen to parts one through six of this 8-part series, if you caught up to speed.

So far in parts one and two we discussed step one, which was to create that investment summary, which essentially summarizes the investment, hence being called the investment summary. Then in part three we discussed step two, which is how to create the email introducing the deal to your investor database. For part one and two we gave away a free investment summary template, so make sure you download that at SyndicationSchool.com. And then in part three we gave away a sample email that Joe has sent to his database of investors to introduce that new deal.

Then in part four we went over step three of the five-step process, which is the eight steps to a successful conference call. So I guess we’re only at step three right now, because we still haven’t finished that eight-step process yet. In step four we went over parts one through five of that, in part five we went over six and seven, and in part six we began to talk about the final step (part eight) for a successful conference call, which is that Q&A.

In this episode we’re gonna finish up going over the Q&A session. There’s 30 frequently asked questions that you can expect to receive from your passive investors during the Q&A portion of the conference call, and we wanted to provide you with those, so that you can make sure that you’re adequately prepared to answer those questions.

So we got through the first 15 questions in part six, and we’re gonna get through the next 15 questions of 16 through 30 in this episode, and then we are also going to move on to step five of the five-step process, which is discussing the follow-up. Then tomorrow we’re gonna finish up the five-step process by discussing the proper documentation you need to send to your investors in order to finalize and make their investments actually official, when they actually send you money.

So let’s just jump right back into these Q&A questions. As a reminder, right now we are in step three, which is where we are presenting our deal to our investors on the conference call. We have our investment summary created, we’ve sent the email introducing the deal to our investors, and they have the information that they need to call into the conference call. Then at this point I guess you’ve started your conference call and you’re in the Q&A session. As a reminder, these eights steps of the conference call are:

  1. Get your mind right. This is obviously before the call; make sure that you’re going in with a serving mindset, so that you aren’t a ball of nerves and stumble over yourself talking.
  2. Step two is to determine your main focus, which should be capital preservation, because people are more averse to loss than they are to gain. We discussed the principle of loss aversion, which is people have a greater negative feeling when they lose five dollars, compared to the same positive feeling they get by gaining five dollars. Or probably even gaining $100.
  3. We actually dive into the call, beginning with the welcome. That’s pretty simple – just a one-sentence “Hey, I’m Theo. Welcome to my call.”
  4. Summarize the actual call, so discuss what you’re actually going to be talking about on the call. Kind of like a table of contents.
  5. Introduce yourself and the team.
  6. Talk about high-level why it’s a good deal, in a good market, managed by a good team. Then you get into the detailed business plan that proves why it’s a good deal, in a good market, and managed by a good team. Then at that point you’re gonna open up the floor to Q&A’s.

I’ve broken the Q&A’s down into kind of just frequently asked questions that are general and can be asked at any time, for any deal, and then the next category, which we’ll get to today, are more deal-specific questions, more specific to the type of deal that you’re doing, or what time of the year it is, whether there’s an election cycle going on, things like that.

You don’t want to just script out your answers. The idea is to go through these 30 questions, make sure that you know how to answer all of them, so that as they come up, you can quickly recall in your mind what the answer to the question is, and then spit it out in an articulate fashion. Or if you’re not good at that, even have an outline in front of you, and just reference that outline to remind yourself how to answer that question… But don’t just read from a script… Unless you’re actually reading the questions as you’re getting them; you’re gonna wanna read those exactly.

Alright, so – frequently asked question number 16 – what improvements, repairs, upgrades have already been done to the property? So it’s not necessarily asking what you’re doing, they wanna know what’s been done already. If that’s the case, then outline the interior and exterior improvements made by the current owner. You don’t wanna make a list of everything they’ve done since they bought the property 15 years ago. What’s more relevant is what they’ve done in the past few years, just because those are things that you aren’t going to have to most likely address or touch, unless the current owner or the current property management company was neglectful and did not keep up with the deferred maintenance on those new items.

Let’s say for example they upgraded the clubhouse, and they replaced 80% of the roofs, and they renovated 50% of the units. Let them know that. Then also – this is not necessarily what they’re asking, but let them know how much extra in rent they are getting as a result of those upgrades. You can say “Hey, they replaced 80% of the roofs, so we’re gonna replace the remaining 20%. We  also don’t need to touch the clubhouse, because they’ve just spent a million dollars renovating the clubhouse, and the business center, and they’ve put a sauna in there”, or whatever. “Also, they’ve spent $6,000/unit in interior renovations to half the units, and they’re able to demand a $150 rental premium. We’re actually planning on doing above and beyond that and investing an additional $1,500 into each of those units, and then $7,500 into the remaining 50 units, and we’re still only projecting a $100 rental premium.”

  1. What is the overall project strategy timeline? What is the exit strategy?

Obviously, you can point them to the spot in the investment summary, as well as once they get the PPM, the spot in the PPM that goes over your strategy, and the timeline. So right here they essentially wanna know when’s the close, and then when’s the sale, and then in-between there what are some of the major milestones, like when do you expect to have the renovations done, when do you expect to actually have your rental premiums in place, when do you expect to have the property stabilized from a vacancy perspective, when am I gonna get my distributions, when am I gonna get my investor updates, is there gonna be any kind of supplemental loan or refinance at some point, when is that gonna come in?

This really depends on the business plan, so obviously you wanna hit on when you plan on selling – in 5 years, 7 years, 10 years; maybe explain why. Also, explain if you plan on refinancing or if you plan on obtaining a supplemental loan. Then also mention – and we’ve talked about this numerous times – that you’re not including those in the return projections. So you’re not gonna see a 40% cash-on-cash return in year three, because 1) it’s technically not a return on investment, but a return of capital, so it’s not really a cash-on-cash return. Plus, secondly, it will throw off your annualized projections if you’ve got 8% and 9% and then 40%, and then back to 11%. They’re gonna ask why is year three the best, and so why aren’t you just selling at year three. Thirdly, if you don’t do the refinance, then your return projections are gonna be thrown way off as well.

You could also maybe explain to them how you’re calculating your sales proceeds. You plan on selling at this time, maybe you’ll do refinance at year three, but you’re not including that in the projections; year five you plan on selling at this cap rate, so “This is the cap rate we expect, and it’s higher than the cap rate we’re buying at, and here’s how much money we expect to make at that point…”

Something else you should mention in this section is if you would consider selling the asset early. We’ll learn this a little bit later on in Syndication School, when we talk about the asset manager’s duties after you’ve acquired the property, but one thing that you wanna do (a sneak peek) is consistently evaluate the market. Not every day, not every week, but maybe every few months, and just take a look and see what similar properties are going for, from a cap rate or [unintelligible [00:12:25].07] perspective, to see if it makes sense, or if you’re gonna hit your IRR goal sooner if you sell year 3, or year 1,5, or year 4, or sometime earlier. Because remember, IRR is tied to time, so if I give you $1,000 tomorrow, it’s worth more than me giving you $1,000 two years from now. So if you can sell it for the same price  a year early, then technically getting that money now is worth more than getting that money in the future.

  1. What is your ideal investor’s investment strategy?

Since we are value-add investors, then the ideal passive investor would be someone who wants a value-add deal monthly cashflow from day one, and they also are interested in getting the potential for pretty big upside at either refinance and/or at the sale.

If you’re a distressed investor, then you’re gonna want a passive investor who is willing to forego the monthly cashflow in return for a large upside at sale, or at refinance, whenever the construction is done… So they don’t necessarily need cashflow for a few years, plus they’re willing to risk all of that capital being gone, for the potential for those huge gains.

And for a turnkey investor – these people just want to beat the market. They want to invest their capital into a deal that’s already stabilized, and they don’t have to worry about renovations, they don’t really care about getting a large profit at sale; all they wanna do is get 3%, 4%, 5%, 6% return on their capital each year.

So it depends on your business plan, it depends on what you’re doing, who your ideal investor is.

  1. Do I (this is from the perspective of the passive investor) have to stay in the deal the entire time, or can I sell my interest?

This is gonna depend on how you dictate terms with your investors… But generally, you have a clause that allows limited partners to sell all of their shares to a third-party that needs to be qualified by the GP.

Let’s say I am investing in one of Joe’s deals, and I wanna sell early, for some reason. I can go tell Joe “Hey, I wanna sell early”, and he can say “Well, we need to find someone else to invest with, and then we need to qualify that person and make sure they actually have the money before we give you your money back.” Or it could be dictated in another way.

But generally speaking, investing in apartment syndication is not liquid. You can’t just demand your capital back the next day or the next week, or early, because it’s locked in, and really the only way to return that capital is to take that capital from somewhere else, which means that the deal will be at risk if you have to return a large chunk of capital to someone. So you wanna go ahead and make that be known upfront, but also let them know if there is a process in place for them to sell their shares, what that process is and where they can find that information, which is generally somewhere in the private placement memorandum (PPM).

  1. What is the funding schedule?

Ideally, you have this in the initial email you sent to your investors. Essentially, it’s “The day after this call, until we’re filled up, or until a week”, or whatever. But typically, especially if you’re just starting out, people are gonna officially begin wring funds once that PPM is created, because that’s what the instructions for wiring are. As long as you have that done before the conference call, or if you have the bank account setup already, the funding can start at that point. It really depends on what you wanna do. Just make sure that investors know when they can send you money, because the worst thing is if someone comes to you and says “Hey, I’m ready to wire you funds”, and you’re like “Oh, it’s not for another week”, and then they don’t end up investing because they forget, or something else happens.

For Joe’s deals, he wants to see 100% of the money in the account at least 30 days before closing. But again, if this is your first deal, that’s not gonna be the case. You’re gonna be scrambling, on your way to the closing table, to get those last few 50k commitments in order to close on the deal.

  1. How will I be able to stay updated on the project after closing?

Generally, you’re gonna want to send your passive investors monthly recap emails, that recap essentially what happened at the property over the past month. For us right now, we’re in the month of July, so we’re gonna put together our June recap emails, where we can include things like occupancy rates, pre-lease occupancy rates, number of units we’ve renovated thus far, how many we’ve renovated last month, what rental premiums are we getting on those, what are some resident appreciation parties we’re doing… In the beginning of our business plan, what exterior cap ex projects are going on, when’s the playground equipment being delivered, when’s the pool furniture being delivered, when’s the clubhouse gonna be renovated… Things like that.

And then we also on a quarterly basis provide the financials – the profit and loss statement, as well as the rent rolls. Then we’ll provide some piece of information about the market. Maybe a new Fortune 500 company just moved five minutes away from our properties.

You can include that information, all of that information, some of that information, additional information, but at the end of the day you wanna be sending something to your investors on a monthly basis. The worst thing you can do is just take their money and then never talk to them again.

Especially if you’re doing quarterly distributions, you might just wanna do quarterly updates, but again, it’s much better to do monthly updates, because you can address potential problems much sooner. Heck, you might even wanna host conference calls every single year, to go over the deals. It’s really up to you, but you wanna do something, and then let them know if they ask that question what you’ll be doing.

  1. When will the distributions begin?

Again, this is completely up to you. For us, we usually send out the distributions at least a minimum of 30 days after the closing date, depending on when we close. Let’s say today is the 2nd of July. If we were to close today, then we would most likely send the first distribution by the end of August, and it would cover the time we own the property in July.

Now, if we closed July 30th, then we wouldn’t send a distribution for one day, at the end of August. We would most likely  send the first distribution at the end of September, and it would cover the days we owned the property in July and in August.

If you do it quarterly, obviously that would be different. It might be the month after the quarter ends. If you do it annually, then it might be in February. It really depends. You wanna make sure that you’ve consulted with your property management company, because they’re likely gonna be the ones that are doing these distributions, and make sure that the frequency, the timing is all aligned with what they can actually do.

  1. Can I review a projected return scenario?

Essentially, they wanna know “If I invest $100,000, how much money are you projecting me to make?”, which is why you wanna include that $100,000, that million-dollar, if you’re a baller that 10-million-dollar ROI sample. It’ll say “Okay, so you invested 10 million dollars; year one, your cash-on-cash return is 8.9%, so you’ll make $800,000. Year two is this, you’ll make this much money. Year three, boom. Year four, boom. Year five, boom. At sale, boom. Overall, here’s how much money you’re gonna make, here’s your return on investment, here’s your equity multiple.”

Again, technically people can just make that calculation themselves, but it’s much easier if you give them a sample calculation with actual dollar figures, and not just the percentages. You might have people that like math, or are good at math, investing in your deals.

  1. How do you do renovations with people currently living there?

That’s a really good question. Obviously, if you’re doing distressed and you’re buying properties that are entirely vacant, then you might not get this question, but… You’re telling your investors that you’re planning on doing all these renovations to the interiors – you’re gonna replace appliances, and floors, and paint walls… So how the heck are you gonna do this without evicting people? How are you gonna do this without having to wait until their leases end?

Again, you can do whatever you want, but a few strategies that you can do is 1) when their lease ends, you can renovate the unit, and then re-lease it to someone else at that new rate. 2) Obviously, you can just go in there right away and renovate all the vacant units. That’s another option. Also, if someone is living there, depending on the level of renovations and how long they’ll take, you can do it while they’re at work. Or let’s say 10% of the units are vacant – you’re gonna renovate all 10% and then you offer those units to someone who’s already living there. So then 10% of those people move into other units, or maybe only 5% do. So there’s 5% more of the units that you can actually renovate. And you kind of keep doing the same thing, and eventually you’ll be able to renovate all the units by either that method, or people moving out from their lease ending.

If you really don’t know what to do – because obviously, your management companies are responsible for this… So if you don’t know what to do — well, first of all, you’re gonna want to confirm with your management company that they’re able to do the renovations, because if they’re not, then you’re probably gonna want to find someone else… Or at least if they’re able to manage these renovations. But also, let them know your plan. Say “Hey, I wanna do all the vacant units within the first 30 days, and then I want to offer those units to people who already live here, at a reduced rent premium than what you would do otherwise, or just the same rent premium. And then once they move out, I wanna do theirs. I see that 30% of the units – their leases are ending in 3, 4 and 5 months, so we’ll hit those there and then. What do you think about this business plan?”

Or you can say “Hey, property management company, what should we do?” and they might be able to give you some advice as well.

  1. This is the last general FAQ – Can you please discuss the tax benefits for the deal?

Obviously, people are interested in investing in real estate because of the tax benefits. At this point you can say that most likely the depreciation – unless you’re doing some sort of accelerated depreciation like a cost segregation – each year is going to be greater than the distributions that are sent out, so they most likely will not have to pay taxes on those ongoing distributions. However, they will have to pay capital gains tax on the sales distributions. So let them know that, but I’ll mention that I’m not a CPA, so this is just a kind of high-level discussion. If you want more specifics based on your current situation, make sure you speak with your CPA.

We’ve got five more questions to go, and then we’ll wrap up this first-ever video Syndication School episode. These are now moving into the property-dependent or deal-dependent questions. These are questions that come across on a deal-by-deal basis.

  1. What is the most likely risk with the property?

If you remember, in the previous episodes (probably parts 4-6) we said that the main three risk points of apartment syndication is the deal, the team, and the market. So the entire conference call is surrounding why it’s a good deal, in a good market, managed by a good team.

Now, there might be some other specific risk to this property that is not covered by those three. I guess technically it should be covered by the deal, but if there’s any unique risk for this deal, maybe there’s a risk of some new development — here’s an example; this isn’t really a syndication example, but… [unintelligible [00:23:05].28] duplex in an up-and-coming market. It wasn’t in the greatest area, but it was a pretty cheap deal, and it would cash-flow well. So he bought it, and then two years later they literally built a warehouse – you can almost touch it – out of the living room window. It was this massive three-story windowless meta sheet at the side of their house, and just towering over the house. That might be a risk.

Maybe there’s some sort of development that’s proposed, that might be coming to the area. Maybe there’s a history of flooding… I can’t think of any other specific examples, so that’s why it’s dependent. If there’s some specific risk that’s specific to this property, make sure you bring that up, and then communicate that to your investors.

  1. What is the current vacancy rate?

Mention that the current vacancy rate is listed on the rent roll. Maybe let them know how current the rent roll actually is, because typically, if it’s still the same rent roll from when you were underwriting the deal, then it’s probably 2-4 months behind.

Then also explain to them that “Hey, I don’t care as much about what the current vacancy rate is, because here are our vacancy assumptions, and here’s why these are our vacancy assumptions.”

  1. How does this deal in terms of projected returns, risk and purchase price compare with deals in the past?

If you haven’t done a deal before, then the answer is “Infinitely better.” [laughs] No, if you’ve never done a deal before – again, it’s when you wanna rely on your team; your consultant, any projects your management company has done, or your business partner… But if you have, this is a great reason to include the case studies in your investment summary. So you can say “Hey, we’ve done this many deals before in the past. We’ve actually included the results of those deals in the investment summary. Here’s just one example of one of the deals that we did. We projected a 10% annualized return, and a 16% IRR, at a five-year exit. We actually ended up selling after 2,5 years, and the cash-on-cash return was 12% and the IRR was 20%.”

  1. Who will be the buyer you’re aiming for at the end of the business plan?

Again, this is another really good question, because a lot of people just focus on underwriting, and due diligence, and all the things you need to do before you close, and then they also focus on the asset management… But where you actually make the most money is at sale. I know people say “You make the money when you buy”, but this is because you need to do proper due diligence… But you don’t buy it and then get all that profit right away. You actually get the profit when you sell.

So they’re gonna wanna know “Okay, who are you selling this property to? Do you have an idea of who you’re gonna sell it to? Or are you just gonna hope that someone buys it?”

Again, this is gonna depend on your business plan, but if you’re a distressed investor, then you’re likely gonna be selling your deals to a value-add investor. So you’re gonna buy the property, stabilize it, but not go above and beyond, and then sell that deal to someone who actually will go above and beyond and make it a turnkey property.

If you’re a value-add investor, then you are going to be selling to a turnkey investor, maybe something like a family office or some institution that wants to buy properties that are turnkey, so they can get cashflows that beat the market.

And also, if you’re a value-add investor, you might sell it to another value-add investor, depending on how much value you add, or depending on how the market changes whilst you’ve had that deal.

And then if you’re a turnkey investor, you’re probably just gonna have to sell it to another turnkey investor, unless you really screw things up; then you might be selling to a value-add or a distressed investor. But I guess you can sell it to a value-add investor too if the market changes, and it was a turnkey but now it needs to be upgraded.

  1. Are you and your partners putting money in the deal?

We strongly recommend for alignment of interest/purpose that people on the GP put money in the deal, that they have skin in the game… Because if not, then sure, if the deal goes sour, you’re not gonna make money, but you’re also not gonna lose money either. It’s an opportunity cost, but you’re not gonna lose any of your own personal capital, whereas if you’ve invested at least with the minimum investment amount  into the deal, and the deal goes sour, then you’re gonna lose that capital. That will make your investors feel more confident and comfortable investing with you, as opposed to someone who’s not really exposed to the same level of risk as them, in which case maybe in the eyes of the investors you may be perceived as not being super-confident in the deal, and just trying to make a quick buck.

I guess it’s actually a nine-step process to the successful conference call, because you’ve gotta close. You can’t just end on that last Q&A question, drop the mic and hang up… So once you’ve answered all the questions on your list, you can go ahead and conclude the call by thanking everyone for participating. Let them know that they can email you any additional questions they might have once the call has concluded. Maybe for some reason they didn’t get their question to you, or something comes up in bed while they’re staring at the ceiling. It happens to all of us… Then you will let them know the process for submitting those.

Then also let them know that you plan on sending out a recording of the conference call in the next day or the next few days… Which is why we use FreeConferenceCall.com, because that allows us to record our conference call, and then right when it’s done, we can download the mp4 and create a new email to send out to investors, with a link to that.

Then also let them know about the next steps for investing. “If you’re interested in investing, please email us the amounts, as well as if you’re gonna be investing as an individual or an entity, to info@theohicks.com.”

We’re gonna end there for today, but from there, the next steps, the next parts of the process for securing commitments from your passive investors are to follow up, and then to send the proper documentation so that you can finalize these investments from your passive investors. So we’re gonna talk about that tomorrow.

Until then, make sure you listen to parts 1-6, as well as the other Syndication School series about the how-to’s of apartment syndication. And make sure you download those free documents. All those can be found at SyndicationSchool.com.

Thank you for listening, and I will talk to you tomorrow.

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