10 years ago, we wouldn’t have had a conversation or podcast episode about this. Apartment syndication has exploded in popularity in the last decade as people started to learn it’s a fantastic way to build wealth and do bigger deals with investors than they could do on their own. So how can you stand out from the crowd? Theo covers three ways to do that in this episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners. Welcome 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 we air two podcast episodes, every Tuesday and Wednesday, on the best real estate investing advice ever show podcast. These two episodes focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series, especially the first batch of series we did, up to about 25-30, we offer a free resource. These are PowerPoint presentation templates, Excel calculator templates, how-to guides… Some sort of resource that will accompany the series or the episode. Of course, those are free. You can download those free documents, as well as listen to the previous free Syndication School series podcast episodes at syndicationschool.com.
This episode is going to focus on how to separate yourself from other apartment syndicators. As you probably know, there are a lot of apartment syndicators out there. Lots of sponsors, lots of people who are raising money for apartment deals and sharing in the profits. Most are also qualified, as well. Most of the offer some sort of competitive return structure… So you need to be asking yourself, how can you stand out from all the other apartment syndicators? Why would your passive investor that you’re talking to invest with you, and not someone else?
Like all things, there’s a secret formula or a secret answer that if you do this one thing, you’re going to attract millions/billions of dollars in private capital, everyone’s gonna want to invest with you and no one else… But there are a few tactics that when you implement those over a long period of time, you can slowly begin to separate yourself from other apartment syndicators out there, and obviously build stronger relationships with your current high net worth individual investors, as well as build relationships with new high net worth individuals, who can ultimately become your passive investor… And these tactics will also help you build a sustainable and successful apartment syndication business model, because again, you’re separating yourself from the pack and building these stronger relationships.
We’re gonna go over three different tactics that you can implement. I’m gonna go over the three first and I’m gonna give some specific examples of what you can actually do. The three ways to separate yourself from other apartment syndicators – number one is going to be alignment of interests. And keep in mind, you should be doing all these things regardless, but these are just things that other syndicators might not necessarily be doing, or might not necessarily be strong at. So if you can be strong at these three things, then you can separate yourself from the other syndicators.
So the first way is to have alignment of interests with your passive investors. What this means is you are doing things – these are things that are evident to your passive investors – that they’re interests, their financial interests, their goals, their interests in general are at least just as important as yours. Ideally, they are more important than yours. So these are things you’re doing that your investors will say “Hey, Theo really has my interests at heart, and it seems as if he’s putting my own interests above even his own interests, even his own financial interests, even his own personal interests.”
So there are lots of different ways to do this, and we’ve talked about different ways to create an alignment of interests with your passive investors on Syndication School. I’m not gonna go into extreme detail on these, but I’ll just kind of go over them really quickly.
Number one is to put your asset management fee in a position behind the investors’ preferred return. Basically, what this means is that if you have a preferred return of 8%, an asset management fee of 2%, if the asset management fee was in first position, then if the deal cash-flowed 8%, then you would get the first 2% as your asset management fee, and then the remaining 6% would go to your passive investors.
Now, if that’s the case, and you had offered an 8% preferred return to your investors, then they aren’t hitting that 8% preferred return. They can still accumulate, they’re still gonna get it at the end of the deal, the portion of that will come out of the sales proceeds, but still, you’re getting paid before they’re getting paid, and as a result, they may not get their full preferred return.
Now, if the deal is cash-flowing 10% plus, then it’s really not that big of a deal, but especially when you’re first starting out, you might be projecting an 8% cash-on-cash return for year one, or a 9% cash-on-cash return for year one, because you’re slowly implementing your value-add business plan, and you don’t expect to get above 10% until, say, mid-year two.
If that’s the case, then putting the preferred return in second position is definitely promoting alignment of interest with your investors, because if the deal cash-flows only 8%, then you’re saying “Hey, I’m not gonna get paid until you get all of your preferred return. For year one we’re projecting 8%, so we’re not gonna get paid year one.” That sounds a lot different than “Hey, we’re only projecting 8% cash-on-cash return the first year”, they see that, but they see that they’re not hitting the preferred return, and they realize “Oh, it’s because they’re paying themselves first.” Those two stories are gonna go across completely different to a passive investor.
So that’s just one way… And there’s definitely not a common practice, where it’s explicitly stated in the operating agreement that you are going to be putting your preferred return in second position. So that’s one way…
The other way to create alignment of interests – this is kind of like a ladder, or a tiered form… Basically, the lowest tier would be – this is separate from what I just talked about, and you really wanna do this regardless, put your preferred return in second position… But I guess the lowest alignment of interests comes from having an experienced team member on the deal. This would be an experienced property management company, an experienced broker, or an experienced local owner… And going from least to highest alignment of interest based off of who you bring on, the property management company would be the highest, because they are responsible for covering the day-to-day operations. Second would be a local owner, just because they’re got experience with apartments, they own apartments in that market… And then the lowest would be bringing on an experienced broker, because really all they’re doing is helping you find the deal, maybe helping you underwrite the deal… But at the end of the day, the broker wants to get paid, so they want you to buy the deal at the highest price. So that’s tier number one, where you bring in an experienced team member on the team.
Tier number two would be bringing on an experienced team member and also giving them an equity stake in the deal. So just straight up “Hey, you’re on my team. Here’s a percentage of the general partnership for joining.” This is a little bit more of alignment of interests than just having them on the team, because they don’t have skin in the game, but they have a financial stake in the deal. So if the deal performs well, they get paid, but if the doesn’t perform well, then they just don’t get that extra money, but they’re still getting whatever fees they are charging you – the property management company is gonna be a few percentage points of the income; a local owner – I guess they’re really not making any money, unless you give them equity… And the broker – they’re gonna make their commission.
So what would be even better – this is tier three – would be bringing on an experienced team member and giving them equity in the deal because they invested their own money in the deal. So the broker invests their commission in the deal. A property management company invests some sort of capital from their company in the deal. A local owner invests in the deal.
Now, this is the case – if the deal performs well, they get paid, but if the deal performs poorly, then they could technically lose their money. So now at tier three they have skin in the game, a lot more alignment of interests with your investors, because they know that not only is the financial success of the GP dependent on the success of the deal, but the financial success of the management company, of a broker, of a local owner is also dependent on the success of the deal.
And then the highest would be if those individuals not only invested their own money in the deal, but brought on their own investors… Because now you’re adding even more people whose financial success is tied to the success of the deal.
And then one more way to create alignment of interests would be to have one of those parties – most likely a local owner, or some other apartment syndicator – actually sign on the loan… Because again, not only are you signing on the loan, so your credit and your money is at stake, but you’ve got someone else on board as well, who’s guaranteeing that loan.
Overall, the main way and the first way to separate yourself from other apartment syndicators is to create an alignment of interests, and we went over multiple ways for you to do that.
The second way to separate yourself from other investors is to be very transparent, to have a very high level of transparency. Now, this doesn’t mean that you want to send your investors emails every day with updates, or send them a KPI snapshot every single day. It doesn’t mean that you want to give them an update on every single thing that happens, every time you get a point of contact from your property management company; you don’t wanna forward that on to your investors. “Hey, one person just stopped by to take a look at a unit at my 500-unit apartment community.” That’s overkill. But you do want to make sure that at the very least/baseline you’re providing them with ongoing updates on a monthly basis, or on a quarterly basis, about the operations, the KPIs at the property… And we’ve talked about what you wanna include in there – things like occupancy rates, renovation updates, what rental premiums you’re demanding on those renovated units, how that compares to the rental premiums you projected to demand, any capital improvement updates, any issues that you have with the proposed solutions, and any other relevant updates like market updates, resident appreciation parties, things like that.
Then also, you’re gonna wanna be transparent with the financials, so proactively send out rent rolls and profit and loss statements, so that your investors can look at the granular details of the operations.
Now, typically, things aren’t going to go wrong — ideally, I guess I should say, things aren’t going to go wrong. I did mention that if something were to go wrong, you want to talk about that issue in your monthly update as having a proposed solution. So that’s key. So not only do you wanna be transparent and say “Hey, we had this issue at the property”, but you also wanna take it to the next level and say “But here’s what we are already doing to fix that problem.” Or even better, “Here’s what we’ve done. The problem is already fixed”, depending on what the problem is. If it’s a fire, or some sort of natural disaster, you’re not gonna be able to fix everything within a few weeks, so at the very least saying “Okay, we’ve got a fire. I’m not gonna reach out to my investors until we know exactly what we’re going to do.” Which means you need to know exactly what you’re going to do pretty quickly. You don’t want to wait and have your investors find out before you reach out to them.
So obviously, sending them updates on the key performance indicators, sending them financials is one thing, but also, when issues arise, telling them and having a proposed solution, or a solution in place already… And then even above that – this isn’t related to transparency, but making sure that you are extremely quick in your responses to investors’ questions and concerns. So when you do your monthly emails, expect to receive responses from your investors. When you present a new deal to investors, expect to have questions from your investors.
And the last thing you wanna have happen is if a passive investor reaches out with a question, a comment or a concern, and they don’t receive a response for a few days, or a week, or two weeks, or they never get a response whatsoever.
So you should set expectations with your investors upfront for how quickly you’re going to respond to their inquiries. Ideally, you do it that same day. So schedule a chunk of time either at the end of the day, or as they come in, respond to those emails.
If it’s something that you don’t know the answer to, or you can’t respond to in a timely manner, then rather than just waiting until you can, let them know “Hey, I’m looking into this and I’ll let you know by this date.” And then put a reminder on your calendar to make sure you send them an email on that date.
This may seem like a minor point, but a huge complaint that you’ll hear from passive investors is a lack of communication. A lack of transparency. They don’t get updates, if something goes wrong they don’t learn about it until it affects their distribution, or “I reach out to this investor with questions and they never reply, or they reply a week later.”
So by not falling into that trap and making sure you’re sending out updates, making sure you’re sending out financials, making sure you are addressing issues, addressing questions in a timely manner, you’re gonna be able to separate yourself from other apartment syndicators out there.
And then lastly, number three is going to be trust. This is the third one, the last one, but it’s probably the most important, because the main reason someone is gonna invest with you is if they trust you, they trust the person in charge. The main way to build trust is to just be yourself. When you’re being yourself, you’re being honest, and honest and trustworthy are basically synonymous.
There’s no reason to put on a show, there’s no reason to be someone you’re not, there’s no reason to act how you think they want you to act. Just be yourself, and that will help you build stronger relationships with your investors, that are deeper. Because again, the can get returns from anyone. So if they trust you, then they’re going to invest with you more often, at a higher number than if they didn’t trust you.
And then another way to build trust besides being authentic, being yourself, is to have a strong online presence. So if an investor googles you, they should be able to find you pretty quickly. You should be one of the top results. If you have no online presence and they can’t find you, then that’s definitely an indication of a lack of trust.
I was interviewing someone on the podcast – I’m pretty sure they’re a passive investor – and one of the things they said when qualifying a syndicator is to google them and see if they show up, see if they have an online presence, see if they have a strong brand… Because if in addition to their syndication business they have a strong brand, then if they mess up on the syndication business, that brand is gonna take a hit… So they have more skin in the game. This is kind of like number one, alignment of interests – if they have a strong brand, then they’re probably gonna take care of it a little bit more. Because if they have no online presence at all and they mess up, then me as an investor – I’m not gonna be able to go and write a review of their brand online, because it doesn’t exist. Whereas if I have a massive brand – if I have a podcast, a YouTube channel – and I mess up, well, I should expect to see a lot of negative comments on those thought leadership platforms about my mistakes, my misdeeds.
So making sure you have an online presence, making sure you’re able to be googled easily, having a LinkedIn profile, having a podcast, a YouTube channel, a blog, whatever. And then the added benefit of this is that if you do that, you can use this to generate interest from passive investors, and when you’re having conversations with them, they’re going to feel as if they already know you, because they’ve listened to you, they’ve seen you talk for hours and hours and hours before you’ve even met them in person… And that’s a great way to establish rapport even before having your first conversation.
So those are the three ways to separate yourself from other syndicators. Number one is having alignment of interests, number two is transparency, and number three is trust.
Until tomorrow, make sure you listen to the other Syndication School series about the how-to’s of apartment syndications, and take a look at some of those free documents as well. Both of those are available at SyndicationSchool.com.
Thank you for listening, and I will talk to you tomorrow.