In today’s Syndication School episode, Theo Hicks shares three valuable tips that will help you maximize your profits and build trust with potential investors. These tips were originally used specifically for the crowdfunding environment. However, they can be easily adapted for raising capital in other ways.
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Theo Hicks: Hello, Best Ever listeners, and welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I’m your host, Theo Hicks.
Each week we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes we’ve given away some free resources – these are PowerPoint presentation templates, Excel calculator templates, sometimes PDF how-to guides, something to help you along your apartment syndication journey… So make sure you download those free documents. Also take a look at some of our past episodes. All of that is available at SyndicationSchool.com.
I think this might be the first time I’ve talked about crowdfunding on this show. Most people listening probably know what crowdfunding is. It’s one of the many ways to raise capital to fund your deals. And for the crowdfunding strategy, you basically create a platform or you go to a crowdfunding platforms already in existence, you will post your deal on this platform, and then investors from all over the world can look at it and invest in some cases very low minimum investment amounts. So this is different than the typical approach that people will use, especially when they’re first starting out, when they’re raising money from family and friends, and then they expand to referrals from family and friends, and eventually maybe expand out to, say, larger family offices, institutions, or they might go the crowdfunding route.
I wanted to talk about not necessarily what crowdfunding is, or the advantage of doing crowdfunding; maybe I’ll talk about that a different time. But what sparked this was a conversation I had with someone who does crowdfunding. She had three interesting points that she made about what made her successful. And not only do these lessons apply to someone who’s raising money with crowdfunding, but these lessons could also be applied to your syndication business just in general. Because at the end of the day, the idea is how is she able to legally raise money from more people. And we’ve talked about this many times on this show, but the main reason why people invest is through trust… So how can you legally get people to trust you and invest in your deals is really the question… And she had three really interesting responses. Again, none of this is complete rocket science, but what she said really resonated with me, and I wanted to share it with everyone listening today. Again, these are specifically talked about in the context of raising money on a crowdfunding platform, so I’m gonna tweak it just a little bit to apply it to people who aren’t at the point yet where they have the credibility or the track record to post their deal on a crowdfunding website and attract investors.
So the first one is investing your own money. From what I remember, this investor would post her deals on crowdfunding websites, and one of the items listed in the description to attract people to this deal was that her business invested at least 50% of the capital into the deal. So if it’s that million-dollar raise, her company would invest at least 500k. If it was a ten million dollar raise, her company would invest at least five million dollars. You get the idea.
Now, you don’t necessarily have to invest half the money. You might not have half the money to actually invest, especially when you’re first starting out… But this is one of the best ways to create alignment of interests with your passive investors. And when you have alignment of interests, you gain more trust. And when you gain more trust, you’re gonna attract more passive investors.
Basically, what alignment of interests means is that the interests of the investors and the interests of the GPs are the same. Or at least similar, overlapping. Obviously, when you’re investing your own capital into your deals, you are in the same position as your LPs, who are also investing their own capital in the deals. Basically you are an LP. And in this case, this investor was half the LP. So when you go to investors and you tell them that “I’m so confident in this deal, and my team, and my business plan, and the market, that we’re gonna front half the funds”, that’s a lot more attractive that someone who puts no money into the deal.
So at least putting some of your own money into the deal is important, but this individual went above and beyond that, and actually invested half the funds. So a massive amount of alignment of interests, and especially in a market that might be saturated with sponsors and crowdfunders. That’s one really good way to set yourself apart from other syndicators. That might be the differentiating factor that makes one person choose to invest with you over someone else. “They’re investing half their money, or a quarter of the LP capital, I’m gonna go with them. They’re really confident in their deal, and they’re more likely to be successful, because if they fail – well, they lose all their money.”
So that was number one. Number two – and again, this is in the context of crowdfunding, but this individual also created their own crowdfunding platform. So rather than going on an existing platform, they’ve created their own crowdfunding portal. So the theme here is taking things in-house, as opposed to using other people’s systems. The more things that you have in-house, the more economies of scale you’re gonna have, first of all. Well, assuming you have economies of scale, is when you can start doing this. And I’m actually gonna do a show probably the next few weeks about bringing the property management company in-house, and the advantages and the disadvantages of that. But for this individual, I’m pretty sure she immediately created a crowdfunding portal.
Most of the time people start by using all third-party, because they don’t really have the economies of scale or the capital to invest in building their own property management company, or building their own crowdfunding portal… But I’m pretty sure she just went straight to that because of the advantages of it. So she hired a web developer, the web developer set everything up, and immediately just started raising capital for their deals, through crowdfunding, on their own portal.
And really, at the end of the day, the two main advantages of this is 1) the future cost savings. As an upfront investment, just like anything, there’s a return on investment, because they don’t have to worry about paying all the fees of the other crowdfunding platforms, and they can set it up however they want, as opposed to not really having any control… But it also makes you a lot more professional than someone who does not have their own portal, or have everything in-house. So if you have your own in-house asset management team and own in-house property management team, and your own in-house acquisitions team, and you’ve got brokers, and you’ve got lawyers, and they’re all not third-party, working for someone else, but working for you full-time – assuming you have the deal flow and the number of deals – that is a lot more professional-looking and a lot more attractive than someone who’s hiring everything out to someone else, or using someone else’s software.
So from this perspective, for crowdfunding, when she’s talking to individuals or marketing her company, she can say “We have our won custom-made professional crowdfunding platform”, with all the bells and whistles that she has on there, as opposed to saying “Hey, go to this other company’s website to take a look at our deals.
So how can this apply to you? Well, maybe consider getting an investor portal, and maybe consider making your own investor portal, instead of using someone else’s investor portal from a third-party, making your own. Again, “We have your own custom investment portal, and we’ve talked to thousands of investors, and here are some of their main concerns, so here’s how we address those in our own custom portal.”
Again, you don’t necessarily have to make your own investor portal, because I’m not really sure what the ROI on that would be, but the whole concept here is to have things in-house to save money, and to be more professional-looking.
I’m pretty sure for her crowdfunding platform she incorporate a lot of education, she has memberships, you have to be a member to see the deals, so there’s revenue flow from that… But overall, it just takes hiring a web developer and letting them do their thing.
Now, the last thing she said – and again, this definitely applies to all apartment syndications – is hiring a legal team. So having a legal team on retainer at all times, as opposed to one-off, by-the-hour projects.
When they obviously initially launched their company, they needed to work with lawyers a lot, and then they also needed to work with lawyers on an ongoing basis as they did more deals, and SEC regulations changed… And again, this is one of the main things that allowed them to be successful, because they didn’t have to consistently worry about paying all this money to lawyers, or the lawyers not having time to get to them, or them not having the right lawyer at the right time for the legal issues that they needed… Or if a legal issue comes up, there’s a long period of time before the lawyer is able to respond… And all those problems she said were solved by having a legal team on a retainer.
So when you’re initially starting a syndication career, you should be definitely working with securities attorneys and real estate attorneys; you need to do that for every single deal. But eventually, if you get big enough, things might start coming up more frequently than just “Hey, we’ve got a deal and we need a PPM a month from now, or a couple of weeks from now.”
So having a legal team on a retainer could save you a lot of time, a lot of money, as well as give you some peace of mind whenever something were to come up. This comes down to just having your team members either in-house, or making sure that your contract or your relationship with these team members – you’re doing it the right way, basically. So those were the three fascinating facts that she talked about, that allowed her to be successful for crowdfunding. I think those obviously apply to crowdfunding; if you’re a crowdfunder, this will be helpful… But also for really any syndicator, investing your own money and creating that alignment of interests, creating in this case for her her own crowdfunding portal, for you just kind of bringing as many things in-house as possible. That makes sense.
Then also making sure that you have a legal team that specializes in what you’re doing on a retainer, to make sure that you’re setting yourself up for success and you’re not gonna run into any legal issues in the future.
So that concludes this episode. When this goes live, we will have completed the Best Ever Conference 2021, so over at least the next two weeks I’m going to be doing some episodes going over some of the best advice provided during that, and then we’ll get back to our regular Syndication School episodes once I’ve exhausted all of those tidbits of advice.
Thank you for tuning in. Again, make sure you check out SyndicationSchool.com for those free documents, as well as past episodes. Until next week, have a best ever day.
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