April 21, 2021

JF2423: Five Billion-Dollar Multifamily Business Ideas | Syndication School with Theo Hicks


In today’s Syndication School episode, Theo Hicks shares five evolutionary ideas for your business. We are going to take advice from Joe Fairless, as he talks about five lessons about things that you need to do once you have reached a certain size in your business which are, Number one is reducing your liability as a syndicator by hiring an in-person compliance expert. Number two is to set clear expectations and provide motivation for your team members. Step number three is to create a fund for better returns to your investors. Number four is to focus on your investing business by hiring other people to maintain and grow your thought leadership platform. Number five is how to overcome that success paradox which is to find three trusted colleagues to provide you with honest feedback. Let’s listen to this episode for these 5 lessons.

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit 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 Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Today, we are going to talk about five evolutionary ideas for your business. We’re going to continue talking about my favorite presentations from The Best Ever Conference 2021.

Today we’re going to take advice from Joe Fairless. Everyone listening knows Joe, the creator of this podcast, co-founder of Ashcroft Capital, controls over a billion dollars in multifamily. He talks about five lessons that he has implemented in order to not necessarily scale from very small to very big, but the types of things that you need to do once you have reached a certain size in your business. So maybe not necessarily a billion dollars, but after you’ve done a handful of deals, these are the things that you can start implementing in your business to set yourself up for success and to create a foundation so that when you do get bigger, you’re essentially reducing your risk of failure, once you’re really, really big.

The first strategy is to protect yourself from the biggest liability that you’re currently not paying enough attention to. For the vast majority of syndicators, this is going to be compliance. Again, I’m not a securities attorney by any means, but when you’re raising capital for deals, there are certain rules you have to follow; you can’t just do whatever you want, because if you don’t, you might get away with it for a while, but once you’re really big, you might be under the microscope of the SEC. That can cause a lot of trouble for your investing business if you weren’t doing things properly, and if you weren’t too compliant with the rules.

Obviously, most syndicators – probably all syndicators – are working with a third-party securities attorney that they’ve found, who helps them create things like their investment documents, so maybe checking the emails for compliance, reviewing investment summary documents, preparing private placement memorandum, operating agreements and subscription agreements. Maybe the real estate attorney helps you set up your LLCs or whatever entity you’re going to use to hold the property… And as things come up, you’ll ask them some questions.

So the liability is in not having a Securities Attorney or not working with a securities attorney. The liability is also not asking them the questions. The liability are the questions that you aren’t asking. Since you’re not a legal expert, you don’t necessarily know all the questions you’re supposed to be asking, and every single attorney is not going to just give you all the info. You have to know what questions to ask. If you don’t ask the right questions, then you’re opening yourself up to liabilities in the future.

A solution here is to hire an in-house compliance person. So have a legal expert on your team that knows the right questions to ask the Securities Attorney and the Real Estate Attorneys. This will help you cover your blind side. That’s the solution, hire an in-house compliance person to protect yourself from the biggest liability, which is compliance.

Number two is a tip on how to bring the best out of your team. Again, if you’re just starting off, it’s just you and your business partner, and maybe a few other people like a VA or an executive assistant. So everyone’s kind of just wearing all the hats; you and your business partner are doing most of the work. But eventually, as you grow, you’re going to bring on more team members. I’m not talking about having a third-party property management company or working with a broker. I’m talking about having actual people working for you – an asset management person, an investor relations person, underwriting analysts, things like that. As you bring those people on, the roles and responsibilities will get more defined. The asset management person is responsible for all asset management duties; you’ve got an acquisition person responsible for that, and then you as the owner does more of the high-level strategic planning for the company.

Now, when it’s just you and your business partner, then the money that you make is going to be tied directly to the number of deals that you do, and then obviously the size of the deals that you do. You’re charging acquisition fees, your asset management fees… That’s how the company is making money based off of the number of deals. But once you start bringing on employees, then how they get compensated is not necessarily going to be directly tied off of the number of deals. You can’t just give them a fee every time you do a deal, or you’re not going to give them a chunk of the GP on the deals. Instead, you’re going to pay them some sort of salary. So when you’re paying them a salary, then if you do five deals in a year, or 10 deals in a year, or 15 deals a year, how many deals you do, they’re still going to get paid a similar amount of money. So you need to figure out how to motivate them to perform at a high level, so that you’re able to do more and more deals every single year. Because what’s going to motivate you, which is the number of deals that are done, might not necessarily motivate your team member, because they’re not paid any more whether or not you do zero deals or a thousand deals every single year.

The solution here is to create some sort of KPI or key performance indicator for each member of your team. If they’re a content creator and they’re writing blog posts, for example, then they need to get a certain number of views on those blog posts every single month. If they are an underwriter, then they need to underwrite a certain number of deals every single month. So the KPI is a threshold that they need to at least achieve, and maybe if they exceed that KPI or something above that KPI, if they exceed that, then they’ll get a bonus. So “Hey, you need to hit this number in order to keep your job and get paid. But if you go above and beyond, then you’ll get a bonus.” That way they’re motivated and incentivized to exceed that KPI, which in turn will help you as a syndicator do more deals.

Break: [00:07:01][00:09:04]

Theo Hicks: Number three is a tip on how to enjoy a better deal flow, deliver better and more stable returns to your passive investors, and to create more sanity for you and your team. Again, just like the vast majority of the syndicators have compliance as a liability, the vast majority, if not all syndicators, most likely all syndicators who first start out, are going to be raising money for individual deals. So one deal at a time.

So you have your list of passive investors who either invested in a deal in the past, or if you’re just starting out, expressed interest in investing. Then once you find a deal, you present that deal to the list. Then between the time you’ve put the deal under contract and your closing, you focus on securing commitments from those investors. Obviously, you’re working with your attorneys to create the legal documents, and from the entities, and you’re doing due diligence… Then once the deal is purchased, this process starts again. You search for a deal, you find it, you go back to the passive investors and raise money, create the legal documents, do due diligence for that deal.

Now, obviously, this is something that all syndicators do when starting out. It’s a great way to get started, but there’s a lot of inefficiencies and drawbacks when it comes to scaling a business by raising money for one deal at a time. One, it could potentially limit your deal flow, because you’re hyper-focused on a very unique asset class in a single market at a time. Secondly, it is potentially riskier for your passive investors; all things being equal, it’s riskier for your passive investors. But obviously, you could be a really, really good GP and provide a less risky investment to your investors, compared to a really bad GP who does what I’m going to mention in a second, which is Joe’s solution. But again, all other things being equal, this strategy is riskier, because the entire investment amount from the passive investor is used to fund that single opportunity. So if it does really well, they do well; if it doesn’t – well, they don’t do well either. There’s a lot more pressure on you, which is the insanity aspect of it, because you have to race to raise money for all of your deals between contract and close.

The solution is to create a fund, instead of doing single asset purchases. I’ve done a Syndication School episode, I’m pretty sure, on the differences between raising money for individual deals versus raising money for a fund. But if not, there’s definitely a blog post on the website, the pros and cons of raising money with a fund versus individual deals. But why does creating a fund help you accomplish the better deal flow, better and more stable returns, and more sanity? First, for the deal flow – you can be more flexible with the types of assets you target. It generates a better and less risky return, because the funds are now spread across multiple deals and markets. Less capital sits idle, which increases the returns; because once you invest, you start making a return, usually. And then it creates more sanity for you as the syndicator, because the money is committed before a deal is actually identified. So the money is already there, you don’t have to go out there and scramble to raise it. You identify a deal, and you can focus on other things instead of raising money. So that’s number three.

Number four is about getting better results on your thought leadership platform, as well as your commercial real estate business. Something we focus on a lot here at the Best Ever brand is the importance of having a thought leadership platform, podcasts, YouTube channel, meetup groups, conferences, newsletters, things like that… Because it’s one of the best ways to build a reputation as an expert in your industry, which will increase your credibility and ability to attract those passive investors. When you’re first starting out as a syndicator, you are probably responsible for the full thought leadership platform. You read a blog, you write the blogs, you’re editing the blogs, you’re posting the blogs, you’re sharing them on social media. You’re the one that’s responsible for planning and hosting the meetup groups and conferences for your podcast, you’re scheduling the guests, recording the podcast, editing the podcast, posting the podcast, and then sharing them on social media. You’re the owner of the social media accounts – at least one. You probably have Instagram, Twitter, Facebook, LinkedIn… And maybe you outsource a few of the things at the beginning, like editing your podcast, for example, but by and large, you are very, very involved in the thought leadership platform.

The problem is that once the brand begins to grow and you are getting a lot of viewers or readers or whatever, it can become a full-time job. There are people, all they do is have YouTube channels, that’s their full-time jobs. It can take up a lot of your time. Eventually, you’ll get to the point where you have to decide whether you’re going to focus on the thought leadership platform or focus on the actual investing business. Either way, one is going to suffer – either the brand or the business, or both if you’re not balancing it properly.

The solution here is to transition your thought leadership platform to other people once it matures. This is not just outsourcing the editing of your podcast or your blog, and you’re still doing everything else. That means that you have someone that’s not you actually creating the content, doing the interviews, hosting and planning the meetups, and it’s all under your name or your brand. This requires having an editorial director of sorts to manage all of these moving pieces. That way, the brand is still being maintained and grown by your company, but you’re not the one that actually doing that. You could focus more on the commercial real estate business instead.

Break: [00:14:39][00:15:20]

Theo Hicks: The fifth and final evolutionary idea is about overcoming the success paradox. Joe defines the success paradox as the fact that the more successful you become, the less likely you are going to receive feedback or constructive criticism from your team members. When you’re first starting out, you’ve got maybe a mentor or a business partner who can provide you some honest feedback. But as you grow and you bring on more and more team members, they’re most likely not going to want to say anything bad about you to your face. One of the reasons why you got to where you were and why you grew is because you identified your weaknesses yourself, or you had other people point out your weaknesses, and then you focused on ways to improve yourself. But what happens when you get to the point where no one is telling you what you’re bad at? What are you supposed to do? That’s kind of the success paradox, is that the more success you get, the thing that made you successful which was feedback starts to taper off, and eventually disappear entirely.

What is Joe’s solution? He said that you want to find the three people in your circle of influence to provide you with honest feedback. These are obviously not going to be your team members, but friends, spouses, mentors, other real estate entrepreneurs, someone that can tell you what you’re doing wrong and where you can improve.

Also, another strategy is to identify an event that happened at least a month ago, so that the emotional sting isn’t really there, so that you can analyze it objectively, and figure out why that event happened. The event should have been something that didn’t go according to plan. So why didn’t it go according to plan, and then how are you responsible for it taking place? Identify a weakness, something that you’re not very good at, or a mistake that you made, and then figure out what you can do to improve that weakness or make sure that mistake does not happen again.

Then something else that I also really like would be creating a Google Form. Don’t put a box for a name, last name, email address, or anything; just have a box where your team members can provide you with anonymous feedback and then send them that link. It could just be a box of saying, “Hey, send me a few paragraphs about the feedback you have for me.” Or it can be more of a “Rate me on a scale of one to 10 on these different characteristics, or whatever.”

So you can take that Google form any way, but the whole point is that it’s something that your team members can provide you with feedback anonymously, without being afraid of hurting your feelings or you getting mad at them or something.

So that’s it, those are the 5 billion dollar business ideas, since it’s coming from someone who has a billion-dollar company. To summarize, number one is to reduce your liability as a syndicator by hiring an in-house compliance expert. Number two is to set clear expectations and provide motivation for your team members with individual KPIs, as well as bonuses associated with those KPIs.

Idea number three is to create a fund for better returns to your investors, more sanity, and better deal flow. Number four is to focus on your investing business by hiring other people to maintain and grow your thought leadership platform. And then number five is how to overcome that success paradox, which is to find three trusted colleagues to provide you with honest feedback, analyze past events that didn’t go according to plan and how you’re responsible, and then ask for anonymous feedback from your team members.

That concludes this episode. Again, these are five evolutionary ideas for your syndication business. Make sure you check out the other Syndication School episodes we have on syndicationschool.com. A lot of free documents associated with those episodes – make sure you check those out as well. That is that syndicationschool.com. Thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

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