Finding investors to invest in your apartment syndication deals can often be easier than keeping those investors for future deals. In our experience, private investors are not most concerned with their ROI, it is a concern obviously, but not as high as three other concerns. They want to know that their money is in good hands, frequent updates, and is the process hassle free? Theo will cover those three things in more depth today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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“When you buy for appreciation, it’s kind of like gambling because you’re betting on the market going up and that’s out of your control” – Theo Hicks
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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 am your host, Theo Hicks.
Each week, every Tuesday and Wednesday, we air two Syndication School episodes on the best real estate investing advice ever show podcast on iTunes. These episodes focus on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes – sometimes the episodes are a part of a larger series – we offer some sort of free resource. These are PowerPoint presentation templates, Excel calculators and how-to guides that accompany these series or episodes. Those are free, as well as the Syndication School episodes are free… Which can be found at SyndicationSchool.com.
If this is your first time listening, I highly recommend going back and starting at series number one, and working your way up through the final series that talks about selling your deal. That way you can go through the entire process, start to finish. Then you can listen to some of the more recent episodes where we go into specifics on some more of these steps.
Today’s episode is going to be one of those episodes where we go into more specifics, and today we’re gonna talk about how to attract and keep passive apartment investors. In order to attract and keep passive apartment investors, a first question that you should be asking yourself is “Why would they invest with you in the first place?” What is their primary motivation for investing in apartment syndication deals? You’d be surprised, but returns, the amount of money you can give them is not their primary motivation. It is not one of their primary concerns.
Obviously, they care about how much money they’re gonna make, and if you offer them 1% and someone offers them 10%, it’s going to go into their decision, but most likely a passive apartment investor is going to be able to get a similar return by investing with any apartment investor. So it can’t be that they want a solid return. Also not the business plan, it’s not the market… It is actually going to be these three things that we’re gonna talk about in today’s episode; these are basically the three reasons why someone would invest in an apartment syndication deal. And if you know these three things, then you can formulate your company around these three things in order to attract more passive investors, and in order to retain more passive investors.
The three things – I’m gonna go over them right now really quickly, and then I’m gonna go over them each in more details. Number one is they want their money to be in good hands. Number two, they want to be updated on relevant information on the deal, and number three, they want a hassle-free process.
Those are really the three main reasons why people will invest in apartment deals, which is why these are the three secrets to attract and keep your passive apartment investors. Is their money in good hands, will they be updated on relevant information on the deal, and is the process hassle-free?
Let’s go over need number one, which is “Is their money in good hands?” Basically, what this means first and foremost is “Are you not going to lose my money?” Warren Buffet is famously known for saying that the two rules for investing are 1) never lose money, and 2) never forget rule number one. As an apartment syndicator, one of your main focuses should be on making sure you’re not losing your investors’ money. The investors’ money is used towards the down payment for the loan, it’s used towards maybe funding renovations, and then of course, the fees paid to you for closing on the deal.
Like any investment, there’s not gonna be any guarantees; you can’t guarantee them you’re not gonna lose their money, because that’s not possible. You can’t really guarantee anything. The market could completely collapse, or there could be a nuclear apocalypse tomorrow, and of course, if that happens, you’re not gonna be able to give your investors their money back. But in that case, they probably have other concerns that are more important. Anyways…
But there are a few things that you can do proactively to mitigate the major risks of the deal. We call these the three immutable laws of real estate investing. If you follow these three laws, then you should be confident that you will not only be able to preserve the capital of your investors, but maximize their returns as well.
Basically, if you do the opposite of these three things, are what get people into trouble, are what get people foreclosed on, losing their deal, not being able to sell at a higher price, and not being able to keep their investors’ money.
The first one is to not buy for appreciation. Making sure you’re buying for cashflow. Because when you buy for appreciation, it’s kind of like gambling. You’re betting on the fact that the market is gonna keep going up, and the market going up is really not in your control. The only thing in your control is buying the deal at that point.
When you buy for cashflow, then you know “Well, it doesn’t really matter what the value of the property is, as long as you aren’t selling” – and we’ll address that not selling part in a second. But when you buy for cashflow, then you know upfront “Well, I’m gonna make this much money each year, really no matter what… Unless something crazy happens. If the market goes up in value – great. That’s the cherry on top, and I’ll have even more money. But if it doesn’t, I’ll still hit my cashflow numbers.”
Now, I wanna differentiate between natural appreciation and forced appreciation. I’m saying don’t buy for natural appreciation. Don’t buy for “The market is gonna go up 10% each year” or “Rents are gonna go up 10% each year.” You can buy for forced appreciation though. Forced appreciation is when you’re actually doing something to force up the value of the property, so you’re doing some sort of value-add. You’re doing some sort of physical improvements to the property, or you’re improving the operations in order to increase the income and/or decrease the revenue, which in turn increases the NOI, which in turn increases the value of the property.
Buying for forced appreciation is fine, and actually encouraged in apartments, and that’s the best way to get the best of both worlds in terms of cashflow and a large profit at sale… Because with forced appreciation, your rents are going up, so you’re able to provide a higher cashflow as time goes on in the project, and then since rents are going up, your NOI is going up, and the value of the property is going up, so when you sell, you’ll have a large lump sum of profit to distribute to investors at sale. So that’s number one, don’t buy for natural appreciation, buy for cashflow and forced appreciation.
Number two is gonna be about debt. Secure long-term debt. I mentioned, of course, you can buy for cashflow, and you can buy for forced appreciation, but if there’s a time where you’re forced to sell the property for some reason, then that can be something that makes you lose money. So in order to avoid having to sell early, you wanna secure long-term debt.
To define long-term debt – it’s debt that is equal to or longer in term than the hold period. So if your plan is to hold on to the property for ten years, you probably don’t wanna get a three-year loan, because at the end of year three you’re gonna have to refinance or sell the property. And if your business plan didn’t go according to plan, if the market took a turn, you might have to refinance and do a capital call to actually have enough equity in the deal to get a new loan. Or you might be forced to sell at a price that’s so low that maybe you can return your investors’ capital, but you’re not able to give them the return you promised.
In the example of a ten-year loan, you wanna get a loan that’s at least ten year long. If you’re doing a ten-year hold, then a loan that’s at least ten years long. If you’re doing a five-year hold, you want a loan that’s at least five years long. Now, it’s tricky when you’re doing the bridge loan, the renovation loan, because those are typically going to be shorter-term, because part of the business plan is to refinance once you’ve done the value-add business plan… And if things go according to plan and you refinance – great; you should be able to return a large amount of capital to your investors.
But if things don’t go according to plan, you still want to follow this principle of having long-term debt. So if the plan is to hold on to the deal for five years and you wanna do a bridge loan, then make sure you have the option to extend that bridge loan up to five years, so that worst-case scenario, if you can’t refinance, then you can extend the loan one year and then reevaluate. If you still can’t refinance or don’t wanna refinance, it doesn’t make sense to refinance, then you can extend it again, and then year five you can decide whether you wanna refinance, or hold to your hold period and sell.
And then along with that comes making sure you’re not being overleveraged. But unless you’re not going the conventional Fannie/Freddie route, or a bridge loan, then you’re really not gonna have that opportunity to overleverage. It’s when you’re looking at lease options or seller financing, where you might actually have the opportunity to get the deal with 5% down, 10% down. Again, not a good idea, because if you have to sell or you have to refinance, you’re gonna have to bring money to the table for the refinance, or you’re gonna have to actually lose capital if you sell the deal, and the value dropped by 5% or 10%.
So the last principle is don’t get forced to sell. Basically, follow the first two, and then you’re going to automatically follow the third principle and not get forced to sell the property. Because again, when you’re forced to sell, it’s likely because there’s a problem, and if there’s a problem, you’re likely not gonna be able to return all of your investors’ capital.
So all those three rules and your investors are going to know that their money is in good hands, because you’re mitigating the chances of you actually losing the money. And then there’s a few other things you can do as well to portray to your investors that you’re in good hands.
Something that’s pretty self-explanatory is making sure that you have a solid educational foundation and a track record in real estate or business before you start raising capital… Because you’re not going to attract anyone if you don’t know what you’re talking about, and if you’ve got no experience with business or real estate. Now, there’s a way to get around this. If you are lacking in any of these areas – probably not education, but maybe the background, then you can make up for this with a trustworthy, credible team.
So you can bring a mentor on, a property management company, a broker, who have a strong background in the apartment industry, and have a strong, successful background in apartment syndications. That will help you get started, but you’re going to attract more investors if you have the experience, you’re the point person. So if you have the experience, if you have the education, then they’re going to know their money is in good hands more than if you don’t, and you’re just bringing on an experienced team.
So the experienced team can definitely help, but you wanna make sure that you are still working on your education, and making sure you still have some sort of relevant background to leverage when discussing yourself with potential investors. We’ve gone over what that means – what specifically is a solid real estate background, what specifically is a solid business background – on previous Syndication School episodes.
This is also pretty self-explanatory, but if they trust you as a person, then they’re gonna know that their money is in good hands. They’re gonna have to have a good feeling about who you are as a person and truly believe that you have their best interests in mind. This trust can be established by the length of time you’ve known this person, by the quality of your relationships with this person, by having a strong online presence, by displaying your expertise of you and your team through a thought leadership platform, and by having alignment of interests, which we’ve actually talked about alignment of interests in yesterday’s episode (the episode just before this one). Make sure you check that out, to learn about the four tiers of alignment of interests.
Once they trust you, then they’re gonna be confident that you have common sense, that you can make good decisions, that you’re going to conservatively underwrite the deals, that you’re gonna perform all of the required due diligence before buying the apartment, and you’re going to at least meet the projected returns that you outlined in your investment summary.
Then lastly, someone will know that their money is in good hands if they know you are a responsive communicator. We also talked about this in the episode yesterday, so I’m not gonna go into too much detail on this… But basically, if something goes wrong, do you let them know and do you already have a solution in mind (or already implemented), and when they reach out to you, how quickly are you responding?
Overall, a passive investor is gonna wanna know their money is in good hands, and you as a syndicator can convey this to the passive investor by proactively mitigating risks, by following the three immutable laws of real estate investing, having the relevant background, educational and business or real estate background, building a trusting relationship and being a responsive communicator.
Again, one of the needs of a passive investor is to know if their money is in good hands, and if it is, that’s how you attract them to your deals and keep them on. Will they be provided with status updates on the deal? They’re gonna want to know what’s going on with the deals they’re investing in, if they are going to invest with you and if they’re gonna keep investing with you. So on a consistent basis, you want to provide them with a director-level – this is in between an entry-level employee level, super-detail, lots of numbers and calculations, and the CEO level, which is quick bullet points of what’s going on. Somewhere in between status updates on the deal.
Again, we talked about this plenty of times on Syndication School, how to do this… But basically, first you wanna send them a monthly update that includes things like occupancy rates, rental rates, renovations, cap ex, issues, community engagement events… You also wanna provide them with quarterly financials, and then any information about when they’re gonna get paid, or anything else like taxes and things like that.
Some syndicators don’t provide any updates, or updates are very minimal, so you wanna make sure that you are letting your investors know that they’re going to be kept up to date on what’s going on. Once you fulfill that need, you’re more likely to attract and keep them on as investors.
Then the last need is a hassle-free process. It’s in the name, “passive investor”, but they wanna be passive. They want a place to park their money and not have to worry about doing anything else. They don’t wanna have to worry about being responsible for any day-to-day operations. They’re busy doing whatever they’re doing to make money, whether it’s real estate, whether it’s a business, whether they’re working a W2 job, they’re busy with family life, personal life… So they want to minimize the amount of time spent on their investment.
So their ideal setup would be they send you the money and you send them money back, with frequent updates on what’s going on, so they know that they can expect to receive their money.
So besides doing due diligence on the syndicator initially, and then doing due diligence on the deals as they come in, a passive investor wants the investment to be as boring as possible, with little to no surprises. All they wanna do is read a monthly email and receive their distributions. So one thing you should probably do, that we recommend doing and that we encourage you to do, is to set up some sort of direct deposit with your investors, or at least offer direct deposit… Because some of them do like the old-school checks, but… With direct deposits, that takes away the added step of cashing a check. So all they need to do is log into their bank account, see “Okay, Theo sent me my monthly distribution. I’m good to go.”
And then also, part of the hassle-free process is if I do have a question, if I do need something from you, I want the problem to be resolved quickly, and I want minimal back-and-forth.
So if I reach out with an issue, I’d much rather have you reply one time saying “I’ve got your email. Here’s what we’re doing to solve this problem” or “Here’s what we’ve already done. The problem is solved” or “Hey, here’s an answer to your question.” Rather than send them one email saying “Hey, I got your email”, a reply on this day, then again on this day saying “Oh, well I still don’t know the answer, so give me some more time.” Just one time, address whatever they need right away, and then that’s it.
Those are the three primary reasons why someone would invest in the deal, the three things that you need to address in order to get them to invest in your deals… And that is “Is their money in good hands? Will they be updated on the relevant information on the deal? Is the process hassle-free?” If you do these three things, you’re gonna attract more passive investors and you’re going to retain more of your current passive investors.
That concludes this episode. Until tomorrow, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndications, and check out those free documents we have. Both of those can be found at SyndicationSchool.com.
Thank you for listening, and I will talk to you tomorrow.