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TRANSCRIPTION
Travis Watts: Hey everybody. Welcome back to another episode of The Actively Passive Investing Show. I am your host, Travis Watts. This week, what we’re talking about is what makes a syndication operator or a general partner reputable. We’ve definitely hit on this topic before in kind of more vague ways. But today, we’re going to go into a lot more in detail. I want to outline four categories for you, whether you’re an active investor, or a syndicator, or operator yourself, or whether you’re a passive investor, like me, just looking for groups to partner with. We’re going to go into what makes a group reputable.
Now, you may have heard this saying before, especially if you are an active investor or syndicator. If the deal is good enough, the money will come. I call false. I don’t think that’s true at all. Why wouldn’t that be true? Here’s why. If an operator has a low probability of actually being able to execute on the business plan, or if they’re just not a very trustworthy individual or group, then what good are the projected returns? The money is not going to show up just because you put some fake numbers in front of a bunch of people. There has to be a little more substance to it. Let’s go ahead and dive right in. I want to talk about the first category, which is exposure and transparencies. Let’s talk a little bit about that.
Investors, at the end of the day, want to work with people that they know, like, and trust. We’ve talked about that here before on the show. But more importantly, if I’m an LP, a limited partner investor, I’m a passive investor, and I’m looking for groups. The first thing I’m probably going to do is get on a Google search or somewhere online and start trying to find these syndication groups. I’m probably going to be on YouTube, social media outlets, blogs, and forums, maybe Bigger Pockets or something like that. These are going to be my starting places. If you’re active, think about that. You want to have some kind of online presence because most people are online when they’re finding operators to partner with. I always think it’s a good idea to have a thought leadership platform, maybe having your own podcast, your own forum, your own community, so to speak. I see everybody’s got Facebook groups or LinkedIn groups. I think it’s all generally a good idea because it puts you in a position of authority if you’re an active individual, and you’re helping bring a lot of conversation, transparency, and hopefully adding value to others through your outlets and through your platform.
Video is always my preference, always has been my preference, I think. We live in 2021 going on 2022 and I think video speaks volumes for transparency. If you’re active, I would really consider video. It’s something I’m personally working on as part of a very big mission for working with Joe Fairless, over at Ashcroft Capital, and doing a lot more video production for 2022. I want to get in the units and the apartments that we’re buying, I want to talk about renovations from beginning to end, and I really want to show a lot more of the transparency on visual. It’s one thing to send someone a before and after photo, it’s quite another to go walking through an actual property. Let’s meet the crew, here’s the manager who’s on-site, and here’s some of the construction crew in here, let’s meet the maintenance staff. It just adds a whole ‘nother dynamic and layer. If you can do video, do it professionally, do it right. I would recommend everybody do video. That’s a little bit about exposure and transparency.
The bottom line is you want to have an online presence, you want to be out there, you don’t want it to be; you hear about a group, you go research them, they don’t have a website, they’re not anywhere to be found, they’ve never written any blogs or books, they’re not on YouTube, they’re not on social media. A lot of people just simply won’t move forward if that’s the case, speaking from an LP perspective. So totally cool if you want to use that approach, just saying it’s going to be even harder to raise capital. And it’s going to be harder for investors to do their due diligence because, after all, if we all invest with people who we know, like, and trust, how are we supposed to know someone, like someone, or trust someone if we can’t even find anything out about them? It’s pretty much impossible. You’re really working against the grain, so to speak, if you’re not going to leverage the online platforms and online presence.
Break: [00:05:22] – [00:06:55]
Travis Watts: Let’s talk a little bit about track record and experience. Because at the end of the day, this is probably the most important aspect that you really have, as far as your due diligence goes. What is your track record? How many times have you done these types of deals? What does your success or your losses look like? What I always tell the newer groups that are in the space, who I’ve certainly partnered on deals with, doing their first, second, or third deals is, “Look, if you don’t have the experience yourself, maybe you want to partner with someone who does.” Have a co-general partner, have a co-sponsor on your deal, or have a coach or mentor that’s part of your network or program that you can kind of lean on and leverage and say, “Look, we’re working with ABC over here who’s got 30 years’ experience doing this.” A lot of mentorship programs that exist today will allow you to leverage their brand when you’re putting deals under contract. You can say “I’m part of this ecosystem, I’m part of this network, I’m part of this group.” So that can go a long way too. Just make sure that you relay that to your investors, that you are part of a network that has a very positive reputation in the space if you yourself don’t have your own track record.
My general rule of thumb these days is I like to partner with groups that are beyond their first, second, and ideally, third deals so that they’ve actually gone through the process a few times, worked out their kinks, and now they’re kind of rocking and rolling. I will tell you from firsthand experience that if you’re saying I only want to work with groups that have 20 to 30-year track record and I’ve done hundreds of deals, good luck getting on their list. They probably won’t let you in because they have too many investors waiting on a deal and not enough deals to present. It can be very tricky to partner with some of the very experienced firms. On the flip side of that too, a lot of these really experienced firms will end up going public or doing what’s called a REIT roll-up. Anyway, they’ll be publicly traded or doing some other kind of institutional capital strategy at this point so you may not be able to partner with them anyway. The sweet spot, in my opinion, is to ride the wave, where the group’s just gaining their momentum and stability, and they’ve still got some room to run. Hopefully, you can invest in many deals with them, those deals turnover, you do more deals, and you’ve got a nice 10 to 15-year track record that you can kind of go through with them, alongside them.
Another thing, just kind of skipping back real quick, that I left out is the track record and experience of the property management group that you’re going to be using on the property, or if you’re a passive investor, that the operator is going to be using, leverage their track record and expertise because you guys, after all, day to day, week to week, month to month, who’s actually managing the day to day operations of the property. You’ve got some oversight from the asset management group, from the general partnership, but really, it’s the property management group. You really want to put a lot of emphasis on their track record and their ability to execute a business plan. One of the best ways to do your due diligence, in my experience, is to visit a property that this particular property management company has already been managing. Walk in like you’re a prospective renter and just see. Is the team there responsive? Does someone greet you when you walk through the door? Are they nice? Are they polite? Are they willing to show you the units? How do the units look? How is the place kept up? Is it dirty? Is it trashy? What’s their marketing like? This is again, visual. We’re all mostly visual learners at the end of the day. This can be a great way to understand how a team is going to operate on the property you are going to put your hard money into.
The last topic that I’m going to put under this category of track record and experiences is the general partnership putting their own money into the deal. That’s something I look for as part of my criteria. “How much” is kind of subjective. If it’s a very experienced group, they’re probably going to put a little more capital in. If it’s a group doing their first deal, they may not have a ton of capital to put in. But the bottom line is, I want to know that if things go south, the general partnership has skin in the game at the same level that I do. So they are, in other words, buying into the limited partnership shares with the same terms that I have so that if they can’t meet the preferred return, they’re not getting paid either, stuff like that. It’s just simply an alignment of interest.
The next category I want to talk about is the power of word-of-mouth referrals, word of mouth references. I can tell you from working years and years in investor relations, in numerous capacities, this is the number one best source for finding new investors and for finding leads. Here’s an audio or a visual example for you. Imagine you’re at home, you’re watching TV, and here pops up an infomercial. This infomercial says “Buy our miracle pill and you’ll lose 10 pounds over the next two weeks. Order now.” How likely are you to pick up your phone or get online and go order that product? If, of course, you were wanting to lose 10 pounds and that was your goal. Versus, you have a long-term friend or a family member that says “You know what? This is really crazy. But a true story, I got this miracle diet pill. I actually lost 10 pounds over the next two weeks. It’s incredible. I didn’t expect it to work but it actually did. You should check it out.” How likely are you to check it out now, now that it came from a trusted source? Again, somebody that you know, like, and trust. It’s powerful, you guys. It’s really, really powerful when someone can say “I’ve been investing with this group for many years. This has been my experience. It has been very positive. They’re very transparent. They’re great about communication. They’ve always under promised and over-delivered.” It’s a very, very big thing. Something to be considered.
Break: [00:12:56] – [00:15:50]
Travis Watts: Another thing is, on the same topic, as you’re going through your due diligence, if you’ve ever read online reviews, how likely do you think it is someone’s going to write a review online that the general public can see if they got screwed out of a product or a situation, or they got hosed in some way, versus someone who bought a product or a service and just sort of received what they expected more or less? Well, no, there’s far more negativity online than there is positivity. The likelihood that someone writes something negative by getting hosed is like 10X. All of that to suggest that if there’s a bad actor in the space, if there’s a bad sponsor out there, you’re probably going to be able to dig up some dirt on that relatively easy. Just through a Google search, or getting on some forums, or just talking around at conferences, or events or meetups. You’ll probably discover that maybe there’s a handful of groups you may not want to partner with. Do your due diligence.
What I want to close out with here is kind of our fourth category is, your goals and your interest. My number one rule of thumb is to ensure that the operator or the GP is aligned with my own goals, my own philosophy, and my own interests. In other words, if my end goal is to have multiple passive income streams through cash flowing real estate and I want to live on that income, I’m probably looking for operators in the space that are purchasing stabilized apartment communities that are cash flowing right out of the gate, that have preferred returns that may be due monthly distributions, things like that. I try to reverse engineer in order to meet my goals. I’ll give you a simple math example. If my goal is that I want $100,000 per year in passive income within the next five years, that’s my timeframe, then there’s a couple of ways I could look at this. If I had 1.5 million to go deploy and invest, I could maybe say “Okay, I want to diversify among about 10 different deals. That’s about 105,000 per deal. If each of these deals could average about a 7% cash flow, give or take, that would give me about $100,000 per year in income.”
But remember that my time horizon was five years to hit this goal. Let’s say I don’t have 1.5 million to deploy right away, maybe I have 900,000 today that I could start with and I want to work towards my goal. I might diversify the 900k among 10 different deals, and instead, I might look at maybe the IRR, the internal rate of return projections. If I could average about a 15% IRR among my portfolio, then in theory at least, in about five years, give or take, that 900,000 could turn into 1.5 million as these deals sell-off, if I’m looking for deals that typically sell in a three to five-year timeframe. Then I would have the 1.5 to then go put to work at 7% cash flow to get my 100,000 per year. There are different ways I’m not giving anybody any financial advice or strategy. These are example purposes only, something to think about. How can you reverse engineer to get to your goals? It starts with simply identifying your goals. What kind of lifestyle do you want to have? Why you’re investing in the first place? What it’s really all about. You’re 42% more likely to achieve a goal if you actually write it down. Share your goals with family, friends, or a spouse, whatever you feel comfortable with. Figure out what you want in life, reverse engineer the strategy, set some goals, and take action.
There are four practical takeaways from this episode. Thank you, guys, as always for tuning in. This is Travis Watts, host of The Actively Passive Show. I hope you found some value in this episode. Always happy to hear from you guys. Reach out, LinkedIn, Facebook, joefairless.com, email travis@ashcroftcapital.com. I’ll see you guys next week on another episode of The Actively Passive Show. Have a Best Ever week. Thanks so much.
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