This is the first edition of the very common questions that Joe gets from potential investors. If you want to know the right questions to ask a sponsor, listen to this episode. If you want to know how to answer these questions from potential investors, listen to this episode. We’ll be back same time next week to discuss more question in part 2! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
We’re doing Follow Along Friday. We’ve got Theo Hicks with us, like we usually do. First off, how are you doing, Theo?
Theo Hicks: Doing great, Joe. How are you doing today?
Joe Fairless: I’m doing well, and nice to do another Follow Along Friday. I’m looking forward to it. We’ve got top questions that are asked by passive investors prior to investing in a deal. We’re gonna talk about that. This is part one, because we’re gonna do multiple episodes on this topics… And then we’ve got another couple of other things too, so let’s go ahead and get rockin’.
Theo Hicks: In this episode we’re gonna go over five of the most common questions asked by passive investors. These are the questions that they would ask prior to actually having a deal. So these are essentially them qualifying you and your team before verbally committing to invest in your deals.
I’m gonna ask the questions, and Joe is gonna provide an answer, and then we’re gonna have a little conversation around the purpose of the question, how you want to think about answering the question based off of your background… Because most of these questions, if they are qualifying you, it’s gonna be based off of your background. If you’re someone like Joe, you’re gonna answer the question a lot differently than if you’re someone like me.
Let’s just jump right into these questions. The first one I’ve got is, as you know, there are a number of apartment syndicators in the market, so why should I, the passive investor, invest with your company over the other companies?
Joe Fairless: I got that question recently on a new investor call; it was actually last week, I believe… And it was mid-way through our conversation; we had yet to speak to a couple other groups, and I said that if they’re value-add apartment investors, then the business model is similar, most likely. There’s only so much new information or unique information or tactics that one group does over another group, and it’s probably not that great of a difference, is my guess… Although I can only speak for myself, because I’m only looking at the world through my eyes. So I haven’t been in other people’s shoes, literally.
That being said, the way that I’ve been told from our investors that we’re differentiated – because I do have investors who invest or have invested with other groups – is through the transparency and consistency and thoroughness of our communication. So the one thing that I talk about is I proactively got a voicemail from an investor – I believe I mentioned this on a show a couple months ago…
The voicemail was from an investor who invested in multiple of our deals, and he said that he really is grateful for the way we communicate with him, because it’s consistent and not only that, but it’s thorough, and then we’re very responsive with change of payment accounts, if he has to change a payment account after we own the property, he maybe switched bank accounts or whatever… And then also sending K-1’s out on time. That tends to be a pain point for a lot of apartment syndication groups, is getting the K-1’s out in a timely manner, so that their investors can file their taxes prior to April 15th.
So it’s not necessarily in the execution of the business plan as much, although certainly we have a phenomenal on-the-ground team, and I put our operations up against anyone else’s… But it’s more in the making the investor’s life a lot easier, and making this process easier as it relates to other groups that they would potentially invest in.
So one, I take the high road; I don’t talk smack about anyone. I just simply talk about how the feedback that we’ve received from our investors and why they continue to invest with us.
One other example is I have an investor who prior to investing with us was involved in a Ponzi scheme with a group that does apartment syndication, out of California. And this investor ended up leading the charge, and with the other limited partner investors, in getting their money back from this venture that was a Ponzi scheme, according to him.
He said he didn’t get the legal costs back, but he got their initial investment dollars back. So clearly, that investor, prior to investing with us, after just having been involved in a Ponzi scheme, is going to have a lot of questions to qualify us and our operations, and I’m proud to say that now he proactively offered to be a reference for our company, because he likes the way we are communicating with him on a monthly basis, he likes the transparency, we provide financials on a quarterly basis, and we’re incredibly lightning-quick responsive to our investors.
So that’s the way we differentiate ourselves from other groups.
Theo Hicks: That last part, when you talked about how you had an investor who their last investment was in a Ponzi scheme – it sounds like for someone like that, they’re going to communicate the transparency and that consistency in responses slightly differently than he would to someone else… So it sounds like the main differentiator is this transparency and consistency, and then depending on the investor, you’ll communicate that in different ways.
A really good example would be an engineer is gonna want transparency in regards to the details, and maybe a sales professional is gonna want transparency in a different way; they just wanna get updated the high-level updates on a frequent basis… Of course, you can mention both of those to them, but one’s gonna be more important than the other, depending on who your audience is. I’m sure that’s pretty consistent throughout most of these responses… There’s gonna be a general answer, but of course, if someone’s situation is way different than all of your other investors, like they invested in a Ponzi scheme, then your conversation is gonna be a lot different.
Joe Fairless: Yeah, absolutely. Ultimately, it’s showing them your track record; ideally, you have a document that shows the projected returns versus the actual returns across your entire portfolio. Having that, and then saying “Okay, so here’s our track record, and this is how we execute”, and that’s kind of the tangible aspect of the business.
Now, the intangibles would be actually making your investment a breeze from an operations standpoint, and also make sure that you’re aware of everything that’s going on as we execute the business plan. That’s where I would bring in the frequency of communication and other anecdotal feedback from those two investors.
Theo Hicks: Okay. Question number two is “Why should I invest in apartment syndications?” implying that “Why should I invest in apartment syndications over investing in my 401k, stocks, or in an IRA, or maybe actively investing on my own? Why in particular should I invest in apartment syndications?”
Joe Fairless: Yeah, two separate questions… One is if they’re considering investing in apartment syndications versus their own deals, and another question is why consider investing in apartments versus stocks or something else?
Theo Hicks: The second question, the one you’ve just asked.
Joe Fairless: Alright. Well, I’m not telling you what I would say; right now I’m just giving you some context. If they’ve gotten to the point where they filled out a form for my website and I’ve sent them company information, and then on the call they ask me “Why should I invest in apartments?”, then they’re not ready to invest, so I just know, okay, long-term relationship as with everyone else, but they’re not gonna be a near-term investor.
So the answer to “Why should I invest in apartments?” — and I don’t get this a lot, by the way… This question probably shouldn’t have been in the batch of questions… We’re a nation of renters, and renting will continue to grow until it’s easier to get loans as homeowners, or there’s some technology disruption or some other policy disruption that makes it a lot easier to buy a house or harder to rent. Maybe there’s some change in policy, or there’s some technology.
But other than that, we’re a nation of renters, supply’s down, the population continues to increase, and investing in apartments, assuming they’re value-add deals – you get cashflow, and then you get the upside as you increase the value of the property… Plus we pass along the tax benefits to investors; what that means in reality is that the depreciation will likely be greater than any distribution, which will likely show on your K-1 that you’ll receive at the end of the year, that you’ll have a loss on paper even though in reality you’ll be getting from us monthly distributions, assuming that we’re on track for the project.
Theo Hicks: Okay. Question number three – kind of on that same note, but this person has actually decided to invest in apartments, and they just wanna know why they should invest in this particular business model. The question is “Why did you decide to pursue this value-add business model?”
Joe Fairless: Because you can get cashflow on a consistent basis, and then get upside whenever you realize the value from the renovations that you’ve done.
Theo Hicks: If you had to guess, what percentage of apartment syndicators do you think are pursuing this value-add business model
Joe Fairless: I can tell you, when I got started, I did not know about the value-add business model, and I was looking at apartments that were cash-flowing and that we’re just gonna hold on to it long-term. It wasn’t something that I had been taught, and it wasn’t something that I had come across yet… So it’s important to know the options, and basically the three options are distressed, value-add, light value-add and turnkey (we’ll call it that). Certainly, development would be major value-add.
The turnkey is what I was initially looking at, but thankfully I did not purchase anything until I came across the light value add, which is what we do… We buy stabilized properties, renovate the interiors, which increases the value… So my guess for the amount of people or percent of apartment syndicators who do heavy value-add and light value-add would be probably 80% is my guess. Then you’ve got probably 15% doing majorly distressed deals — or maybe 30% doing majorly distressed deals, 65% doing what we do (medium to light value-add), and 5% doing turnkey, because they have a big pocket investor who’s just looking to beat inflation and they don’t need to get those returns that the majority of us need to get in order for our deals to make sense.
Theo Hicks: Another major benefit for value-add investing – and you’ve kind of talked about this in the podcast where you talked about why you don’t care about cap rates…
Joe Fairless: As much. I do care about cap rates, but it’s not the primary thing.
Theo Hicks: You mentioned how someone in New York who’s a value-add investor can make a 2-cap profitable by having the correct strategy… So another benefit of value-add is that it can be applied really anywhere in the country. And of course, you’re gonna have a specific market you’re investing in, but kind of just pulling back a little bit and from our perspective, that’s why I like it – for me, I’ve gotta move to Tampa… And of course, Tampa is a really good market, but if it wasn’t, then would I throw my hands up in the air and be like “Oh, I can’t do this now”? It’s like, no, we’ll just value-add. If someone can do it in New York City, at 2-caps, then I can do it where I’m living, too.
Joe Fairless: Absolutely. Yeah, you’ve just gotta know how to add the value in your unique market and with that type of property.
Theo Hicks: Perfect. Question number four is “What’s the worst-case scenario from a passive investor’s point of view?”
Joe Fairless: Worst-case is you can lose all your money; it’s a risk to invest with us, as with any other group or any other investment. You are at risk of your principal. But then on top of that – that’s not even the worst case. The worst-worst case is that you lose your initial investment dollars, then we do a capital call, you participate in the capital call, and then we lose that too. So not only is it your initial investment, but then it’s the additional dollars on top of whatever you put in during the capital call.
My company has never done a capital call before, and we don’t plan on it. That would be a very bad situation, both for the deal and then also just for our reputation… But that is the worst-case scenario, and all the risks are outlined in the private placement memorandum that you’ll receive.
Theo Hicks: And of course, the person is asking this question not because they wanna know what’s going to happen when the worst-case scenario happens, they wanna know what are the risks involved that could potentially lead to that worst-case scenario… So the last question would be “I want something that is low-risk, so what are the major risk factors with investing in apartment syndications?”
Joe Fairless: Three. The deal, the market, and the team. Those are the three categories of risk factors, and all of them will be outlined in the PPM (private placement memorandum). But from a conversation – because clearly, I won’t have an exhaustive list in my head of all the risk factors… But from a conversation standpoint, something that could go wrong in the deal is we buy a deal based on the school district being very desirable, and then all of a sudden it gets rezoned, and now our property is no longer in that school district. That’s one example.
The market – we buy in a market that is not as diversified as we need it to be, and then that one employer bounces, goes somewhere else… Well, that’s gonna be a problem.
Third is the team. We have a property management company, and they don’t do their job. Well, everyone can be spreadsheet millionaires, but in reality, it takes a team on the ground to execute what is in the spreadsheet. And if you don’t have a team on the ground to execute what’s in the spreadsheet, then things aren’t gonna work out very well. So that would be an example of a risk for the team.
Theo Hicks: I think what’s really great about talking about those three factors – the deal, the market and the team – is that that could be talked about by a syndicator at a really inexperienced level; someone who’s done upwards of 20 deals, like you, can talk about that, but then someone who’s only done maybe one deal or is trying to get their first deal done, can also have that same conversation with their investors…
One of the questions that I was gonna ask as a follow-up – not as a passive investor, but as someone who’s an aspiring syndicator – is for a lot of these questions the answers involved talking about your company’s track record, referencing case studies, referencing projections versus actuals, referencing past investors’ testimonials with the type of experience they’ve had with your company… So if you’re someone who doesn’t have all that stuff, of course, you’re gonna want to answer these questions a lot differently… I’m assuming – and you can correct me if I’m wrong, Joe – you’re gonna want to make sure you surround yourself with the right team, the right proper management company, the right real estate broker, maybe a consultant or an owner, and then make sure you’re bringing them up during these conversations.
One of the episodes that we did is “How to show alignment of interests with your passive investors”, and in that episode we are essentially addressing a listener’s question about how to get in started in apartment syndication with no experience… And we go over (in extreme detail) five different ways to show alignment of interests with your passive investors with increasing levels of alignment of interests, all of those involved – leveraging the experience and credibility of various team members, and having them participate in the deal in a certain way.
So if you’re listening to this and you’re asking that question that I’ve just asked, which is “Okay, how do I answer these questions if I don’t have any experience?”, the answer is in alignment of interests, and we had a conversation about that in the podcast “How to show alignment of interests with passive investors?”
So that concludes part one of the answers to the most common questions for passive investors. Next week we’re gonna go over five more questions that we’re going to answer in a similar fashion as we did today.
Moving on, we had a listener – it wasn’t a question, it was more of a comment. It was from Richard. Richard is a psychologist who just started off in real estate investing – he recently purchased a duplex – and he mentioned that he is a frequent listener of the podcast; he’s been listening to the daily episodes for the past few months… And he’s listening to them while he drives. During the episodes, sometimes people will bring up a website or a book title or someone’s name, and he likes to go back once he’s out of his car and follow up to figure out what that website is.
He gave me an example in an e-mail – he tried to figure out what someone said for a website, and he couldn’t understand what the person said… So he asked us if we could do transcriptions. At first, he offered to do it himself, but then he realized it’d be like $17,000 to do it himself, so being a very resourceful person, he said that he had an idea of creating a GoFundMe where people that are listeners could donate money to creating a transcription for the episodes… But we actually already have transcriptions, so we wanted to kind of mention that as a feature of the website in today’s episode.
Joe Fairless: Yeah, you go to BestEverShow.com and we do transcriptions… The thing is they lag approximately 7 to 10 days from when the episode is aired, so if you go back ten days, then you’ll find transcriptions for all of the past episodes… And then if you’ve got an episode you wanna see the transcription, then just wait ten days, set your calendar reminder or something, and then go to BestEverShow.com and you’ll be able to see the transcriptions. So we’ve already got that incorporated, so thank you for offering to do the resourceful things that you offered to do – GoFundMe, and pay, and everything else. We’ve got you covered, buddy, so looking forward to you checking that out, and I hope that’s a lot of value.
Theo Hicks: Yeah… Because there are so many different amazing resources on the website that sometimes people forget about them… We’re gonna start bringing up — Richard, for example, couldn’t find our transcriptions, so on each episode moving forward we’re going to bring up some feature on the website that you might not have known about, and how it will benefit you and your real estate business.
Moving on to any updates or observations – from my perspective, I’ve got my three fourplexes; I haven’t talked about them in a while, because we’ve had a couple of vacancies and I didn’t wanna bring anything up until they were filled… [laughs] And they’re filled now, so…
Joe Fairless: How long were they vacant?
Theo Hicks: The longest one was vacant for three weeks. We kept reducing the price until we found someone… And I mentioned this on a previous episode, but I’ve found that we’re demanding a higher rent if the people just stay and they accept the rent increase, than we do if they move out.
Joe Fairless: Getting a higher rent if you have the current tenant stay and increase, versus if someone leaves and you get a new person in?
Theo Hicks: Yeah. For example, we raised the one-bedroom rents from around $5800-$600 to $685, I believe.
Joe Fairless: Wow.
Theo Hicks: Because they were so [unintelligible [00:21:09].18] I think two people of the six decided to move out, and then four of them decided to stay and accept that rental increase… And the other two people that moved out, we got $650 and $625 for the new leases.
Probably something else that came up that I didn’t expect was that two people just decided to switch units… Someone that was in a one-bed went to a two-bed, and someone that was in the two-bed went to the one-bed… And they accepted the increases in rent.
So all the vacancies are filled now. We’ve got two units that we’re still waiting to hear back on whether or not they’re gonna accept the increase or if they’re going to decide to move out… But all the other ten – we got new leases on them for a year at either the new price, or at least an increased price compared to what they were before… So it’s good.
Joe Fairless: Congrats on that.
Theo Hicks: And surprisingly, this place was not in a really good condition, but the turns were not as expensive as I thought they were actually going to be. They weren’t like a couple hundred bucks, but I was expecting a lot more to have to be done.
Joe Fairless: How much were they?
Theo Hicks: About $1,000 on average.
Joe Fairless: Where did the bulk of that cost go?
Theo Hicks: Painting.
Joe Fairless: How much did that cost?
Theo Hicks: I can’t remember… It was between $300 and $500, I think, depending on the size of the unit… And then some of the units needed new appliances, because the appliances were really old.
We put up new curtain rods in all the units, we replaced any of the damaged (or let’s say gross) outlet covers, we put in new ceiling fans, which was a really inexpensive replacement, but it makes the units look a lot better…
And the units that have hardwood floors, one unit in particular that had hardwood floors, we ended up refinishing those floors, just because they were in such bad shape… But still, I don’t think any of the turns were over 2k. Basically, the rental increases will pay back — just from the increase in rent… I’m not talking about the cashflow, but just increasing rent, within a year or so. It’s exciting.
Joe Fairless: Yeah, that’s awesome.
Theo Hicks: It’s good to see [unintelligible [00:22:57].20] increase and it’s good to see that bank account finally go up.
Joe Fairless: Any update on the acquisition front?
Theo Hicks: So we kind of paused buying personal properties (like these fourplexes) in Cincinnati for now, just because I’m actually focusing on apartment syndications right now. I’ve actually got a meeting today with someone in Tampa who’s done a couple of those that we might potentially work with… So that’s where we’re at from the acquisitions standpoint. We’re pausing for the fourplexes, but we’re pursuing the apartment syndication, and the goal is to do one within a year… So like a 12 to 18-month period of building our team, finding capital, and then looking for deals and underwriting a bunch of deals. Ideally, we’ll have one under contract in 12 months.
Joe Fairless: Awesome. And Ellie, your dog, is either in favor or opposed to it, but Ellie does have an opinion on what you’re saying either way, I know that…
Theo Hicks: Or she just hears the garbage man.
Joe Fairless: Or she just hears the garbage man, that too.
Theo Hicks: Do you have any updates?
Joe Fairless: Yeah, real quick… We closed on a deal yesterday; it was part two of a two-part portfolio, so we’re officially closed out of that project, and now the fun begins on the deal we closed on. We already had started on the business plan of the other deal, part one of two, because we closed on that last month… So we will be moving forward on the execution of that.
Our property management company is in the parking lot, waiting for us to say we closed. That’s the type of response rate and take-over time that we have.
We also are closing on a deal at the end of July, so we’ll be having a busy month this month… Just focused on the execution of all of our properties, the business plan, and closing on the deal that we have later this month.
Theo Hicks: Well, congratulations on that; that’s exciting. That’s a lot of acquisitions in this two, three-month period… This is the third or the fourth one.
Joe Fairless: It’s just how it shook out. One got delayed a month; the one that we closed on yesterday was delayed a little bit due to the sellers financing and a pre-payment penalty… So that’s why it was late. But yeah, it’s been a pretty active month.
Theo Hicks: You don’t have to answer this question if you don’t want to, but the seller is gonna be affected by pre-payment penalty? Do they tend to build that into their price, or do they just have to kind of bite the bullet and take that penalty in order to sell the property?
Joe Fairless: Well, in this case they didn’t have to bite the bullet to sell it, because we agreed to delay the closing. It was an off-market deal, and that was part of the negotiation. He said, “Yeah, everything looks good, but in order for it to make sense for me, we’ve gotta delay the closing until this point in time, because that way my pre-payment penalty will be lowered.”
Theo Hicks: Okay, cool. Alright, so we before we wrap this show up, I wanted to mention one thing that I’m not sure if I mentioned last week or not, about the passive investor site that we launched — actually, right before we went live last week we launched it… That’s at BestEverPassiveInvestor.com. It’s essentially the only comprehensive resource for passive investors who are interested in investing in apartment syndications.
If you read through it and you have a question that you can’t find on there, or a comment about the page, you can e-mail that to info@joefairless.com, and we’ll add that question, as well as the answer, to the website. So whether it’s a question to ask about the team, or if it’s a definition that’s missing, or whatever it happens to be, e-mail that to info@joefairless.com, and we will add that to the site.
Joe Fairless: Yeah, the questions we went over today, they’re included on the website, except for, I think, “Why invest in apartments?” Besides that, the other questions are included on the website… So it’d be helpful for not only passive investors to go check out BestEverPassiveInvestor.com, but also active apartment owners who are looking to bring in investors in private capital, you’ll be educated on all the different questions that you should be prepared to answer… And it’s not only the questions, but it’s also our thoughts on the response that would be ideal. So it’s a good learning exercise for active and passive investors.
BestEverPassiveInvestor.com I can tell you received a bunch of e-mails after we sent it out to our investors, and they said “Wow, what a great resource! Detailed, I love the format…” It’s very helpful for passive investors, so I’m really glad that we’ve launched this thing.
Theo Hicks: Yeah, me too. Alright, so lastly, guys and girls who are listening…
Joe Fairless: Nice work. You made a note. You made a written-down note…
Theo Hicks: I did make a note. I kind of cheated a little bit.
Joe Fairless: [laughs]
Theo Hicks: Guys and girls listening to the podcast right now, make sure you guys subscribe on iTunes and leave a review for your opportunity to be the review of the week, which we’ll read live on the podcast.
This week the review came from AAAinvests, who said “Joe really digs into the most useful details.” The review says:
“I’m constantly impressed with the questions Joe uses in his interviews. Joe is one of the best ever podcast hosts on the planet. No matter what your business, no matter what the business of the guests on the show, I always get something out of it because of the ingenious style of Joe’s.
I highly recommend the podcast to anyone involved in real estate investing. Keep them coming.”
Joe Fairless: I will keep them coming, and thank you for that. I’m grateful… The podcast helps me with my business, let’s put the cards on the table. Clearly, I get benefit from doing this podcast, but the best businesses are the ones that exponentially benefit the consumers much more than the creators of that, and I’m grateful that it’s benefitting a whole lot of other people, yourself included, and thank you for taking time to write the review… And for everyone else, like I’ve mentioned before, if you want to continue to have high-quality guests on the show, then please leave a review; it helps whenever the guest we reach out to can go see the reviews that are written about the show, and that helps us attract high-quality guests.
With that being said, thank you everyone for spending some time with us. I really enjoyed our conversation. Theo, I enjoyed our conversation today. We will talk to you tomorrow.