This is part 2/2 of a Syndication Series Theo started in Episode JF2010 where he goes over the best tips and advice he gained from the speakers and conversations he had with other investors at the Best Ever Conference 2020 in Key Stone, Colorado. The Best Ever Conference hosts many great speakers who talk on multiple real estate investing topics but the ones Theo will be sharing today are focused on Apartment Syndication. Enjoy this episode as he explains his takeaways from day one of the conference and what he felt was very helpful from different speakers.
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“As a GP this is obviously a good thing because if it’s just a straight up profit split you end up making more money, as opposed to having to give away 8%, 10% of the deal before you make a profit split ” – Theo Hicks
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 am your host, Theo Hicks.
Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes and series we offer some free PDF how-to guides, PowerPoint presentation templates, Excel calculators, things like that that will help you on your apartment syndication journey. All of those free documents, as well as past Syndication School series can be found at SyndicationSchoo.com.
This is going to be a continuation of yesterday’s episode, or if you’re listening to this in the future, the episode before this one, where we are talking about the top apartment syndication lessons from the Best Ever Conference 2020.
Yesterday (or the episode before) we talked about day one lessons, and today we’re gonna be talking about the day two lessons. The first set of lessons comes from the session called The Life of a Champion, which is the talk given by Buffalo Bills Hall of Fame wide receiver Andre Reed.
He basically talked about what makes someone a champion. The three things that he says makes someone a champion is number one, to value your huddle. Again, he’s a football player, so this is applying to football, but extrapolating this to real estate, valuing your team. Making sure that everyone on your team is on the same page, that everyone knows what the game plan, what the business plan, what the strategy is, and that everyone is executing the business plan… And then making sure that everyone is respecting each other and listening to each other’s input and feedback. That champions lead by influence and not by authority.
Number two is Know your role. Champions know what they are the best at, and they know what everyone on their team is the best at… Well, I guess, taking a step back, they know what they’re the best at, and then they create a team of people who are the best at things that they’re not the best at. They know what their team is the best at, and so they let them focus on those aspects of the business. They know what they’re the best at, so they focus on those aspects of the business, and everyone comes together to use their strengths for the betterment of the team.
Then number three is that you win some and you lose/learn some. Champions know that things are not always going to go according to plan, and that as a result they know how to handle things when everything goes wrong, and they know that once they figure things out, when they make it through this obstacle, they’ll come out the other side even stronger.
Then the fourth lesson from this talk, kind of bringing all three of these characteristics of a champion together – he says that being a champion is not based off of luck. So valuing your huddle, knowing your role, knowing that you win some and you lose some is not something that you just luck into. It’s not the shake of an 8-Ball, as Andre Reed says. It comes from hard work, and then consciously following the lessons one through three of being a champion.
That was an interesting talk… I actually met Andre. I didn’t realize it was even him until he started passing around his Hall of Fame ring, which — I won’t say literally, but figuratively the size of my head. It was huge. I didn’t realize he was sitting right next to me at the breakfast table. I got to hold his Hall of Fame ring, which he says is one of 170 of those in the entire world.
Anyways, next is John Sebree, who was in the debate from day one… I can’t remember, I think he works for Marcus & Millichap. I can’t remember who he works for, but he’s a big-time broker. The two things that I got from him was, number one — well, I should talk about lesson number two, because yesterday I mentioned that talk about this, but… In the intellectual debate he talked about how demand is outpacing supply for multifamily… So John actually went into the numbers of this and says that housing construction has fallen short of demand.
From 2000 to 2007 there was an oversupply of 2.5 million units. From 2008 to 2020 there’s an undersupply of 1.5 million units, which means that they need to build 1.5 million units to meet the demand. So that’s going back to yesterday’s thing… But similarly tied to that is that there is increasing demand for class C assets, because most of the new construction has been for class A multifamily. So there has been and will continue to be a demand for workforce, affordable housing, which is reflected by the lower vacancy rate and higher rent growth for class C compared to class A.
Basically, they’re not building enough units, and what they are building are all class A, so there’s not enough class C properties. So the vacancy rates are really low, because people are afraid to move out because they’re afraid they’re not gonna find another place to live, which is resulting in an increase in rent… So class C is a good asset class to be investing in right now, according to John.
And then similarly, secondary and tertiary markets are in demand. Most of this new construction for class A and most of these class A deals are being built and done in these primary markets, so people are starting to move into secondary and tertiary markets as well… So you’ll wanna move there before everyone else is, and start doing deals there, because of the high competition in these primary markets. So that’s John Sebree.
Next is The Age of Data, with Michael Cohen of the CoStar Group, and Jeff Adler, which I’m sure you’ve seen… I get emails of him all the time, from Yardi Matrix. They had an interesting lesson about how to find deals. The first tip was about these on-market deals, saying that basically no matter what, you’re gonna overpay for an on-market broker-listed deal. So you need to make sure you’re buying it in a market that allows you to offset overpaying for it. They said that this is done by investing in markets with high net migration; so a lot of people moving in will allow you to offset the extra money that you pay for the deal.
More specifically on finding deals is that you can look at loan maturity data to see what owners have loans coming due soon, and then you can use CoStar or Yardi Matrix data to come up with a valuation of that property, and then reach out to the owner to buy the deal… And they’re saying how you don’t wanna reach out to them and then they ask you how much it’s worth and you say “Oh, well I’ll get back to you.” Instead, you wanna come up with the valuation first, and when they ask you that question, say “Well, based on what I have, I think it’s worth this much… But can you give me some more information, so I can confirm or adjust this number?” That was interesting.
We’ve talked about people’s loans who are coming due being good targets before, but just the extra tip of making sure you have a valuation for the property beforehand is kind of new.
Next is probably from the apartment syndicators’ perspective probably one of the better panels, because it was stories of raising capital. I’ve got three lessons I wanna go over from here. The speakers were Matt Faircloth, who I’m sure you know; he’s got a pretty big presence on YouTube. Then we’ve got Ryan Smith, and we’ve got Neal Bawa.
The first lesson comes from Ryan Smith, who says that he believes we’re transitioning from an LP market to a GP market, which as a general partner, as an apartment syndicator, that’s good news to hear, right?
He says that the margins on apartment deals are being pinched and put under pressure, so as a result he thinks that 1) GPs are gonna do less deals that they expect this year, which may or may not seem like a good thing or a bad thing to you, but… Because they’re doing less deals, because the returns on the deals are getting lower, there’s gonna be more capital looking for deals than there are deals available.
So he thinks that the 8% to 10% preferred returns that are being offered right now are either gonna be reduced, down to maybe 6% or 4% or 2%, or they’re gonna go away entirely and it’s just gonna be straight-up profit splits. Or there’s gonna be some more unique passive investor compensation structures in the future.
So as a GP, this is obviously a good thing, because if it’s a straight-up profit split, you’re gonna end up making more money, as opposed to having to give away 8%, 10% of the deal before you make a profit split. So that was Ryan’s prediction, and I thought that was pretty interesting.
Number two – and this is Neal – this is gonna be big for people who haven’t done many deals or haven’t done a deal at all… He says that a track record is not required to raise capital. He says that this is completely a limiting belief, and that it’s pretty easy to debunk, because no one would be on-stage talking about raising capital if they needed a track record to start raising capital… Because everyone raised money for their first deal without a track record, so obviously it’s possible.
He says that people don’t invest in projects, they invest in people, so it’s less about the deal, it’s less about your experience in this particular type of investment strategy, but it’s more about the emotional connection you have with the investor, how candid you are, how well you come across, and how specific you are that matters.
He says a great way to combat a potential passive investor who says “Well, you don’t have a lot of experience, and this guy over here has done 18 deals, so I’m gonna invest in his deal.” And you say “Well, I don’t have a track record, that’s correct, but if you invest with this syndicator who has their 18 deals, then you’re gonna get at a maximum one-eighteenth of their attention and effort… Whereas if you invest with me, you’re going to get 100% of my effort focused on this deal, and I’m actually going to stake my business, my reputation on this one deal.”
So kind of just turning the tables on them and saying “Well, sure, they have a lot of experience, but here’s something that’s negative about that. And sure, I don’t have a lot of experience, but here’s something that’s positive about that.”
Then number four was also Neal Bawa, and he was talking about the fact that you’re not gonna scale by adding more content, you scale by repurposing content. So you’re not going to triple your investor base by increasing the amount of content you put out by tenfold, because it’s just not possible. There’s only so much new content you can create… So instead you wanna repurpose content that’s already been created, which is (if you’ve noticed) something that we do a ton on the Best Ever team.
He says that for example — let’s say he records a one-hour podcast episode; well, he’ll take that podcast episode and break it down into one-minute clips. Maybe he’ll get 10-15 one-minute clips from an hour podcast episode… So there’s one repurpose. Then he’ll take those 15 clips, take the best ones and then push those out to his investors. Then he’ll take those 15 clips and then another 15 clips from another podcast, and maybe 15 clips from another podcast, and maybe 10 podcasts’ worth of clips and then turn that into an eBook. Then he’ll take the podcast, the eBook, the shorter clips, push that out on Facebook, push it out on social media, on LinkedIn, things like that.
Basically, he said his objective and your objective should be to repurpose every single piece of content at least ten times. Not once, not twice, not five times, but ten times.
We seem to be focusing a lot on Neal Bawa in this episode, because we’re back with Neal again… He gave his advice on some 2020 real estate location trends. And I’m not gonna go too into detail on what he talked about, but basically he has his five metrics that he looks at, so I’m gonna quickly run through these.
Number one is population growth. They only invest in cities with a population growth of at least 21.25% between 2000 and 2017. Number two is median household income – he wants to see the median household income growth of at least 31.5% between that same date range. Number three is median home values. He wants to see a growth of at least 42.5% between that same date range. Number four is crime levels only invest in cities with a crime level index calculated by city data that has been gradually decreasing and is below 500. Then number five is the 12-month job growth – only invest in cities where the 12-month job growth is above 2%. So those are his five metrics.
He talked about how easy it is to look those metrics up, and then based on that, two markets that you’ve probably never heard before that are really strong in all five of those categories – St. George, Utah, and Yuba City, California. I’ve never heard of them before, but apparently, based on Neal’s metrics, these are solid locations. Other top markets were Raleigh NC, Reno NV, Gainesville GA and Asheville NC.
One of the things he said right at the beginning of his speech, kind of setting up his talk about how important data is, is that the Bible got it wrong by one letter. He says that it isn’t the meek who will inherit the earth, but the geek. So not the meek, but the geek. Then he went into the types of things that geeks should be looking at.
Next we’ve got Frank Roessler, who’s Joe’s business partner. He talked about underwriting and asset management. He went into the asset management duties when managing a single property, as well as managing a portfolio. We’ll talk about the portfolio one.
He said that the two things that change when you’re asset-managing 20 properties as opposed to one property. Number one, managing the scale properly, so doing things like implementing a system of schedules or reminders, creating daily/weekly/monthly to-do lists, having an organized file-sharing platform where each deal has its own folder, and each project in that deal has its own sub-folder.
We’ve got delegating tasks to other team members, because obviously one person can’t wear all the hats. Not becoming too emotionally invested. Celebrating wins only for a small period of time, and then using problems as a learning experience… And then secondly is adding in more sophisticated processes – getting a revenue management software like YieldStar or LRO, doing cost segregation analysis to accelerate your depreciation, hiring a local tax protester to protest your taxes each year, because taxes are gonna be your greatest expense…
Recapitalizing, so having new investors coming and buying shares, as opposed to selling the property, to make sure the taxes remain the same… Because something Frank says is [unintelligible [00:16:00].09] increase the value so much, the taxes will increase at sale, and that’s something that investors really don’t wanna see. They don’t wanna buy a property where the taxes go up a ton… So recapitalizing is a good way to avoid that.
Doing 1031 exchanges to defer taxes, purchasing interest rate caps on floating rate loans… And then once you’ve done a certain amount of deals of debt with agencies like Fannie Mae or Freddie Mac, you can access a security line of credit, and then use that line of credit to buy deals, so that you don’t have to pay any prepayment penalties.
Something else that’s interesting that Frank said is why do you need asset management if you’ve got a great property management company. Number one is the biggest risk point is the execution of the business plan. So you can do everything right, but if you don’t execute the business plan properly, then the project is gonna fail… So there are hundreds of moving parts that need to be taken into account when executing a business plan, so having someone to oversee all the moving parts is important… Because the property management company is just one of the moving parts, but there’s a ton of other things going on that your property management company necessarily isn’t doing or isn’t responsible for, that the asset manager needs to do.
Then secondly, the property management company does not have ownership stake in the deal. And even if they did, it’s not gonna be as much as the ownership stake that you have in the deal, and their reputation isn’t necessarily on the line. If they mess up, they can go somewhere else and continue managing properties. If you mess up, then your business collapses. So no one’s gonna take care of the property as well as you, the asset manager.
We’ve got two more lessons. Next is Taking the Next Leap – this is a panel Joe did with some of his clients, talking about how they took the leap to do more syndication deals.
One of his clients, [unintelligible [00:17:41].04] had a really funny way to build a relationship with brokers. For his first deal he said that it took three years’ worth of networking to do his first deal. It involved conversations on the phone, actually flying in-person to the market and meeting with brokers in person, wining and dining them, reviewing deals and providing feedback – all the things we’ve talked about before. Basically, everything he could to prove that he was a serious investor, who could close on the deal.
So that’s how he did his first deal, but eventually, he still after this had a hard time getting a deal. He was invited to multiple best and final offer rounds, but wasn’t able to get the deal… And then he said that he called his dad and said “Dad, I’m flying to town. I want you to go to the store and buy ten bottles of Dom Perignon”, and he went and met all ten of his brokers, gave them all bottles of Dom Perignon, and sure enough, within a week, he had a deal. So if you wanna find a deal, buy your brokers some Dom Perignon… Which I think is champagne.
The last lesson comes from Bryan Ellis, who’s the CEO and host of Self-Directed Investor Radio, selfdirected.org. He was talking about the Elite Capital-Raising Webinar Strategies. Basically, talking about how to create the best webinars.
He said that the first thing you need to realize is that people aren’t investing based on rationality, they are actually rationalizing. So he says that when someone sees a webinar, the first thing that happens is they have an automatic response to the deal. Something that [unintelligible [00:19:10].01] they have no control over whatsoever; it automatically just happens, similar to if you put your hand on a hot stove and you pull your hand away automatically. You don’t put your hand on there and say “Huh. This hurts. I think I’m gonna pull my hand away now.” So that’s number one.
Then after that they have this automatic response result and emotional stimulus, which is the gut feeling they have about the deal and what you’re saying to them. So do they like, do they not like it, is it scary, is it interesting? Then after that, they will then think about all the data and facts that you present to them about the deal, and then from the automatic response, it’s resulting in emotional stimulus, and the analysis of the data and facts, they will have their impression of the deal. Now that they have the impression, they will go back over those three points and they’ll pick out all the different pieces that make the most sense to them and support their impression, and they ignore the rest. And then they decide. So basically, they decide on their impression of the deal, which comes from their automatic response and emotional stimulus, and not the facts and the data.
Most webinars focus on the facts and the data and not the emotional stimulus and the automatic response. So a few tips that he gave about how to get more capital commitments from fewer investors, with less resistance and less time, which is obviously focusing on the automatic response and the emotional stimulus, is number one, create questions in the mind of the prospects. Don’t answer every single question; make sure you leave some unanswered questions that can only be answered by reaching out to you and taking the next step that you want them to take.
Number two was to create urgency by design, so let them know why investing now will be better for them, and then number two was to have someone else tell your prospects why they should invest. This is gonna be ideally someone who’s more credible in the eyes of the investors than you, and this could be an example of someone who’s currently investing in your deals. An example that Bryan gave is he had someone else that was actually a speaker come on stage and talk about how great his services were.
He said that “I’ve gotta come up here and say the exact same thing, but you’re persuading more by him coming up and saying how great my services are.” That’s Bryan Ellis, the last lesson.
Those are the syndication lessons from day two. Again, the day one lessons, all of them, and the day two lessons, all of them, are on our blog. So if you go to JoeFairless.com, Resources, Blog, or if you just search “Top lessons from every BEC2020 session”, both of those blogs will come up, and you’ll get all of the different lessons that I got from the Best Ever Conference 2020.
Then make sure you listen to part one of this episode as well, where I went over the main apartment syndication related lessons from the conference
That concludes this episode, as well as this series, “The top apartment syndication lessons from the Best Ever Conference 2020.” Until next time, check out some of the other Syndication School episodes, as well as take a look at those free documents that we have on there. All of those are available at SyndicationSchool.com.
Thank you for listening, and I will talk to you soon.