Closed on 250 apartments in Houston, Texas yesterday! 2 Lessons Learned...
I'm proud to say that my group closed on a 250 unit yesterday. It's the second deal I've syndicated and both of them have been over 150 units (first one was 168).
A couple syndication and multifamily lessons I've learned so far from these deals:
1. If you are not doing the property mgmt yourself, then have your local mgmt partner put their own money in the deal. This creates much more accountability and aligns the interests. I didn't do this on my first deal (mistake) but did it on this deal in Houston.
Bonus pts: if the local partner also brings in investors. That adds another layer of accountability and alignment of interests.
2. Yes, money will find good deals but you shouldn't wait for the deal to get the money. On my first deal I raised over $1M and had to do it after finding the deal. It was a...character-building experience :) I don't recommend that same experience to others. On my second deal I had already prepped most of my investors so it was much smoother. I still brought in new investors but the overall process is much better when you prep investors before you have a deal. Note: I don't actually receive money before I have a deal. I only speak to investors about a hypothetical deal (or past deals) and gauge their interest level in investing.
Bonus pts: How do you prep investors before you have a deal? Easy. Schedule a meeting with them and learn their financial goals and how they evaluate success with their investments. Then, talk to them a little bit about what you're doing. At the end of the conversation ask them "If I find something that meets your financial goals would you like me to share it with you?" I've never had anyone say no. Then, keep them updated as you look at properties and, when you have one, they are well aware of everything and more inclined to invest.
Bonus bonus pts: another way to do this is to create a fund where you actually do raise and have money wired before your deal. I haven't done this before but it's a natural evolution from raising money on a deal-by-deal basis.
For anyone who wants to raise money and do syndicated deals, I'm confident these two lessons I've learned will help you be successful.
Joe
Gongatulations @Joe Fairless! That's awesome to hear (read) that it is possible to do good deals in Houston even in todays market. Thanks for the motivation!
Hi Joe,
I would like to hear more about your experience with a PM company that didn't work out and where you said they didn't have money in themselves.
How specifically are the deals structured now??
I get requests to do syndicates for people to invest. Watching over the PM company as a syndicator is one thing but being the PM also is a different level of time.
PM is usually a low return function and high touch so the syndicators I know farm it out and never do it themselves.
@joel
@Joel Owens sure, happy to elaborate. It's really pretty straight forward where I want the local property management group to put in equity with us in the deal and bring in investors. They would then be General Partners with us on the deal.
The trade off is that I get less equity in the deal but the upside is that there's more accountability and alignment of interests.
The other route I could take is doing the PM myself by creating my own company but that's not the route I personally want to go.
The key to all of it is that I'm fully comfortable with the PM partner otherwise I'm stuck with them as managers AND as General Partners in the deal - double whammy.
I love the advice about having investors prepped before the deal comes up. That has just become my new goal.
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@Joe Fairless that's interesting.. did you actually have a PM company that put money into your deal? I know the big PM companies out here on the West coast stay as neutral as possible IE they don't take commissions if they find deals and they don't compete or invest.. they do what they do best and manage.
But I like the concept and when I did my SFR program that's exactly what I did.. but it was in a different level.. and PM got sweat equity IE I traded equity for NO management fee's and no lease up fee's and they did all the maintenance at cost etc. but they earned in in exchange for this.. worked pretty slick really... in Atlanta we had 50 some homes and they doubled in 18 months and we sold so the PM who had no cash invested got a nice check when we rolled out. And we enjoyed better cash flow than most folks because we saved 20% or better right off the top ... IE in SFR 10% management fee 1 month lease up fee and 15% mark up on maintenance.
@Jay Hinrichsyes, they put money into the deal and became a GP. And, your example just inspired me to try and get the property mgmt company on the next deal to not charge a mgmt fee - that would help our the cash flow big time. Thanks so much for sharing that example!
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@Joe Fairless my dad did that in the 60 and 70's he was in the development business IN CA. our partners in the land developments were our attorney.. NO attorneys fee's we gave him equity.. Our civil engineer no fee's gave them equity.. our land surveyor no fee's gave equity... and of course all the hundreds of salesmen that came and went over th 25 years all worked on commish.. so only over head was office and secretarial staff all others got paid when we all got paid.. made expanding easy.
my thought to put my company together the way I did came more from the frustration of PM in the out of state SFR space.. as we know its a major issue.. so my thought was lets make them partners.. so when they are managing 1000 houses my 50 they also own.. human nature when your PM rolls up and its his house too.. surprising how the maintenance cost get cut by a bunch and how our houses stayed full and rents came in..
Granted we gave up a lot when we sold.. but we enjoyed far more cash flow and PEACE of MIND as an out of area owner cannot be measured in dollars and cents.
@Jay Hinrichsthat's fascinating. I'm going to see how I can apply that approach in the future. Thanks so much for sharing.
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@Joe Fairless Joe I did like my model it was just so hard to raise capital back in 09 2010 and 11.. but once the hedges started private folks jumped on the band wagon.
Joe,
First two lessons are spot on. May I offer a third?
When working with investors to understand their prospective level of investment prior to identifying a property, it is best to "overfund" your prospective deal by 2x or 3x. Money is not static and investors often overstate their liquidity or interest.
Bill
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Many congrats, @Joe Fairless! Sounds like you need to interview yourself on your next show!
@Joe Fairless, how to you go about making construction projections? Do you have an inhouse construction manager? Do you tidy up your projections during the due diligence phase?
Would be really interesting to hear how you attack this, considering you are focusing on value add scenarios.
Great advice and congrats! We've closed on over 2200 units of multifamily in Texas and made some of the same mistakes in the beginning...
Good luck with your next acquisition!
Wow very impressive !! I am in Houston though i invest primarily in los angeles, I really feel like the houston market is harder for "retail" or "small time" guys but 14m is def not a mom and pop operation
thats really awesome i would love to see the progress on this project it sounds like a great learning experience even on the sidelines
We can see this is a profitable deal, Congrats!
How about sharing what you bring to the table in the transaction and the compensation you get for that added value?
We know you put the deal together and got it closed, did you get front end money? Backend money? Who is managing the property? Managing renovations? Do you get additional compensation for that piece of the deal? Management fee? Do you have team members that handle this or subcontract it out?
Maybe the best way to share is using an example of many revenue streams available for someone that puts this type of transaction together. You may not have received upfront money, but that may be one possible revenue stream for others. So more of a what someone could expect to make on a deal like the one you completed.
Pretty impressive Joe I have also purchase properties in the Houston area. Very hot market.
Impressive. I've just started out investing full-time and currently have 4 single family rentals. It's a start, but have huge aspirations and realize I need other investors to help fund deals. My burning question...how did you find the guys that funded this deal?
@ Joe,
Congrats!! Hope to get your level some day :)
Did you say the apartment was purchased in Houston? If so, which part of Houston?
Thanks!!
Congrats on your deal!!!! I'm starting way smaller with a 5 unit, but hope to scale up as time goes by! Keep us updated on your future endeavors.
Joe,
Inspirational and informative.
I remember you being from New York. Did you move for RE business reasons? if so can you elaborate? Thanks.
Originally posted by @Joe Fairless:
@Mark Murphywe found this deal through a broker relationship
@nick
@Nick B.sure, happy to. First some context. The current owner upgraded 30 out of the 250 units and then stopped because it wan't in their biz plan to complete the renovations therefore we are picking up where they left off. Here's our projected Year 1 #s:
Effective Gross Income: 2.45M
Operating expenses: 1.34M
NOI: 1.10M
Debt service (bridge lone while we do renovations): 645k
Net Operating Cash Flow: 386k
I am new to Real Estate so take this question with a grain of salt.
I appreciate you showing the numbers but I am curious as to how many investors you had involved on this syndication and what is there ROI? Would that ROI not come out of your NOI along with the bridge loan (645k) for renovations?
@Brent Thurnbefore the due diligence phase and before the offer is submitted, I sit down with my local mgmt partner who also has a renovation dept to discuss the vision and what we want to do with the property. We then conservatively estimate the cost for the work. If something changes during due diligence we update accordingly.
@Tony SanFilippothanks for the congrats. I'm partnering with Nitya Capital in Houston to do the mgmt and oversee the renovations.
Re: what I bought to the table is the money for the deal.
Re: what I get compensated I wrote a detailed post on page 2 of this thread so please refer to that.
@Jeremy Fieldshaving a daily real estate investing podcast helps because potential investors could be hearing my voice on daily basis. That goes a long way and I actually had a couple people invest who are listeners. But the overarching way I find investors is just by speaking to people who know me through life.
What I recommended to people looking to raise money is to do the following:
Create a spreadsheet and list out all the networks you're a part of. My examples include: - Texas Tech Alumni Advisory Board
- NYC, Midland, Cincinnati, DFW friends
- college friends
- advertising industry friends (I used to work in this industry)
- Flag football friends
- softball friends
- Board of Junior Achievement friends
- etc...
You get the picture. List, all the networks. Then, write in all the names of the people you know in the network.
Your goal is to get 1 person from each network to be interested in investing with you.
Then, you can name check them with other people by saying something like "Well, Jeremy and I were talking and your name came up and we thought you might be interested in this as well."
It's very compelling to have someone you already know be interested then be the first person you know interested in an investment opportunity.
One other tip:
- get on a board of a charity that you love. That will surround you with people who care about the same cause and will likely be able to investor or know people who can invest.