June 24, 2021

JF2487: 3 Metrics You Need From Your Sponsors | Actively Passive Investing Show


Ever wonder what happens next after investing in a real estate syndication? Theo Hicks & Travis Watts talk in detail about what to expect from your sponsors monthly and quarterly after investing, the key items to look out for, and what tools to use to truly have the financial freedom of a passive investor. 

Best Ever Quote: “Do what you love, and outsource the rest.” —Travis Watts


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Theo Hicks: Hello Best Ever listeners and welcome back to another episode of the Actively Passive Investing Show. As always, I’m Theo Hicks, joined with Travis Watts. Travis, how’s it going?

Travis Watts: Hey, Theo. Doing great.

Theo Hicks: Today we’re going to answer the question, “I invested in a real estate syndication. What is next?” Again, you’ve done your homework, you’ve invested your capital into a deal, you’ve signed all the legal documents, you’ve gotten that “congratulations, we’ve closed” email. What happens next? What do you do? What can you expect? That’s going to be the topic of today. Travis is going to go over some more context about why we’re talking about this today.

Travis Watts: Sure, Theo and everybody listening. This was an actual phone call that I received from a real investor, who had –to your point– done all their homework, researched, listened to podcasts, read books, finally did a deal, and then set up a call with me to say, “Now what?” It kind of caught me off guard. But I thought, you know, this is actually something that we really should address, because we’re always talking about all the first steps, and your due diligence, how to vet deals and markets, and all this kind of stuff. But then what do you do afterward? That’s really the theme of today

I want to share a few ideas, next steps, I’ll share with you guys couple stories and that’s what this one is all about. The first thing I’d say is that being a limited partner in apartment syndication or in a real estate syndication is a very front-loaded business. You’re going to be doing a lot of homework, like I just said, a lot of research, a lot of meetup groups, conferences, and all this kind of stuff, to get you to the point of being able to competently make an investment. That’s the theme of our show – the Actively Passive Show highlights the active roles and the active components of being a passive investor, for the most part. We obviously go on tangents and we cover other topics, but that’s kind of the overarching theme. Theo, I’ll let you chime in to a few things to consider first, then I’ll share a couple of stories, and we’ll just take it from there.

Theo Hicks: Taking a step back, high level, what is going to happen? What is going to get sent to you? How often the frequency is really going to vary from GP to GP. I’m just going to kind of give just a typical what to expect, and then some extra things that you might get if you’re investing with a really good –in my opinion– sponsor GP. At the very least, they’re going to send you some sort of update on what’s going on at the property. Ideally, the updates are sent out every single month by a certain day, or on a certain day every single month, so you know when to expect it. Sometimes you might get quarterly updates as well, sometimes you might get updates twice a year, sometimes you get one update a year, maybe you’ll get no updates… But I think monthly and quarterly are probably the most common. The information included in these updates, the format is also going to vary, but it should be including some of the important operational metrics at the property.

What I like to see is occupancy curves, as well as trending occupancy, or pre-lease occupancy. You might see collections; that’s a big thing, especially more recently, in 2020 and 2021 so far, with the COVID pandemic, letting people know you might have a 90% occupancy, but if you’re only collecting rent on 70% of those units, that’s painting a different story than just providing occupancy numbers. So collection rates – if it’s some sort of value-add a play, like a value-add apartment syndication deal, then I want to see the number of units that have been renovated so far, and I want to know what the rents they’re getting on those units, and how that (this is important) compares to what they projected. If they projected $100 rental premiums, I want to know are they getting $100? Are they getting $50? Are they getting $150? Obviously, if they’re below what they are expecting, I want some explanations as to why.

They might include other cap-ex updates, especially early on in deals. Here’s an update on the clubhouse, the fitness center… Again, I do apartments, so I’m just going to talk about it in apartments. If you’re investing in something else, just insert the details for self-storage units or something.

They also might talk about any sort of events they have going on, any sort of marketing they’re implementing. So really, if any of those metrics aren’t looking good, there should be an explanation as to why they’re not good, and then what they’re doing to make it good again. So at the very least, it should just have some metrics in there, some info on the property; pictures are also nice too, so you can see and then qualitative and quantitative at the property. Then you’re also going to get your distributions. Monthly or quarterly are the most common. Those will be sent to you most likely through direct deposit. So you’ll set that up beforehand, and then you’ll just check your bank account to make sure the money’s there, and that it’s what it’s supposed to be.  If it’s not, there should be some sort of announcement explaining why it’s less than what it’s supposed to be.

Break: [00:05:22][00:07:24]

Theo Hicks: Sponsors will typically provide you with some sort of financials on the property. So from an apartment perspective, this could be a rent roll, this could be a profit and loss statement, or some sort of balance sheet or something… Just so, again, you can know what’s going on at the property. It’s all about transparency, and you can see what they’re spending money on, how they’re making money, and what that NOI is. Usually, they won’t go below the NOI; [unintelligible [00:07:46].17] “Hey, here’s the net operating income.”

Those are the three main things – the updates, the distributions, and the financials. You’ll get your tax information once a year. Whenever they sell, you get notifications; if something happened… At the beginning of COVID, a lot of sponsors were sending out more communications, on a more frequent basis, to let people know what was going on. But on a high level, that’s what happens.

One thing we did want to mention is that we have a free a passive investor tracker. You can input your distribution numbers, and then input your financial goals, and then it’ll help you track and see how close you are to achieving that goal. If you want to do that, something else you can do after you buy a deal is email me at theo@joefairless.com and I’ll shoot you over that Excel document.

Some of the other things that sponsors might do – not all of them will do this, but they might provide extra educational content to their passive investors. It might be exclusive to passive investors, or it might something they just do in general on their website. So you might be subscribed to the deal list, but also another email list that you get a newsletter with their blog posts, or podcasts, or YouTube videos, or reports of the week. They might send you a yearly state of the company reports… So that might be something they do as well.

Travis Watts: Exactly. I was just going to share, as you were talking – great points, by the way. I get asked all the time about these passive trackers… And quite frankly, what I do is probably not what most people are looking for. I just take an Excel sheet and I just do a very basic tracker, with really no formula other than auto calculate for the total. But the one that Theo is talking about is very detailed. We both helped design this one. Really, really great if you’re looking for more of the IRR approach and getting to your goals approach. It’s kind of an all-inclusive tracker, with multiple tabs and stuff. Anyway, check that out. I wanted to share a quick story about passive investing, just kind of as a side note to this, and Theo, I’ll let you get back to the more practical next steps.

Some people are confused when I say “I’m a full-time passive investor.” Because it would easy to say “Wait a second. What about these blogs, webinars, these podcasts, and working with Ashcroft capital and Joe Fairless? Isn’t that active?” Yes, that’s active. The thing to recognize though is I pursue things actively that I thoroughly enjoy and want to pursue, and then I basically outsource passively the things that I don’t enjoy. In other words, all of my investments that I have are passive investments. But not everything I do in this world is passive, obviously. I wouldn’t be good at playing bingo and card games in a retirement home in my 30s, so I still stay active, to a point.

I think, to me, that’s what financial freedom really is. The ability to pursue the things you love and to focus less on the things you don’t. I don’t know, that’s my opinion on that. The other day, I was scrolling through – I forget what platform it was; somewhere on social media, and someone posted this little saying… It said “Exchanging 50 years of work for 10 years of freedom isn’t worth it”, or something to this extent. I got to thinking about that, I guess they’re assuming you start working in your 20s after college or something.

I got to thinking about that, and I thought there’s really two types of people. There are the types of people that love what they do – they love their work, they go to school for something, they’re passionate, they’re a doctor, and they love helping people, whatever. They found their purpose, and I think it’s amazing. I love those conversations with those types of people. Then you have the people who I was at one time, and who I was was somebody trading my life away for a paycheck, working 100 hours a week. It’s something I hated and didn’t enjoy, didn’t want to grow, didn’t want to advance, and it didn’t suit me well, it wasn’t my skill set, on and on. There was really a low point in my life with very little joy, no romantic relationship, no local friends, no vacations, and it just wasn’t worth it. It was a very sad existence to be a workaholic. So I encourage everybody listening to do what you love and outsource the rest, simply put.

The question of what’s next, to kind of get back to our topic… I think what’s next really is when you start passive investing, you start getting these income streams coming in. You may not be financially free on day one, but start building the life that you want to have on your terms. I think for me that’s what’s next; and you can at least start, you can start outsourcing. Maybe you hate cleaning the house; you have $300 a month in passive income – you could use $100 a month towards hiring a cleaner to come in, stuff like that, so that you can get to the point one day where you have a full service maid or whatever it is you want that would give you the life on your terms. Anyway, I just wanted to throw that in there. I’ll let you continue. I digress…

Theo Hicks: I think that’s a really good point. A passive investor, for example, might be, as you said, a doctor working 60-hour weeks and they love it. Or it might be someone who’s working 60-hour weeks with something they don’t like to do. So there are no absolutes here. It’s not that every single person who is working 60-hour weeks is miserable. It doesn’t also mean that every single person who isn’t working at all as a passive investor isn’t bored out of their mind. It really just depends, but that is a great point to bring up.

Break: [00:13:06][00:13:43]

Theo Hicks: Other things that you can do, as Travis said, to start living the life the way you want to [unintelligible [00:13:47].16] take some planning. That’s where the passive investor tracker will come into play. In the tracker, we basically have it set up so it’s different types of goals. So “Hey, here’s how much money I need just to pay my bills. Then hey, here’s how much money I need to live the life I want to live. And here’s how much money I need that’s just FU money, in a sense.” You can set each of those, and then as you input your distributions, it’ll tell you, “Hey, you’re this far away from covering your expenses. You’re this far away from living that life that you want to live.” Obviously, it means knowing what kind of life you want to live, and then having a plan; that tracker will help you with that and then help you realize how many deals you need to invest in, how much capital you need to have invested in deals in order to reach that goal.

Another point is that passive investing is going to be a longer-term play, so you’re not going to make a 100% return in a year like you would for a fix and flip. It’s passive, and in return for less effort and time, your returns are going to be a little bit lower. But if you continue to invest and reinvest that compound interest over decades, it will allow you to achieve that goal.  Don’t stress out about it. There’s no reason to hurry. Think in terms of decades, I really like that concept. At the same time, while you’re investing, there is no problem with investing with multiple sponsors in multiple different types of deals. Sure, you can go all-in with one sponsor, that’s one strategy, or you can invest with different sponsors. Continue building relationships with the sponsor you’re investing with, but also, seek out other sponsors, vet other sponsors, learn more about other investment types, and then consider investing in those as well.

That kind of comes into the idea of just continuously educating yourself. It can be as much or as little as you want; you want to have a good understanding of the investment class that you’re actually investing in. Obviously, when you’re ready to move on to something new, it’s really front-loaded, so it’s going to take time to learn the new self-storage business, find that new sponsor, vet that sponsor, vet the deals, get that confidence to invest in something new… Because obviously, continuing education is also super important. Then, as Travis said, do what you enjoy doing. If you don’t enjoy investing in a certain asset class, either don’t do it, or don’t invest as much time into doing it. Just kind of do it and then focus on multifamily, or self-storage that you do like. Probably more of that, focus on what you do like, and don’t just invest in something that you hate just because it’s got good returns.

Travis Watts: Yeah, all great points, Theo. I think in summary, we’re all different. The bottom line is you do you, that’s what it comes down to. I’m bringing back the self-quote section of our podcast. We’ve left off for many episodes, so here’s a quote by Sir Travis Watts, and it’s “Do what you love, and outsource the rest.” That’s my quote. Write that down, everybody. [laughter]

Theo Hicks: I don’t think there’s a better way to end than with a quote from Sir Travis Watts. I’m honored. Alright, Best Ever listeners, that is what to expect after you’ve invested in a deal, and some tips on extra things that you can do in order to achieve that financial passive investing time freedom goals. Make sure you email me, theo@joefairless.com if you want to get your hands on that passive investor tracker. If you have any questions that you want us to answer on this show or our 60-second question segment we do on YouTube, same email, theo@joefairless.com. Travis, as always, thanks for joining us today. Thank you so much, again, for the quote. Best Ever listeners, thank you for tuning in. Have a Best Ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

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