All Forum Posts by: Jonathan Twombly

Originally posted by @Matthew W Croulet:

Hello, I'm new to the forum, and I was looking at a couple of deals that are worth a couple of millions of dollars. While I was looking at these deals, I was wonder how would I be able to organize a partnership where I can raise millions of dollars. I was wonder is there a book or posts I should look into to learn how to structure and find people who want to do this? Any help would be fantastic. 

 Hi Matthew,

The hard truth that many people don't fully appreciate is that, no matter how good a deal is, you won't be able to raise money unless you have already built an investor network ahead of time.

You need to dig the well before you need the water.  If you wait until you need the water to start digging, you will die of thirst.

Looking at deals is a good way to familiarize yourself with the market and give you something to talk about with potential investors.  You need to build an investor list, and it must be really big, because most people who say they will invest with you never will.  You should assume that your conversion rate will be 25% max.  So, if you go out and network and collect commitments before finding a deal, and you have total commitments for $1,000,000, you should assume that you only have $250,000 to work with.

You should also remember that commercial property (i.e., anything with 5 units or more) has a different kind of debt than residential property.  So, let's say that you raise $1,000,000, you cannot buy a $4,000,000 property unless you have a $3,000,000 net worth. (Or your partners do.)  If you and your partners don't have that net worth, then you must find a balance sheet partner who does, and you will have to give them part of the deal.

If all this seems daunting, if you really have found a good deal, perhaps you can find a qualified, experienced sponsor who will take the deal and give you a piece in return for finding it.  That is probably the quickest way to get started if you really have found a great deal but don't have the funds and the balance sheet to take it down yourself.

Originally posted by @Cody L.:

Originally posted by @Juan Vargas:

Finding value add multifamily properties where the broker hasn't added the "value add component" into the whisper price. The whole point in buying a value add is to "add value", not to pay premium for it and STILL have to inject more capital into it. 

I think that describes a deal I’m closing on shortly to a T. It’s being pitched as a value add deal. It’s a mess. But it’s priced as if it’s fixed/stabilized. 110 units near galleria. I’m paying way more than I would have 2 years ago. Hell, maybe even a year ago. It’s jist the best of a bunch of crappy deals out there  

The definition of "value add" has changed since I started in this business in 2011, all because of where we are in the market cycle. Back then, "value add" meant you were buying a deal that already cash-flowed at the current price, but it was below the intrinsic value of the deal if you invested the capital to maximize the value of the asset. The classic case was buying an 80% occupied deal in a 95% occupancy market. You got the deal at a bargain just by paying the current cap rate times the NOI at 80%, but you knew there was another 15% occupancy there that was not being used, and all you needed to do was put in capital or improve operations or both.

Now, "value add" means you have to pay the after-renovation stabilized asset price now, but then you still have to take all the risk of doing the rehab and retenanting.  In other words, in the old days, you bought at a discount to inherent value, but you could run as-is and still make money.  Now, you are paying for the future value and you won't make the return you need unless you add the risk of rehab into the deal.

Which you may or may not be able to execute on before either the economy trends downwards or the property market does the same.

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I agree with what @Alan Rohrer said.  The most important thing is to hire someone with extensive real estate experience, and particularly with precisely the kind of deals you are doing.

I actually have experience with this, as when I first started my company I outsourced bookkeeping to a company in India to save costs.  What a mistake.  They had no idea what I was talking about with the transactions and kept allocating costs and expenses the wrong way.  Finally, I brought the bookkeeping back to our real estate accountants.  It's more expensive, but I never have to worry about it being done correctly, there is never any aggravation, and it saves on tax preparation because they know the books intimately and don't have to reconstruct anything.

Originally posted by @Alina Trigub:

@Dan Handford, @Jonathan Twombly, You both make valid points and good recommendations. I would also add that to make such statements/appearances, one has to get a credibility first and get well acquainted with the crowd. In other words, gain the crowd's trust first. That takes time. I in no way want to discourage anyone from doing it. On the contrary, I completely agree it is a great way to find investors, but I wouldn't start an intro to the crowd with the talk about investments. The crowd must get fully comfortable with you first! 

Best!

 I wasn't talking about public speaking on this.  I was talking about getting into the right room and getting to know people.  They will ask you what you do.  You tell them about real estate investing.  You have a conversation.  You're not pitching or selling anything.  You are just beginning the process of getting to know them.  That's it.

Originally posted by @Dan Handford:

I have been speaking to physician groups across the country for several years and I typically am in front of groups of private practice physicians. I usually speak on Strategic Patient Marketing or Relentless Implementation as it relates to business. 

One day it hit me....that I should start discussing my multifamily real estate syndication business during my talks. I didn't want it to come across too direct so I just started randomly showing pictures of apartment complexes throughout my talk (usually 2 pics during a 1 hour talk). It would remind me to mention what I am doing with the real estate syndication for apartments and I briefly cover the tax advantages for high net worth individuals such as physicians. Now after every talk I typically have 3-4 physicians come up to me to discuss how they can invest with me. Recently I had 8 physicians come up to me after the talk. Pretty awesome!

You should start thinking of topics that you can talk on to get in front of other high networth people. If you have something that is valuable to them, you should start trying to get on their stages at various trade show and annual conventions.

I am on my way to Beverly Hills, CA today to speak with 250+ physicians at another conference. I'm actually sitting in the Delta SkyClub right now in Atlanta waiting for my 8:30AM flight to LAX. I have my 6 yo daughter in tow since I always like traveling with family. I have 4 children now so each gets a turn to travel with daddy. It's the first time my daughter is riding in first class cross-country. Hopefully it doesn't spoil her...wink...wink...maybe it will and it will turn her into a real estate queen so she can afford to fly in first class. :-)

Anyway...I shared a unique way that I reach high net worth people. 

What other ideas/strategies do you have to reach more investors to raise more capital?

 Dan, this is a great practical example of what I always advise people to do - figure out how to get into the rooms where you are the only person there who knows anything about real estate.

It's totally pointless to be in a room full of other real estate investors who are also looking for money for deals.

You want to be in a room full of people with money and no competition from other real estate guys.

So, skip the REI and BP meetings and join the country club or the local Chamber of Commerce or a BNI group. Figure out where the local business people hang out and hang out with them.

Don't pitch your deals to them.  Just talk to them about what you are doing.  Talk about it with passion and excitement.  

What so many people here don't realize is that rich people have a unique problem:  what to do with all that money.  Good investment opportunities are few and far between.  Good investment opportunities run by trustworthy people with integrity are even fewer.  And good investment opportunities run by people with integrity with whom those wealthy people have personal relationships are even fewer still.

That's where you want to be:  the trustworthy real estate investor with integrity, who is the only real estate guy in a room full of rich people he knows personally, with no competition from any other real estate guys.

Go find those rooms.  They exist.

REI meet ups are great for learning from other investors. But if you want to find money for deals, you need to go elsewhere.

Originally posted by @Jason Lee:

Case-Shiller data is worthless for NYC. Their "New York" data is made up of counties in NY but also NJ, CT, and even PA(!). It also only tracks single family re-sales. No new construction or multi-families. Percent of single family home sales in Manhattan is about 1% of all sales so despite being labelled New York, it doesn't cover Manhattan at all. Manhattan average and median sales prices are actually down in Q1 YOY. Q2 numbers will probably be worse. As others have noted, the data is backward looking and some of these March numbers are for deals that could have very likely been accepted in 2017. If the data is skewed and worthless for NYC, it might be in these other "cities," too. 

Yours Truly,

"Nay sayer ;D"

Yes! And, prices in New York have not fully recovered to their previous peaks in real terms according to Case Shiller before turning downward, meaning that people who simplistically believe that a market will always return to its previous peak are engaging in wishful thinking.  Sure, the market may return to its previous peak, and they often do in normal cycles, but the last cycle was not normal.  Assuming that the current cycle will exceed the previous peak before turning down is not a safe assumption, especially in markets that lack strong underlying fundamentals. 

First, see whether the syndicator provides you with the actual financials from the seller, so you can underwrite the deal yourself if you want to and see if you really believe the story the syndicator is telling.

Second, see if there is anything realistic about the deal.  For example, a property built in the 1970s or 1980s of 100 units in size is likely to have an expense ratio (operating expenses divided by total income) of 50% or more.  If the expense ratio is below 50%, it's an indication that the syndicator may be overly aggressive on either achievable rent growth or on cutting expenses.

Watch the fees as well.  A deal that is overloaded with every kind of fee you can think of probably means that the sponsor isn't wiling to rely on performance compensation.  Especially at this point in the market, where we are at or near the top of the cycle and the deals are very expensive.  Underwriting may be aggressive and the sponsor knows it, so they want to make sure they get paid lots of fees, which they collect no matter how the deal performs.

Watch out for too much leverage.  At this point in the market cycle you want to be very conservative, not very aggressive.  But the temptation is to be aggressive with debt because it increases the returns to equity investors.  Be wary if they are going above 75% leverage, especially if they are doing it with seller financing or some kind of mezzanine debt.  It means that the sponsor is trying to financially engineer their way into returns, rather than get there on fundamentals - they've overpaid for the deal, most likely,

I'd put way more faith in the population flow from Californians seeking relief from the high cost of living than in the stadium.  Stadiums and conference centers often prove to have negative net economic effects - basically government giveaways to private corporations that don't pay for themselves.  Population growth is another story, though.  Still, if California starts to tank and becomes more affordable, what happens to Vegas?

As you say, the data lags by two months.  New York, it seems, has already gone negative, and it looks like Cleveland will follow.  So, perhaps it's time to start getting concerned.

New York looks like it will start turning down before it ever reaches its previous peak.  There is no magic in the previous peak number, especially when it was a bubble.  Look at Japan.  It's 2018, and property prices are still trading way, way below their 1989 peak, even in Tokyo, which has solid population growth even though the country overall is shrinking.  (Kind of reminds me of Columbus, which is growing even though Ohio has flat or negative growth.)

Interest rates are on the rise, which is going to start showing up in the data very soon. REIT stocks are getting creamed right now because Wall Street believes higher interest rates will take a huge bite out of their profits.

In any event, who wants to invest in a hot market?  How do you make money by buying at or near the top?  You make money by buying when other people are scared to buy, and getting a great price, and then by selling to people who like to buy in hot markets at ridiculous prices.