In this episode of Syndication School, Theo shares the best tips and advice he learned from The Best Ever Conference 2020. The Best Ever Conference hosts many great speakers on different real estate investing topics but the ones Theo will be sharing today are focused on Apartment Syndication. Enjoy this episode as he explains his takeaways from day one of the conference and what he felt was very helpful from different speakers.
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“Don’t make offers in your personal name so basically create a separate LLC, that you use to make offers and then have something in the contract that allows you to assign the contract to yourself, and the reason why you want to do this is because if you walk away from the deal the seller can sue you personally for damages.” – Theo Hicks
TRANSCRIPTION
Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners, and welcome back to another episode of the Syndication School series, a free resourced focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.
Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we give away some free stuff – free PDF how-to guides, PowerPoint presentation templates, Excel calculators… Things like that, that will help you on your syndication journey. All of those free documents from past episodes, as well as the past episodes, can be found at SyndicationSchool.com.
This episode is gonna be part one of a two-part series about the Best Ever conference. I just got back from the Best Ever conference two days ago. This will probably be airing about a week after the conference has ended, and this year the conference is focused on apartment syndication, active investing, and then passive investing, with a focus on multifamily. Obviously, there were other talks as well, but for this, being Syndication School, I wanted to go over some of the top apartment syndication takeaways that I got from the conference, that I thought would be helpful for those who either couldn’t see every single panel or talk, or those who were not able to attend.
Now, if you want a full breakdown of all of the talks from the Best Ever conference, we’ve got two blog posts. They’re both called “Top lessons from every BEC 2020 session.” There’s one for day one and one for day two, and it goes over the main takeaways for each of the sessions. I’m only gonna focus on the ones that were related to apartment syndications, and the ones that I thought had lessons that were interesting, things that I hadn’t necessarily thought of before and I wanted to share with you. So this is gonna be part one, where I’m gonna focus on day one. Then depending on how many lessons we get through today, we’ll finish up day one tomorrow and then move into day two. So let’s jump right into it.
The first lesson comes from Glenn Mueller, who is or was (I’m not exactly sure) a professor at the Denver University, and I’m pretty sure he has a Ph.D. in real estate. One of the things that was interesting is he talked about the current economic expansion, and why it’s been one of the longest – I think this is THE longest; I don’t think he said this, but someone else mentioned that this is the longest economic expansion in recent history, starting back from the 1950s… He talked about why, and he called it a “lower for longer” environment.
Basically, what he said is that the three main drivers of real estate demand are gonna be population growth, GDP growth, and employment growth. As you know, we talk about population growth and employment growth a lot when talking about which markets to invest in… So compared to previous periods of expansion, being from the end of a recession to the beginning of a recession – that’s the period of economic expansion – these three factors (the population growth, the GDP growth and the employment growth) have been lower compared to the previous expansions.
The current expansion that we’re in, the growth of those three factors has been lower compared to the growth of the same three factors in all previous economic recessions. He also said that these income drivers are essentially identical to the cost of real estate. The GDP growth, for example, and the employment growth, and the population growth have been very similar to the interest rates. He said because of this we’re in an equilibrium state where one’s not higher than the other, and that’s why this current expansionary period has been more stable, has been the longest, and why he thinks it’s going to continue to be stabilized, be equalized, and not enter a recession. That’s Glenn Mueller, from Denver University, saying that we’re in a “lower for longer” environment. I thought that was interesting.
The next one was Jilliene Helman, who is the CEO of RealtyMogul. Her talk was “Lessons learned from crowdfunding two billion dollars in commercial real estate.” There’s actually two pieces of advice that she gave that I thought were interesting. One of them is funny, the other one is — and I guess it is practical, but it’s a little out there. I thought it was funny, and everyone laughed when she went over this lesson.
Basically, she said that when she first started, she was a little afraid of raising capital from her family and friends. Didn’t think she could get the return that they wanted, was afraid that she’d lose their money… So in order to overcome the fear of taking a risk and potentially facing bad consequences, what she did is she decided to start illegally parking all over Los Angeles… And ultimately, she said she ended up paying $1,000 in parking fines, but by doing this she was able to change her mindset around fear and taking risks.
Basically, what she did is she took a risk that she knew there would be negative consequences for eventually, and then once she went through those negative consequences of paying the fine, she realized that it wasn’t that big of a deal, and that the fear that she had for illegally parking was blown out of proportion compared to the consequences… And she could just figure it out by, in this case, paying it, but for raising money she then realized that it’s something she could do, it was just kind of an irrational fear that she had. I thought that was funny.
A way to get over fear is to put yourself into situations where you know you’re gonna get rejected or you’re going to fail. That way you get used to the emotion/feeling of failing, so that if you were to do it in real estate, it wouldn’t completely take you over and make you not be able to figure out a solution. I thought that was kind of funny.
Then her other lesson that was a lot more relevant to apartment syndications is that the proforma is always wrong. In this case, I don’t think she’s just talking about the proforma that you’ll get in an offering memorandum from a broker who’s listing an apartment deal, but the actual proforma that you create. The income and expense projections that you create for your deal, based on your assumptions.
Since it’s always going to be wrong, she gave advice on four things you can do in order to minimize the wrongness. You’re gonna be wrong, so if you are wrong, you need other things in place to offset that wrongness.
The first thing was to have a minimum 10% contingency budget for your capital expenditures, and I think she’s also applying this to the expenses as well, so maybe having a reserve fund of 10%. So that was number one.
Number two was to use a cap rate at exit that is at least 1% greater than the cap rate at purchase. We’ve talked about that before on Syndication School.
This one was interesting… She suggested to reduce the number of units that you plan to renovate each month, and that you plan to re-lease each month. She actually uses 4-6 units per month, and sometimes up to 8 units per month, as opposed to 10, 15, 20 units per month. That’s huge, because obviously, if you are cutting the number of units you’re renovating in half, that extends your renovation timeline by two times, and you are going to achieve your stabilized rent twice as later… Which means that, for example, if you cut the renovation timeline from 12 month to 24 months, being stabilized at year one, and then having it 30% greater at year two is a lot different than being halfway to your stabilized rents at year one, and then fully to your stabilized rents at year two. Huge difference in cashflow, huge difference in the value of the property.
So again, these are all conservative things, and if you are able to exceed these and do better, that’s just more money in your pocket… But in order to make sure that you’re not being aggressive, you want to – according to Jilliene, follow these steps.
And then the last one is to increase the vacancy and the bad debt during the renovations period. We’ve talked about increasing vacancy before, but she also increases the bad debt, because whenever you’re doing the renovations at your property, there’s gonna be chaos, there’s gonna be noise, there’s gonna be dust, there’s gonna be people everywhere… And tenants are more likely to want to move out because of that skip-out on their lease, which results in bad debt… But also, for the vacancy part of it – and we’ve talked about this before, but just as a refresher, if you’re raising rents by a couple hundred bucks, the demographic that’s currently there is not gonna be the demographic that pays two hundred bucks more. So you’re actually gonna want to turn over the residents, and then the ones that you aren’t turning over, expect some of them to skip and leave because of the increases in rent, because they can’t afford it. So that was Jilliene Helman.
The next one was a panel with a bunch of securities attorneys called “The unknown unknowns of SEC law”, and there were two lessons from here that I wanted to highlight. Number one was that if you have an investor who is not happy, buy them out. What they were saying is that the SEC isn’t out there searching for apartment syndicators who raise a million dollars incorrectly or out of compliance. That’s not what they do. They’re only gonna come after you — I guess not only, because they possibly could come after you without someone coming to them, but most of the time they go after syndicators who have done something wrong to their investors. The investor reaches out to the SEC, and then the SEC pursues the syndicator. So it’s more of a reactive, as opposed to proactive on the part of the SEC.
The investors can potentially reach out to the SEC without you doing anything that you think is actually wrong. So if you do have a disruption like this, they said that the best approach is to just buy out that investor, especially if they’re a small investor. If they’re 1% of the total capital raise and they’re out there reaching over to the SEC because they’re confused of what preferred return meant, they thought that 8% preferred return meant 8% each month, not each year, if they’re going to SEC thinking that you’ve lied, even though they’re wrong, that’s still gonna be a major headache for you. So in order to avoid these types of disruptions or potential lawsuits, you can just buy the investor out. It saves you both time and money. I thought that was interesting.
The other lesson was about the differences between a JV and a syndication. What they said is that for a JV, the people who are involved all need to be active in the business. But what you might not have known is that you can have someone who invests, say, 90% of the capital, and their active involvement is deciding the compensation structure for the sponsor. So they pick what the acquisition fee is, they pick what the asset management fee is, and according to these lawyers, that can be deemed a JV, even if they’re not asset-managing the deal. They’re the ones that upfront picked and decided what the fees were, so that’s an active role, therefore it could be a JV. I thought that was pretty interesting. I didn’t necessarily know that someone could just pick the fees and be considered a JV. Maybe I misunderstood what they said, so don’t just take my word for it when you’re structuring any type of syndication or JV. Make sure you’re talking with an attorney… But that’s what they said, and that’s what I’m telling you today.
The next lesson is from Joe. This one was funny – basically, he was talking about how to accomplish more. This was similar to the Jilliene Helman illegally parking lesson, but a little grosser… Basically, he said “How to accomplish more is to have a thorn.” A thorn is a negative experience that you can draw upon to propel yourself forward.
For example for Joe, his thorn was he had a bad deal, where he ended up losing money on his first deal, among other things that went wrong with that deal… And he never wants to experience that again, so he uses that negative experience to propel him to always make money on his deals, because he does not wanna go through all the chaos that happened when he ended up losing money on the deal.
So he said that everyone needs to have an experience like this, that is something that they are kind of avoiding and using to propel themselves towards something else. If you don’t have the thorn, another strategy is to make a thorn up. Basically, say “If I don’t accomplish X, Y, Z, then I am going to have to do something really bad, that I don’t wanna do”, and that’s gonna be your thorn. An example that he gave was holding dog poop in your hand and licking it.
So let’s say you have a goal of syndicating one deal in 2020. Your thorn, the thing that you don’t want to have happen again could be that if you don’t syndicate a deal in 2020, then the next time, the 1st January 2021 you have to pick up the first dog poop that you see, smell it, rub it in your hand and then rub it on your face, or something… I probably wouldn’t lick it, because I think you’d get sick from that, but… Just something really gross like that, that will mentally make you not wanna put the dog poop on your face and get the deal done.
I thought that was really funny, really unique, and I’m sure that it works. If there’s something else that you really don’t wanna do, like “I don’t wanna go skydiving”, or something that you’re afraid of, something that’s gross, something that scares you, then you can use that as a punishment, in a sense, for if you don’t accomplish whatever goal you want to accomplish. So that’s Joe Fairless, lesson number one – if you wanna accomplish more, lick a dog poop.
The next one is going to be Alex Racey, who is a Special Ops guy. I think he was in the Army; I’m not sure he was Army Rangers, or Green Berets, or something, but he was in the special forces in the Army… And he was talking about peak performance. Basically, what he was saying is that there’s the human performance, physical performance, and then mental executive performance. And your human performance is based off of eating, sleeping and moving/exercising, and if you don’t have peak human performance, you can’t have peak executive performance. So those two are tied together.
Basically, if you’re not in good shape, then you are limiting your ability to run a business, to accomplish goals, to scale a business, things like that. He talked about three performance categories that I thought were interesting. He says that most people fall into one of these three categories when it comes to human performance.
The first one was kicking the can. I probably fall into this category right now a little bit… So someone who was a star athlete in high school, or college, or maybe when they first graduated college they got in a really good shape, or at some point early on in their lives they were in really, really good, peak athletic shape, and they obsessed with it, they focused a lot of their time and energy on the physical side, and then once they got a job, they shifted 100% of that energy to their job, and they stopped working out, stopped eating well, stopped sleeping well… Maybe made a lot of money in their job, maybe were really successful in their job, but their physical and their mental/emotional health was lacking. This is the guy who works all day and then maybe drinks all night, or something.
Then – this is called kick the can, this is the person who says “Eventually I’ll get back into working out. Eventually, I’ll focus on my sleeping or eating, but for now I’m just gonna focus on my job.” That’s kicking the can.
The second category is the head in the sand. This is basically someone who’s overwhelmed with the total number of different fitness routines, and sleeping advice, and diets out there, hundreds of thousands of these things, and they don’t know how to pick between the two, so they say “Screw it! I’m just gonna put my head in the sand and just ignore all of it and just forget about it… Because how do I know which one’s right, how do I know which one to pick? Just forget about it.”
And then the third one is the all good. He had pictures, cartoons to represent each of these, and the cartoon for the all good is the one where the dog is in the house, sipping the coffee, and the house is on fire, and he’s saying “Everything’s all good.” Basically, this is someone who is working out, is eating well, is sleeping well, but they maybe are overdoing it, maybe they are not doing it totally 100% properly, and so they have issues. Maybe they’ve got joint pain, or back pain, or acid reflux, or insomnia, or some issue… So again, on the outside everything looks like it’s fine, but on the inside is where they’re having the problems, and this is the category Alex said he falls into.
So you don’t wanna be in either one of these three categories. You wanna be in peak performance. So he said that in order in peak performance, optimize your human performance for each of those three categories, you want to look up and research the following three factors. For eating, you wanna look up metabolic flexibility; for sleeping, you wanna look up sleep hygiene, and for moving you wanna look up minimum effective dosing. So if you follow those three things, you’ll have peak human performance, which will also as a result positively impact your executive performance. So that’s a lesson from peak performance, Special Ops veteran Alex Racey.
Next we’ve got a lesson from Clint Coons, who is (I believe) an attorney, and it was about asset protection and planning for real estate investments. Pretty quick lesson, but basically what he was saying is that don’t make offers in your personal name. Create a separate LLC that you use to make offers, and then have something in the contract that allows you to assign that contract to yourself. The reason why you wanna do that is because if you end up walking away from the deal, the seller can sue you personally for damages.
So let’s say you put a property under contract and then 30 days later you cancel the contract, but during that 30 days if the value of the property drops by a million dollars, they could technically come sue you for that million dollars. But if you put the property in an LLC name that doesn’t own any property, then they can’t sue you personally, they can only sue the LLC, which doesn’t own anything.
The last section I wanted to talk about was the intellectual debate that was basically between two people on one side and two people on the other side, and the topic was “Will you have greater success over the next years if you sell more than you buy in 2020?”
We had Neal Bawa and John Sebree, who said “yes, you’ll have greater success over the next years if you sell”, and then you had Jilliene Helman and Jamie Smith saying “No, you should buy more.”
I’m just gonna go over the arguments on both sides. For the ones that said you should buy more, they set the stage by saying that you’re only buying things that are long-term value-add deals, in quality markets, with quality underwriting and management. One of their best arguments was saying that when you sell a property, you lose the future wealth potential of that property, because you no longer own it, you’re no longer benefitting from forced natural appreciation. But also, you’re going to be taxed on the money that you actually make. So not only are you losing out on the future wealth, but you’re also losing a portion of the income that you’re getting because of the capital gains taxes at sale. I thought that was pretty interesting. That was Jamie Smith.
Then Jilliene had three reasons why you should be buying more. One was that interest rates are extremely low, there’s a huge demand for multifamily but not enough supply, which we’ll talk about a little bit more in tomorrow’s lessons, and you will lose 2% each year due to inflation if you are liquid, so “Where else can I put my money? If I put my money in my bank account, it’s just gonna lose money, whereas if I keep it invested, even if the rents go down, rents are low, my returns get lower – I’m still making a return, as opposed to actually losing money.”
And then lastly, they said that if you are buying, besides long-term value-add deals in quality markets, with quality underwriting and quality management, you should be playing defense and investing in asset classes such as mobile homes and affordable housing, which they say continue to perform during recessions.
On the other hand, we had Neal Bawa and John Sebree, who said that “No, you should sell more in 2020”, because 1) people are no longer underwriting deals based on fundamentals of a property, but on aggressive proformas. They’re also more leveraged and securing loans with longer interest-only periods, and sponsors are trying to maximize fees. They talked about government is continuing to spend our tax dollars to create inflation, which they said is quantitative easing, and that this is unsustainable.
They talked about how rent growth is slowing and expenses are increasing, which means NOI growth is slowing. They said that an economic slowdown is inevitable, and you want to have cash to take advantage of opportunities. That people are buying overpriced properties from veteran investors who are waiting for a recession… So basically saying everyone buying right now is a bunch of dummies, and everyone that’s selling are all the geniuses who know what’s happening and taking advantage of these dummies.
They talked about the trillion-dollar debt deficit, they talked about people from get-rich-fast courses are flooding the market, and that the Fed continues to cut interest rates, even though the economy is supposed to be strong, so what do they know that we don’t know?
What’s funny is they had this heated debated back and forth, and then the ones who thought that you should buy more were the ones that ended up winning the debate, and then at the end they were like “By the way, we just kind of drew straws to see what side of the debate we would be on”, and that it’s not actually what they even believe… [laughs] They were just doing it because that’s what they picked, and they needed to come up with reasons why on their side… So just because they said all these things doesn’t necessarily mean they believe their side of the equation, which I thought was kind of a funny way to end the debate, and a funny way to end the episode.
So to close this one out, these are the top apartment syndication lessons from day one of the Best Ever conference from 2020, in February.
In the meantime, until we come back tomorrow, check out some of the other syndication school series about the how-to’s of apartment syndication, check out all of our free documents. All those are at SyndicationSchool.com, and make sure you pick up your ticket for the 2021 conference at BEC2021.com. It’s the cheapest it’s ever gonna be, so if you want to attend it next year and see these talks first-hand, you’ll want to go to BEC2021.com.
Thank you for listening, and I will talk to you tomorrow.