Not only does Joe put together his own deals and help others do the same, he invests in other peoples’ deals as well. He has three main reasons for doing this, which can benefit everyone who wants to be an apartment syndicator. Tune in as Theo reviews the benefits that active investors can receive by being a passive investor too. 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 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.
Each week, every Wednesday and Thursday, we air our Syndication School episodes on the best real estate investing advice ever show, podcast on iTunes, they will also be available to watch in video form on our YouTube channel a little bit later in the week. Either way, consuming them in audio or video form, we’re gonna be talking about specific aspects of the apartment syndication investment strategy, and we’re gonna give away some free resources to accompany those episodes and series as well. All of those can be found at SyndicationSchool.com.
This episode we are going to take a step back a little bit. This is not gonna be on a specific step in the syndication process, rather it’s going to be a general conversation on why you should consider investing in other syndicators’ deals as a limited partner.
Now, before I dive into these lessons, I wanted to let you know that whether you’ve done one deal, ten deals, a hundred deals, zero deals, these lessons are going to apply to you. So whether you’ve done no deals, or all of the deals, the reasons I’m going to go over today for investing in other people’s deals are going to apply to you, and you’re gonna learn why here in a little bit.
This is based off of a post that Joe wrote about the reasons why he specifically invests in other people’s deals. And when I read it, I realized that this would be good content to share with Syndication School, because obviously everyone listening to this is an aspiring syndicator, and just because you can’t do a deal right now, whether you’re lacking education, you’re lacking in experience, you’re lacking in credibility, whatever it is, you can still move your business forward, you can still work on getting closer to doing your first deal by investing in other people’s deals.
So there’s actually three reasons why Joe invests in other people’s deals and why you should as well, and the first reason is that it makes you a better general partner on your own deals. When you’re investing in other people’s deals, you’re not the general partner, you are the limited partner. And since you want to be a syndicator, you’re gonna have your own limited partners. So what better way to get inside the mind of the limited partner than to be a limited partner yourself? And when you’re a limited partner in other people’s deals more specifically, you’re going to see first-hand how other general partners or competition are organizing their deals and executing their deals.
So a few things that you’ll be exposed to – again, this is not an exhaustive list, but these are some of the most important things that are gonna be relevant to you as a GP, these are things that you’ll be exposed to as an LP on other people’s deals. Number one is the initial email announcing the deal. As a limited partner, whenever the syndicator has a new deal, they’re gonna send it out to their database that you should be on. And when they send out this email, a few things you wanna look at are how do they write the email, how is it designed, what does it say in this email and what doesn’t it say, and then at the end, what is their call to action?
So you’re gonna analyze their email using those questions, and essentially see what they’re doing good and what they’re not doing so good, and then extracting the good and making sure you do that when you announce your deal, to your investors. You’re also gonna learn about their sign-up process for investing. Do they have some sort of investor portal that they want their limited partners to go through? If not, what do they use? How are they getting people to send in their commitments? Do they have some sort of Adobe Sign, or DocuSign, or something else? So if you want to invest in their deal, what process do they put you through? And then when you go through that process, was it smooth, was it kind of frustrating, was it confusing, was it simple, was it easy? And then thinking how can you take the good from what they’re doing and applying it to yours?
That’s the theme for all of these, so I’m not gonna keep saying that. Basically, you wanna look at these things and see what they’re doing good and what they’re doing wrong, ask the questions I’m gonna mention, and then apply that to yours.
Number three is gonna be the deal structure. What is their profit split? What fees do they charge? What type of financing do they secure? What information in regards to this deal structure do they include in their investment package? What are their underwriting assumptions? Things like that. How are they structuring the deal with their investors, and then where are these numbers coming from? What are these numbers based on?
Next is the deal presentation to investors. This would be conference call or the webinar, where all the LPs are on the call, or in the webinar, on mute, and the general partners are presenting the opportunity to their investors. When you’re on that conference call you’re gonna learn how they’re presenting their deals.
We have an episode in Syndication School where we talk about the new investment offering, so make sure you check that out to see what questions from your perspective the LPs are going to ask, and then how to actually structure that call, and then see how they’re doing it, and then see if there’s anything extra that they’re doing that is not included on there, or are they doing anything extra that you hadn’t thought of before.
Next is the ongoing communication. Do they send monthly updates, quarterly updates, or are the updates sporadic? Joe gave an example that he was investing with one operator whose communication was sporadic, and the deal did not perform as well as his other investments that did not have sporadic, that had more consistent communication. Joe said he will not be investing in that deal again, because according to this specific example, ongoing communication was sporadic, the deal didn’t do good, so why invest with that person again if the deal is not doing so well? And then it’s a red flag for the future that if you find that a GP has sporadic communication, the deal is likely not going to do as well.
Now, if they are sending out monthly updates, quarterly updates, what’s included in these updates, and then what types of financials are they proactively sending out?
Next are the distributions. Are they sending out monthly distributions, quarterly distributions, or some other distribution schedule? And depending on what they send out, do you like it or don’t like it? Are they sending out their distributions just via check, or are they sending them out via direct deposit?
Joe hates getting checks. He prefers the direct deposits because it’s easy to track, and you don’t have to go to the bank and deposit your check, or use one of those apps, take a picture of the back and the front of the check and you can never get the right zoom in level and it takes forever, and half the time they don’t work anyways, so… That’s just me ranting about my experience with those apps… But direct deposit is obviously gonna be better, because it’s really no time commitment on an ongoing basis to Joe, to the LP.
And then more importantly, do you get paid when they say they’re gonna pay you? For example, sometimes you’ll see these GPs doing quarterly distributions, so the LP expects to get their check at the end of that quarter, whereas in reality they might not get that check for another month or two due to processing.
And then lastly – this is more overall – what happens when things don’t go according to plan? If something happens to the property, does the GP just go dark and you don’t hear from them, or do they clearly communicate the problem and then the steps that they’re already implementing towards finding the solution? Of course, investors want to be told succinctly and straightforward what’s going on with the property, whether it’s good or bad, and they want these updates on a consistent basis.
If the communication is slow when challenges arise, that’s a red flag, that Joe has experienced on some of his other passive investments. So again, all of these things – essentially, what you’re doing is analyzing from start to finish what the GP is doing, and then from your perspective as an LP do you like it or do you not like it? If you do like it, then maybe your LPs are gonna like the same thing, and things that bother you, red flags that come up, are things that your limited partners probably don’t want, and then you know not to do that for your own business.
Overall, that’s a long way of saying that one of the main benefits of investing in other people’s deals is that it makes you a better GP because you see the things that people do right, that you might not necessarily have thought of, plus things that people do wrong, that you know you should avoid on your own deals.
Number two is that it allows you to test-drive other markets. The second reason that Joe in particular passively invests in other people’s deals is because it allows him to test-drive markets that he’s not currently invested in. At the moment, they’re invested in Texas and Florida, and since they’re laser-focused on those markets, they don’t really have time or the mindshare to focus on opportunities that are in other markets for their own business. But let’s say they want to expand to Ohio, for example, or they wanna expand to Atlanta. Well, rather than buying a deal and seeing how it goes, or rather than initially diving into an insane market study research, they can go to those markets and see how those markets are doing for other operators, for other general partners.
And it’s a great opportunity to actually invest passively in deals without having to do one yourself, to test out that market as well. Plus, the operator should do a ton of market research on that area before they even started looking for deals, so you kind of have a jumpstart on your own market research because you can pull what they’ve done already and look through that, rather than having to do all of it on your own.
And then lastly, benefit number three is to strengthen your relationships with influencers. Joe said that by investing with other GPs, he’s able to strengthen his relationships with other people who are influential in the business, who are also putting together deals. He says by investing with other general partners, that allows him to help them grow their business, while staying in touch with them in a relevant way.
It’s important to make sure that we’re always in contact with people who are out there, the movers and shakers. And obviously, you can get lunch, you can make trips, you can do all these different things, but another great point of contact is to actually invest in their deal, because you have a natural way to always stay in contact with that person.
So those are the three main reasons why Joe invests in other people’s deals and why you should as well. As a refresher – number one, you will become a better GP on your own deals. Number two, it allows you to test-drive other markets without having to jump all-in yourself, and number three, it allows you to stay connected and strengthen your relationships with other influencers.
Now, Joe also went over some other takeaways that he got from investing in other people’s deals. Not necessarily reasons why he does it, but just lessons that he learned from investing in other people’s deals. Maybe mistakes that were made, or things that people did good, that he then applied to his own business. Let’s quickly go over those before we wrap up.
Number one, one operator sent him a deal, and Joe said he would invest, and then after a month or so they sent a follow-up email to Joe saying that they were pulling out of the deal. In this follow-up email they had a thorough explanation of why they were pulling out of the deal, and it made a lot of sense to Joe. As a result, the experience gave him more confidence in them as a GP.
So they told Joe they were gonna do something, that they were gonna buy a deal, and a few months later they said they’re not buying the deal anymore… So okay, you’re not doing what you say you’re going to do, which is no problem, as long as you’re able to explain specifically why you’re not doing it.
In this case, they probably weren’t doing it because it wouldn’t have been able to get them the returns they wanted, which obviously saved Joe a lot of money. So by them telling him “Hey, we’re pulling out of the deal. Sorry about that” probably would not have given Joe more confidence in them as a GP… But they said “We’re pulling out of the deal because of a, b, c, d, e, f, g. We’ll definitely let you know when we find another deal that meets our requirements and meets your requirements.”
So in one scenario, two different responses – one results in Joe strengthening his confidence in them, the other one probably results in him not investing in one of their deals in the future.
Another observation is that some of Joe’s investors have said they prefer a higher preferred return, and don’t really care as much about upside in the deal, whereas Joe’s typical structure was the preferred return plus upside. So he had some investors who wanted the opposite – they wanted a higher preferred return, they didn’t really care about the upside. Around the same time, Joe came across an offering from a GP that offered a higher preferred return for class A investors, and then a lower preferred return for class B investors. The class A investors, with higher preferred return, had firstly no upside in the deal, so they made their preferred return and that was really it, whereas the class B – sure, they got a lower ongoing preferred return, but they participated in the upside, they got a split of the profits above and beyond the preferred return and then at sale.
Seeing that and talking to other GPs about that, Joe tested this out on one of his deals. So if he hadn’t been on this person’s list — I’m not sure if he actually invested in this person’s deal or not, but the fact that he was on their list and saw their new investment offering email and saw this unique structure, Joe was able to test-drive that on his own deals, and the investors actually really liked it.
Another observation – one group that Joe invests with does interviews with experts like self-directed IRA custodians, property managers, and then share these recordings exclusively with their LPs. Obviously, we do a ton of interviews – we’ve got Syndication School, the podcast etc. but we don’t have anything specific for the limited partners… So this is something that we are likely going to implement moving forward. Again, if Joe was not a part of this group’s email list, he might have never known about this and we would have never implemented it in the future.
Another operator – and here’s a negative – hardcopy-mailed Joe all the legal documents (the PPM) rather than allowing him to fill it out virtually. Obviously, that’s a no-go, because you have to sign everything hardcopywise, whereas it’s much easier/simpler to do all of it via the internet.
And then lastly, an operator mailed Joe a gift with their logo on it. Obviously, that’s a kind gesture, but for Joe this was amiss, because whatever this gift was, he could buy it himself. Investors don’t really need another mug or another thermos or another pen. Joe would much rather like to see GPs send out gifts that are much more thoughtful and much more personalized.
Based on this lesson, Joe is working with us to create a program for the investors in his deals that provides them with more thoughtful gifts on special occasions. Once we implement that, I’ll definitely do a Syndication School episode on that, and a blog post as well.
So again, overall, the main reasons why you wanna invest in other people’s deals is 1) you’re able to learn how to become a better GP, 2) test-driving other markets, and 3) strengthen your relationships with other movers and shakers, with other syndicators… And then we went over some other observations that Joe had from either investing in other people’s deals, or at least being on their email list.
That concludes this episode. Until next time, check out some of the other Syndication School episodes, download the free documents. All of those are available at SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.