February 11, 2022

JF2719: Top 10 Things to Ask Before Investing ft. Ryan Gibson

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We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the next Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Ryan Gibson—CEO and co-founder of Spartan Investment Group—shares the top 10 questions you should ask an operator before investing in a deal.

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Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show, where we are sharing the top sessions from the Best Ever Conference 2021. This year, the Best Ever Conference is back in person, February 24th through 26th. Come join us in Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year, that is still relevant today and will be beneficial for you.

Ryan Gibson: My name is Ryan Gibson, CEO, and co-founder of Spartan Investment Group. I’ve made some bad decisions passively investing and what I’m about to share with you today is hopefully going to prevent you from doing that. I’ve made some bets on some operators that didn’t do a very good job, and the signs were there based on the information I’m about to share with you. If I had just known to ask it, then I probably would have been able to research and figure out that these operators were not people that I wanted to invest with. I’ve also invested with some outstanding operators. So all of this I’ve kind of sort of put together and really made a concerted effort to provide this type of information and provide this type of resourcing at Spartan Investment Group for our investors.

Without further ado, the first thing you’re probably looking for with an operator is to find the operators. I get asked the question all the time, “You guys do self-storage, who else do you know in multifamily, or mobile home parks, or different types of space?”

So before you get together your questions and your routine for interviewing an operator, you want to find them. These are kind of six ways that I find operators. You can find them online, there are two really great resources. 506investorgroup.com lists a lot of different syndicators and operators, there are probably, I don’t know, maybe 100 or 200 on there. A great group put together. You can read reviews on operators and see how other passive investors have rated them.

The other thing I like is an interesting website called formds.com. That provides you with a list of every single syndication that’s ever taken place legitimately and listed on the MCC website. If you search a company on formds.com, you’ll see active raises, what the raise was for, how they’re raising capital, and things like that. If you want to find some 506B offerings, if you’re sophisticated or not accredited, that’s a great resource for that.

The next thing I do is networking. Obviously, you’re doing that now, so congratulations; I won’t elaborate too much on that. Funds, when I say funds, there’s Fund of Funds, Hunter Thompson, RealtyMogul, CrowdStreet, things like that, where there’s a platform or there’s a representative that’s raising a fund and finding great operators to place capital with. Syndication groups, obviously – there are great meetups that you can be part of or privy to. And then projects. Sometimes you’ll be in your neighborhood or your street, you’ll see a project and you’ll figure out that that’s syndicated equity. A lot of times you’ll figure out that a lot of things in Main Street investing are syndicated equity and you can kind of figure out who that operator is. And a lot of that is – once you get the operator that you really like, ask them who they know in other spaces. Great operators will give me great referrals, we do all the time.

First, setting the stage. If you want to invest passively with an operator, how do you structure that interview? Maybe you get 15 minutes, 25 minutes, or an hour, or that sit-down coffee or meeting and you want to ask questions to the operator or the person who’s syndicating the equity to do a deal. This is how I like to structure my interview. Ask open-ended questions. So get the operator talking, and kind of see what the things that they talk about the most are. Write down everything that you ask, everything that the operator says, and keep a log of that, keep a log by operator, maybe in a Word document, “This operator, this is the things that we talked about, this a the things we discussed.”

The other part of that, too, is to see if they’re interested in what you have to say, and really kind of determining what kind of investor you are and what you’re looking for. So it’s kind of a two-way interview there. You’re trying to see if you’re a good fit for one another. Ask for their portfolio projects; this is every deal they have now, every deal that they’ve done and closed, the historical performance, referrals, and maybe a property location that you can go by if you have time.

Okay, are they an operator or a syndicator? The first question you’re going to ask them is are they syndicating equity for somebody else’s deal, disconnected? If they’re an operator, determine what role their company is playing in the operation. Just go into this with eyes wide open – are you going to a fund of funds, are you going to an operator? If they are an operator, how much of a role do they play in the operation? Are they property management? Are they construction management? Are they simply syndicating the equity, buying the deal and outsourcing it? There’s nothing wrong with either lane that you go down, but just get clear on who you’re really investing with. How are they compensated and how are they aligned with the deal?

If they’re an operator and they’re doing all aspects of the business, figure out how their alignment is through their fees, through their splits, through their structuring… How are they aligned with the project? And lastly, are they aligned with the success of the project? Are there compensation and incentives based on the success of the project and your ultimate success? Just make sure that you’re really clear in the PPM, how the waterfall is structured, and how they are being compensated, and how you’re being compensated if the deal does well or doesn’t do so well.

My favorite question of all time is – tell me about a deal gone bad. Somebody might say, “Well, all my deals have gone perfect.” That probably means they don’t have a lot of experience. Because as we know, in real estate eventually something goes bad. It may be the fault of the operator, it may not be the fault, it may be a blend, maybe kind of the operator’s fault, and maybe some outside circumstances… If nothing’s gone wrong and they’ve been in business for 30 years, it’s probably a good chance they’re not being truthful with you. And then get them talking about the deal going bad and listen to how they responded to the bad issue.

This happened in 2020, this is a picture of my business partner, Scott Lewis. He’s standing in front of an RV park that we own that was ripped apart by an F1 tornado in West Texas. You can see here that the deal went bad; we had a tornado rip through our property. Fortunately, there were no injuries… Well, a limited number of injuries, and everybody was okay. Within a couple of months, we had the park completely restored, and actually, the park is distributing a return to our investors within the same year. So you know, talk about that story. What happened? How did you respond to it? What kind of operational team did you have on the ground within a certain period of time? You want to really try to learn what type of capability the group has to respond in bad situations.

Another thing about this is, is the company well-capitalized? Never mind the deal; the deal can be well-capitalized, I understand that. But if the operators doing 10, 20, 30 deals, and one deal goes bad, does the main corporation or main company have the liquidity to sort of handle these one-off deals needing an infusion of cash to get things kind of going again before insurance catches up? So kind of gets to know the company more than just the deal.

Mission, vision values, alignment. This is huge. If they’re just one way talking to you on that interview and not learning about who you are, you’re never really going to kind of figure out if they’re really interested in you and kind of helping your goals and your mission. Read the company’s mission/vision/values and see if it’s kind of aligned with your way of thinking, your values, and your culture. Ask them for an example. “Hey, give me an example of how you’ve completed your mission recently. Maybe tie it to an investor situation.”

Who’s on the team? Here’s the great picture of the one-man band. Are they a one-man band? Are they doing everything themselves? Do they have a deep bench? Do they directly hire the team? Are they vertically integrated? Do they have a property management construction company? Whatever it might be, kind of understand their business model; understand when they take fees on the front end of a project, are they going out and finding great employees to run your projects? Or are all those fees sort of just going to them, and maybe they might hire the person to complete your deal or not. So kind of find out who their team is, who’s on their team, and how many FTEs or full-time employees that that business has.

Break: [00:11:49][00:13:58]

Ryan Gibson: What is their business model? You may have an operator who is a business coach, they’re selling an education platform, they’re teaching classes on the weekends, they have all these webinars and education platforms… But are they focused on their deal, or do they have people focused on their deal? Are they working another full-time job? Are they a guru? We all know the gurus out there that are doing great guru stuff, but they’re not doing great deals stuff. Or maybe they have a great team, and they can be a guru and have projects go really well. So just kind of figure out what their core business model is and where they focus their attention on stuff.

What’s their communication plan? This is probably the number one most important thing to me when I’m deciding to place capital with another operator, and the number one focus inside Spartan Investment Group in our Investor Relations Department. Do they have best in class, or a minimum standard of communication? That is our communication plan up on the screen. We do a monthly email project reporting, we do a quarterly financial reporting of the quarter, and we do an investor conference call every quarter where we get all of our investors on a call and we go through just kind of high level of how every deal on our portfolio is going. Not just their deal, but we go through all the deals. We can usually get through an optional conference call in 30 to 45 minutes and really kind of have an opportunity for everybody to ask questions to get answered.

The thing is, a lot of people say, “Oh, yeah, we are so good at communicating. We communicate with our investors.” Say “Okay, great. Can I see your last three communications with your investors?” You might gain a lot of information from that. If they said they had great communication, I asked them, “Hey, can I see the last three communications that went out on specific deals?” That will give you a better understanding of their communication style, the reporting standards, how they’re communicating to you when you’re inside of one of their deals. And is their plan in writing? What I mean by that is we put our communications policy in our operating agreements or the deal. We’re actually putting down in writing that we’re not just saying this, we are putting it in an operating agreement, and we’re committed to the communication plan.

Performance and portfolio. I really like this one, because there are a lot of different ways to present data and project performance to people. What I like to see is a historical performance, proforma versus actual. You might see something that was a low return and you might say, “Oh, these aren’t great returns,” but they could be a core or core-plus asset. So you kind of got to understand, when they’re projecting returns in their portfolio or they’re showing historical performance, do you have the context of the business plan? Did they meet their business plan and exceed it, or did they just perform below it? There’s a type operator that’s going to tell you the performance is here and they’re consistently coming in down here. So you want to start to see what performance they had in the past, what performance they have now, and kind of reconcile if that’s better or worse than they projected.

My favorite is, what is project-level IRR or is it an investor-level IRR? Are they giving you the total project IRR, which could look great, or are they giving you what went to the actual investor? And consistent metrics. There are a lot of different ways to spin IRR by return in capital, or return on capital; you can really manipulate that number quite a bit.

What I like to look at are two things as part of my overall analysis – let’s look at equity multiple and how long it took to get that equity multiple. Because equity multiple is giving you a true, time-tested return on how much money you earned on your initial investment over a certain period of time. IRR might be something that might not be as representative; it’s a tool to use that is consistent across multiple asset class types, but it might not be the best metric. So find consistent metrics, and then when you’re looking at different operators or evaluating opportunities, you can kind of figure out if that’s consistent across multiple deals and multiple operators.

References and background checks. My favorite way to get a reference is not to ask somebody for a reference, it’s to find my own reference for that person. [unintelligible [00:18:04].18] when you get job candidates or you get people that are applying for a position, who in the room has actually given someone a bad reference? It’s kind of funny, when you ask for references and you get references, I always check them, but it’s something that I’m not going to give a bad reference; at least I hope somebody wouldn’t. If they did, that’s bad, because they probably don’t have anybody that they can call that are going to say good things, and that’s even worse. So try to find other people that have invested with that operator and ask them how it went. How did they communicate, and all the questions that I prepared you with earlier in this presentation, ask them. When was the last time there was a distribution? How did the communication go? Kind of get the feeling, too. The business plan was set out and they’re not quite hitting the business plan – that’s okay, so long as they’re doing something to fix it or get the project back on track, and how they responded to that.

Other ways – look on BBB, visit Better Business Bureau, Google reviews, the 506 Investor Group, etc, and see what’s out there on the internet about not only the company name, but also the individual sponsors that are on the deal. Google the actual principals in the deal and kind of see what information you can dig up on that. That’s very helpful.

Insurance. So I always ask this in the syndication process, if something goes bad, it may not be you that have the issue, it may be another investor that has an issue, and if the syndicator operator isn’t covered by insurance, they could be financially strapped and fighting a lawsuit if they don’t have the proper insurances in front of them to protect them. You may not be the issue, it might be another investor that has an issue and that is making an issue, frankly, out of nothing, but you’re still getting dragged into a lawsuit. So ask them, does their SEC attorney provide E&O insurance to cover lawsuits? Title insurance; what exclusions are on their title policy? If they’re doing raw land development, you may want to look at their title policy and see that they’ve done as much as they can to kind of mitigate what’s covered in their title insurance policy. For property level insurance, minimally A-rated carrier giving them coverage on the property. Just ask for any other insurance that they might have.

What we do is, is we put our civil engineers and architects — we require them to list Spartan Investment Group on their E&O insurance. That way, if they design a big building for us that we go out and build and they do it incorrectly, we have an insurance to go after for our architect and civil engineers. So there are a lot of things that an operator can do, but just get them talking about and see how cavalier they are about insurance or how dialed in they are about how they’re insuring a property in general.

And [unintelligible [00:20:33].02] access is a great one. As a limited partner, generally, it’s up to the operator when you sell. But just kind of get their feelings on how they go about deciding to exit a project. A lot of these are five-year or seven-year holds. You’ve got to ask yourself, if the business plan is completed early and I’ve got the right offer on the table, are we going to sell? What is your thought process for doing that? Deciding to exit is great early in the project, but is the operator going to put numbers in front of you and show you the justification why they’re exiting? They don’t have to justify and get your permission necessarily, but you want to make sure that they’re keeping you on board and you kind of understand with eyes wide open why we were going through an exit. Ask them about deals that they’ve exited. How many deals have they exited and how did that go? How did it compare to the original projected timeline, and what was their decision to decide to exit early, later, or on time?

Joe Fairless: Well, I hope you gained some useful insights and actionable advice from this previous Best Ever Conference session. Remember, if you’re looking to scale your investing in 2022, we look forward to seeing you in Denver. Get 15% off right now with code BEC15 at besteverconference.com. That is code BEC15 for 15% off at besteverconference.com.

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