Today Theo and Travis will be sharing their knowledge on how to vet the team before entering a real estate deal with them. They discuss this matter from a limited partner (LP) position. Since your real estate investment is illiquid, you need to consider the long-term implications of this business relationship. You’ll be communicating with your partners over the next 3-5-10 years, so you’re much better off finding out about who they are, what they do, and how they do it early on.
This episode is part 1 of the series “How a Passive Investor Vets an Apartment Deal”, focusing on the most commonly asked questions about real estate deals. The other parts will focus on vetting the market and the deal itself.
We also have a Syndication School series about the “How To’s” of apartment syndications, and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.
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Theo Hicks: Hello, Best Ever listeners, and welcome back to another edition of the Actively Passive Investing Show. I’m here again with Travis watts.
Travis, how are you doing?
Travis Watts: Theo, I’m doing great. I love your background. Everybody tuning in on YouTube, we finally have matching backgrounds, check it out.
Theo Hicks: You have to go to YouTube once this video is aired and check out our matching backgrounds. I’ve got the green screen now, so it’s nice and bright in here, I’ve got the nice ocean background. So thank you to Travis for helping me figure that out.
Anyway, so we’re going to kick off, I guess this first-ever series that we’ve done on here. It’s really a three-part series about vetting syndication deals. Obviously, from the perspective of the passive investor. And in part one, we’re going to talk about vetting the team. So that’ll be today. And then next week, or if you’re listening to this way in the future, seven episodes later, we’re going to do part two which is going to be vetting the market, and then part three is going to be vetting the actual deal itself.
So as I mentioned, we’re starting off today with vetting the team, and so we’ve got 10 points we’re going to go through, and Travis and I are going to alternate. So do you need to jump right into the first one or do you want to say something first, Travis?
Travis Watts: The only thing I would add to that is this is coming from a limited partner perspective as you’re investing in an apartment syndication or a real estate private placement. These are the questions that I’m asked by investors every week, I’m asked on nearly every podcast I do, no matter which podcast it is; it always comes down to, how do you vet a team, a market, a deal? So I figured, why haven’t we covered this on our show? Because it’s one of the most commonly asked questions that I get. So that’s why we’re doing the episodes. That’s all I got. So go ahead and kick it off.
Theo Hicks: Perfect. And I guess one quick thing too is that we’re going to answer all these questions from the perspective of the passive investor. Travis is obviously going to take it as being an actual passive investor himself, and then the way that I’m going to answer the questions is how we teach people that want to be active syndicators to be prepared when they’re talking to passive investors; what types of things they should expect the passive investor to ask based off of the team, the market and the deal. So we obviously wrote a massive book on this, 450 pages, The Best Ever Syndication Book, so we’re going to not do a 24-hour podcast. We’re going to try to hit these high level, but for all the things we’re going to talk about today, at least for most of them, there are more in-depth blog posts or they go in more depth to it in the book.
So the first thing that we’re going to look at when vetting the team is going to be their experience and track record. So when I talk to syndicators, I tell them that you’re going to want to make sure you have relevant business experience or relevant real estate experience, or both. So the vast majority of, if not all, syndicators that are active when they got started, they weren’t just fresh out of college, they typically had some sort of experience in business or in real estate.
So to be more specific, it’s not just having a regular full-time job, where you don’t get promoted or you bounce from job to job every year. What you want to see from the business perspective is someone who got promoted multiple times, preferably to any large corporation, preferably to a director type level. And then from a real estate perspective, it doesn’t necessarily need to be multifamily, because it’s kind of like a chicken and the egg situation where if I want to do multifamily, I need multifamily experience and if I’ve never done multifamily before, so how do I do without the experience.
So they need to have some sort of real estate experience. It could be being an investor themselves. So their investments — it could be single-family homes, smaller multifamily, maybe have an apartment, maybe invest in some sort of commercial real estate… Or it could be some other form of working in the real estate industry like they were a broker selling or doing loans, maybe they worked for a property management company… But the key is, is that they have to have either strong business experience, strong real estate experience, or ideally both.
And the reason why is because they are going to have skills that they learned from that past experience and then apply to apartment syndications. This is kind of when you’re working with a beginning apartment indicator. Obviously, if they’re more experienced, then what’s more important is their actual track record. So I’m not sure, we’ll probably get into this in more details… But by the track record, do you mean have they done deals in the past that met or exceeded the return projections to their investors?
Travis Watts: Yep, 100%. Love those points, and you’re exactly right. It’s funny, both LPs and GPs in this space often actually don’t come from a real estate background. So maybe they had some single-family experience or whatever. But here’s the good thing. Real Estate Investing isn’t rocket science, right? I think we can all wrap our heads around it even from scratch as an adult in a matter of days and we can pretty much get the ins and outs of it.
I see it all the time. A GP would say something like, “I was a former Marine, so that taught me a, b, c, d, e, f, g. Now I’m syndicating deals and I’m bringing that experience and that methodology to what we do in our business plans,” that kind of stuff. Or come from an engineer background, used to do startup companies, switched gears into real estate. “I’m a numbers guy,” that kind of stuff. So great points, I won’t get too long-winded on that.
The only thing I would add, actually, on that small segment is aligning your philosophy with the actual GP. So what I do as an LP – and we’ll get into criteria later; this closely borders criteria and it is technically part of your criteria… But you need to identify what your investing philosophy is. I’m a cash flow focused real estate investor, I prefer to invest in affordable housing nationwide; not subsidy housing from the government, not like Section 8, but average rents, let’s call it $1,000 a door or $1000 a month, where a lot of Americans can benefit from this. There’s historically always been a demand for affordable housing, there continues to be an increased demand for affordable housing. So I like to be in that sector, because a lot of people can afford that rent. And if they can’t, there’s always someone else willing to come in and pay that rent in most cases. So a little less speculative there.
I like the idea of value-add, that’s part of my philosophy as well. That goes far beyond real estate; even as a child, young adult, anything — like buying a car that needs some work and then we’re going to buy it, fix it up, it’s going to be worth more now and it’s going to sustain its value longer. I like these types of concepts. So I apply that right into real estate. And I like buying something off-market at a discount, improving it, making it better and selling it for more. That’s just something that really aligns with my philosophy in life. There’s a lot of things that we all can buy, pre-owned perhaps and still get the same usage out of it than what we had before when it was new.
So I define that on paper and in my head and speak it out loud, make sure I fully understand it. And then as I’m interviewing general partners and sponsors and teams, I’m just asking them about their philosophy and what do they look for in real estate? Why do they do what they do? And the more alignment you can have, I think the better off you’ll be. It causes a lot less problems down the road, because you know, they’re generally going to be thinking along the lines that you think when recessions come or what have you, and hopefully, they’re going to make decisions in alignment with decisions you yourself would make if you were calling all the shots. So that’s all I had to say on that segment to add on.
Theo Hicks: I think a lot of things you said we’ll hit on a little bit more later on this episode, when we talk about understanding what their business plan is. But you didn’t mention something about speaking with them and making sure you understand what their investing philosophy is. That brings us to the next point, which is scheduling some sort of introductory call to actually vet them. So I’m not going to spend too much time on this. But the whole point here is that before you invest with a syndication team, it’s best if you actually speak to them first, to ask them a list of questions, which we’ll get into here in a second. And I’m sure it’s possible to invest with someone, and maybe Travis has done it before, without actually talking to them or not even meeting them in person. We’ll get into some of the questions you want to ask about the team and their background and what they’re doing, what their business plan is, with their experience with the business plan, who’s doing what… But really, at the end of the day, one of the most important factors, if not the most important factor when you’re deciding who to invest with is trust. So when you speak to them and what Travis will talk about next, meeting with them in person, you’re going to be able to, in an intuitive sense, determine if this is someone who’s trustworthy or not, by the way that you feel when you talk to them, how you feel, they are answering the question; does it seem like they’re hiding something and not being transparent? Is this someone that you like, that you enjoy speaking with? All these things – they might not seem like they’re directly related to the ROI and what the renovation timeline is and the hold period and things like that, but that’s going to go a long way, because you’re giving them your money and you are trusting them to invest that money, to preserve that money and then to ideally grow that money.
So if you don’t like them, if you don’t trust them, if they don’t seem transparent, then it’s probably not a good idea to invest with them. And really, the only way to determine that is going to be actually talking to them and asking them questions.
Travis Watts: That’s a great point. And you brought up something that’s so important, and I speak to this a lot also on podcasts, which is – you need to essentially get along with these folks. I don’t know if you go as far as saying “be friends” with them. I mean, obviously, business friends, good acquaintances, something, but… I kind of treat it that way myself. Because these investments are illiquid. When I give someone my money, it’s out and it’s gone for three years, five years, seven years, it could be 10 years. So the last thing I want to do is make a big decision like that, not get along with the people and have to be forced into communication with them for a 10 year period. That’d be a horrible thing.
So take the due diligence time to have an actual conversation, like a human interaction conversation, not just a transaction-based conversation, like, “Hi, this is Joe. What’s the cap rate? What’s the break-even occupancy? How much is the minimum? Okay, thanks, bye.” That doesn’t qualify as contacting the sponsor to me. I want to know about the sponsor, what are their hobbies and what do they do on their days off? And I just want to get to know them a little bit as a person… And there’s so much to be said about a simple gut check. It’s something this year—I’m so glad I use a Calendly link to connect with people and network, especially since COVID, that’s really kicked up.
The problem, though, has been up until this point, that it’s just a phone call. And there’s a lot that you miss in body language, in professionalism and things like that, things I wish I could portray to others, things I wish I could see upon others. Are they sleeping on their couch in their pajamas having a call with me or are they at their desk at home? I don’t know what they’re doing.
So I started implementing a Zoom link to my Calendly call, so that we can connect like this face to face and people love it. I’m telling you, 8 out of 10 people that book a call with me are choosing the Zoom option and I think that’s awesome. And it has a lot to do with COVID, and everyone’s getting more familiar with Zoom and Skype and all these online things. But hey, guys, it’s free. You live in California, your sponsor is in New York, you can either pick up your bags, put your mask on and go buy flight tickets and hotels and taxis and rental cars to go meet someone face to face, or you just hop on a Zoom call and it’s free and it takes five minutes. So you choose, but it is important.
And the last thing I’d say is additionally, if you can, if it’s reasonable, try to visit a property that they’ve actually worked on before or that they’re working on currently or the property that you’re vetting and I know we’re just talking about the team and not the deal, which we’ll get to in a later episode more about that. But these are things that I do when practical. I don’t always do it before I invest. Sometimes it’s after, which I know, sometimes may be a moot point. But it’s good to see how their teams are performing, how their property managers are performing, how they’re performing as an asset manager, ask the property managers questions about the sponsor… It’s always good to get this kind of feedback. So I’ll keep it to that and we’ll move on just for time sake.
Theo Hicks: So the next point is some top questions to ask the GP. And the way you want to think about this is that you have a whole list of questions that you’d want to have answered, and you don’t have to ask every single question when you’re talking to the GP in an intro call. You don’t have to have a list of 100 questions and go through every single one. You can do research on them beforehand, and we’ll get to that a little bit more a little bit later; it comes to their online presence. But you can go to their websites, maybe they have some sort of deck that you could look at the talks about their company, maybe you found them and that you have a live deal and they can answer a lot of questions about what types of deals they do, who they are, who their team is, and the other investment summary. But of course, there are some things that you’re going to need to ask on the call. So again, there’s a lot of questions, but I’m just going to go over the overall categories that they’re in.
So first, you’re going to ask question about who is actually involved in the deal. So this is going to include the actual point person you’re talking to… So this would be a member of the general partnership; they most likely have one or more business partners, and they split up duties. So you’re going to want to know who does what, why is Travis doing acquisitions and asset management? Why is Theo doing investor relations and capital raising? What part of their background makes them an expert, credible in that specific part of the business plan?
And you also want to ask questions about the other, what I call third-party vendors that are involved. And the most important one is going to be the property management company. So who’s a management company? How big are they? What’s their background? What’s their experience? The CPA is also kind of important, right? You want to make sure they have a CPA that specializes in, in our case, apartment syndications, so they make sure that they’re taking advantage of the tax. And Travis and I talked about this last week, we talked about Biden’s tax plan.
And then these other team members as well. But those are the most important members involved. You can also ask questions about the actual passive investors, right? Who is their longest passive investor? Is the person or people who invested in the first deal, if they have been investing for five years, whatever – is their first investor still investing? How many family and friends are investing, right? Because if they got family and friends investing, if they’ve had someone who’s invested for a long time, that indicates trustworthiness.
Travis Watts: Yep.
Theo Hicks: Next is going to be their credibility, we’ve kind of talked about that. What’s their actual track record doing, what they’re doing right now, for that specific deal? Next is going to be alignment of interest which, Travis, just as you hit on earlier about the alignment of interest in the investment philosophy… There can be an alignment of interest in other ways as well. Essentially, the more skin in the game the team members have, the better. So are they investing their own capital in the deal or other team members investing their own capital on the deal? If the deal were to suffer, will they suffer as well? This also kind of ties to an online presence, right? If they also have, for example, a really popular podcast, well if they start doing really shady things for their deals, it is not only going to impact their investing business, but it might invest their thought leadership platform, maybe they have some sort of consulting program as well. So it’s also something that promotes an alignment of interest.
Theo Hicks: Now, to the—
Travis Watts: 100—
Theo Hicks: Sorry, go ahead.
Travis Watts: Sorry. I was just saying, 100%, I agree. Go ahead. Sorry.
Theo Hicks: I’m going to be quick. So next is going to be transparency. So how transparent are they? So we kind of talked about this before, when you’re talking to them. Are they trustworthy? Does it seem like they’re hiding things? Are they willing to share financials? How often are they giving you updates on the deal? Questions like that.
And then next two are going to the business plan and the target market, so ask questions about their market and their business plan. That’s going to be part two and part three. So we’ll go over those questions there. But overall, all these things are going to give you an idea of how trustworthy they are and how probable it is that they are going to preserve and grow your capital.
Travis Watts: Great points. And I’m going to keep it brief on my extension to that, which is – don’t exclusively do this, but I know this is difficult for a lot of people, including myself, but try to ask the difficult questions. But don’t just have a phone call and ask all the difficult questions. Because that can be a huge turnoff to a GP if you’re coming in like an interrogator, just trying to get to the bottom of everything. So ask the questions Theo talked about, the general questions, the experienced questions, and slip in a few things in there like, “Hey, COVID is happening. What if our occupancy drops a lot? Have you done a stress test or something like that to see what might happen to this project?” Ask, again, about co-investment. I know you already mentioned it, “How much are you personally investing in the deal?”
Make them light and space them out. Maybe if you have 10 of those, only ask three or four on one call and give it a break for a while and turn to it. But it is important, it really is and all those questions of key person risk. What happens if you yourself pass away or so-called “get hit by a bus”. That’s a horrible thing to say. But it’s good to know. There’s not a right and wrong answer per se. It’s just that they have an answer. It’s that they’ve thought it through and that they can say, “Oh, yeah, well, here we have keyman insurance in place,” or, “Oh, we have a co-GP and they would be taking over the business model.” It’s just something, right? And it’s not, “Oh, uh… Hm, I don’t think I will get hit by a bus. I don’t see that happening.” That’d be the wrong answer, I guess. But ask the hard questions. That’s all I’ve got to say. Let’s move on.
Theo Hicks: That’s a really good point; asking, what’s the worst-case scenario and then what would happen if that happens? I never thought about that one. The worst-case scenario would be if the entire general partnership died, and then what would happen?
So the next point, this would be a quick one… It’s understanding the asset class and the business plan. So we’re going to go into a lot more detail on this. We talk about analyzing the deal in part three. But the business plan and asset class are important when evaluating the team, because if they’re doing a heavy renovation business plan and they or the team members have never done a heavy renovation business plan before, well, maybe you don’t want to have them learn on your dime, right? And then also, secondarily, the track record of the team, in making sure that all the team members ideally have done this business plan in the past.
You’ll also want to understand, as Travis mentioned earlier, your investment philosophy and investment goals, because the return structures and the types of returns that you’re going to get are going to vary based off of the business plan. So on the one hand, you’ve got something that’s completely turnkey, where it’s mostly cash flow, but not a lot of upside. On the other end is some development deal where it’s all upside and no cash flow. So if you are someone who wants steady cash flow and wants to almost guarantee that your money isn’t going to be lost, then you’re not going to invest in a development deal. And so the syndicators doing developments, then you’re probably not going to want to invest with them and then vice versa. If all you care about is doubling your money in five years or whatever, then investing a turnkey is probably not going to be the best approach.
Travis Watts: Yeah, bottom line, know your criteria. The easiest way to know your criteria is to grab a resource like Theo and Joe’s book, The Best Ever Apartment Syndication Book, as an example, read through what criteria means and what all the criteria may be, things like that, and then decide which ones are most important to you… Or reaching out to someone like me or anybody active in the space to say, “What do you look for in terms of your criteria?” I’ll share with you a few bullet points of just examples of what criteria would mean. It would mean I invest in Texas and Florida 200 to 600 units, B class assets, five-year holds, five caps or higher… I’m just spitballing stuff out there to look at; break-even occupancy at 70% or lower, projected exit cap rates that are higher than our entry cap rate. This is all just criteria; monthly distributions versus quarterly. There’s a lot out there. So you have to decide which ones are most important to you and then be asking them, “Do these match up to what I’m looking for?”
And trust me, there’s enough general partnerships out there, you will find someone that meets your criteria or at least most of it. That’s kind of an illusion, that – when I got started, I didn’t think there was many deals to be had and so I had to compromise a lot. That’s not true. There’s a lot of groups, keep looking, keep searching, keep asking people, “Hey, if this is my criteria, do you know anyone that’s doing deals like that?” I’d be happy to share that, I’m sure a lot of people would. So I’m going to cap it at that and let’s wrap it up.
Theo Hicks: Yep. So the last point here and I’ve already kind of hint on this would be their online presence. So a lot of this information that you can gather on the general partners can be found online if they have a website, for example. Now, something that we talk about a lot when we’re talking with people who want to be apartment syndicators is the importance of having some sort of a thought leadership platform like what Travis and I are doing right now. And besides what I talked about earlier, that if they’re consistently out there, putting out content, talking to other real estate professionals and they have this brand, that may or may not even be generating the money, but at least giving them a strong reputation, than if they are doing shady things on their deals, then more than just that deal is going to be threatened. So that’s one thing, the alignment of interest.
But also with the passive investors perspective, as Travis and I kind of mentioned, you’re going to talk to them before you mess their deal, maybe for like a few hours, right? So you’re going to have to use that time on the phone, maybe back and forth email, maybe some sort of webinar or conference call. That’s really going to be your main interaction with them before investing in their deal. So if they have an online presence, if they have a podcast, a YouTube channel, if they’re doing blog posts, if they have a website, if they’re being on other people’s podcasts, they have conferences, all these things, that’s a bunch of content that you’re going to use to get to know them a little bit better. Obviously, people don’t act the exact same when they’re doing interviews like they do in real life, but if you listen to enough content, you’re going to get an idea of who that person is, that they know through talking about, if they’re trustworthy, if you like them, if you can get along with them, that you might not be able to get if it’s impossible to find them.
I can’t say specifically why, but I don’t think it’s good if you Google someone’s name. Like, if I want to invest with Travis Watts Syndications and I Google Travis Watts and there’s nothing that comes up at all, I can’t find them, that’s not a good sign.
Travis Watts: Yep, 100%. And only thing I’ll add to that is the power of referrals. Most of my deals, most of the partnerships that I’ve been involved with as an LP, started with a word of mouth referral. How? I used to go to a lot of conferences and I would ask people who they’re investing with, what their experience has been? You tend to get the same names over and over and over in a positive way and a few in a negative way. So you can learn that way.
You could get on online forums like BiggerPockets and ask questions there. Usually, that’s best to do over direct message and not a public thing. A lot of people don’t bash people publicly and rightfully so.
The other way is, I’m in a few very large real estate meetup groups, one in particular, I’ve probably done 8 deals out of that group alone, where they have presenters and stuff. And there’s a lot of people in the room who have already invested with these sponsors. So that gives some credibility there and some referrals. So something to think about. That’s the last point I’ll make. And in general, that’s really the approach. I think you hit on some awesome key points. And that’s how I vet out a team or a sponsor.
Theo Hicks: Perfect. Well, Travis, thanks again for giving us your wisdom and your thoughts on this, the passive investors’ perspective when evaluating the actual team. As I mentioned, this was a 20-25 minute podcast, there is a lot more that goes into this. So if you go to our website, https://joefairless.com/ and under the “Blog” section, we have a category for accredited investors. And a lot of the stuff we talked about, we have blog posts on them that go in more detail. Specifically, we have a blog post called How To qualify the GP, How to Qualify their Team.
So next, we’ll do part two, which is going to be the market. So that’ll be next week. So Best Ever listeners, as always, thank you for tuning in, have a best ever day and we’ll talk to you tomorrow.
Travis Watts: Thanks, everyone. Thanks, Theo.
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