All Forum Posts by: Todd Dexheimer

Welcome to BP. Are you wanting to invest passively in a syndication as an LP or are you wanting to be the general partner and syndicate to your investors? 

It sounds like you just need to pivot to a more passive role. There are a lot of passive options. Invest in a syndication, invest in a fund, buy a NNN lease property or be a hard money lender.

It’s important as a limited partner to be sure that the sponsor/general partner is qualified and that the deal and market are a fit as well. Here are my top questions to ask a sponsor:

QUESTION #1: WHAT IS YOUR EXPERIENCE?

It is important to look at the history of the sponsor. You want to be sure they have dealt with investors’ money before and been able to provide them with returns.

QUESTION #2: HAVE YOU DONE A DEAL USING INVESTORS MONEY THAT HAS GONE FULL CYCLE AND WHAT WHERE THE RESULTS?

Not a requirement, but it is better to deal with sponsors that have purchased and sold assets.

QUESTION #3: HOW LONG HAVE YOU BEEN IN BUSINESS?

Are you sure you want to invest with the new group or even the group that’s done a bunch of deals, but only been in business a few years? Inexperience isn’t a bad think, just understand that there is greater risk.

QUESTION #4: HOW OFTEN DO YOU COMMUNICATE WITH INVESTORS AND WHAT DOES THAT LOOK LIKE?

I like monthly email with a written explanation of the operations, as well as the monthly P&L statement.

QUESTION #5: WHAT KINDS OF ISSUES THEY HAVE YOU HAD AND HOW DID YOU HANDLE THOSE ISSUES AND COMMUNICATE TO INVESTORS?

They better be able to tell you about problems that they’ve had and what they did to solve those issues. You also want to be sure they communicated frequently and openly with investors. Ask when they gave notice to investors. Was it right away or after they solved the issues?

QUESTION #6: WHAT PERCENTAGE OF INVESTORS HAVE INVESTED IN MULTIPLE DEALS?

I am proud to say that I have investors that have been with me since my very first deal. Syndicators that have investors that keep investing deal after deal indicate that they are trustworthy and follow through. These are great referrals as well to call or email.

Look at other things like their presence online and how they handle themselves online and on forums. Do they appear well connected online and in real life? Doing a search online can reveal a lot about a person’s character and knowledge. Don’t just blindly trust their online presence, but it can certainly help.

QUESTION #7: WHAT IS YOUR OVERALL BUSINESS PLAN?

It is important that the sponsor has a detailed and well thought out business plan. You should be able to read through the business plan and understand why they like the deal, why they like the market, and what they are going to do with the property that will make everyone involved money. The business plan needs to tell the investors what the problem with the property is, what the positives are and what are they going to do to make a positive impact on the tenants, in order to provide a great place to live, while also providing good returns to the investor.

QUESTION #8: CAN YOU SHARE YOUR FULL DETAILED UNDERWRITING?

This to me is very important as the market goes through volatility. I see sponsors that are projecting rent growth that is normal in yesterday’s market but is very high compared to the actual market. They often use high occupancy and low expenses as well. Compare their projections to the owner’s current level of operations. One thing is for sure, it is nearly impossible to increase revenue in year 1 by more than 15%.

The same thing happens with sale prices in 3-7 years (or whatever their hold time is). Many sponsors are using really low cap rates at exit (this determines sales price). Ask for sales comps with a market cap rate report. Verify this information with a local broker or appraiser for extra protection. Also, make sure the comps are near the asset, with no major freeways or train tracks in between.

In my opinion underwriting needs to be based on the current market with future projections based on historical data.

The other important factor to look at is the amount of reserve capital that the sponsor is raising. It is prudent to have 6-9 months of mortgage payment allotted as an initial reserve account. If the property needs capital improvements up front, it is important that the amount raised exceeds the budget by 10-15%.

I can’t say enough about underwriting. Really look to see what scenarios could derail the investment. If a downturn happens and rents go down 15% as well as occupancy, can the investment weather the storm for a few years or will it go back to the bank, with your money being flushed down the drain? We can never predict every bad case scenario, but we do need to be aware of the breaking points on each deal we invest in. Make sure you and the sponsor both know that.

QUESTION #9: WHO IS ON THE TEAM?

Understand the experience of the property manager, contractors and any other members of the team. We want to make sure that they understand the type of property that is being purchased and they have the ability to execute the business plan.

QUESTION #10: WHAT IS THE SPONSOR INVESTMENT?

I think it important that the sponsor invests at least 5% of the equity raise. 10% is a better amount, but they need skin in the game!

QUESTION #11: WHAT IS THE PROFIT STRUCTURE FOR THE SPONSOR?

It is important as a limited partner that you get paid, but you also want to be sure that the sponsor is getting fair compensation. If a sponsor is in a deal and not making much money, where is their motivation when things start to go wrong and take up more of their time?

I like to see the following:

2-3% acquisition fee. The larger the deal, the lower percentage the fee should be.

1-2% Asset management fee

5-8% preferred return to investors (I don’t like higher than 8%, as this forces the sponsor to sell, in order to profit)

70/30 to 80/20 split (I don’t like 90/10 splits, as there is little incentive for the sponsor to perform)

A waterfall that incentivizes the sponsor at a 13-16% IRR is ok as well. Think 50/50 split at a 15% IRR paid to investors.

No disposition/capital transaction fee.

QUESTION #12: WHAT TYPE OF FINANCING DO YOU GET?

Short term, long term, floating vs fixed. Do they have a mortgage that is highly leveraged? What is the debt service coverage ratio? Do they have Mezz debt or a pref partner? Understand the debt and how that plays into the risk.

Understand that it is extremely rare for an asset that locks in long term fixed debt to get into trouble. Short term bridge debt adds a big layer of risk that the sponsor has no control over. They may say they’re buying a rate cap to reduce the risk, but that is only temporary.

QUESTION #13: WHAT TYPE OF LOCATION DO YOU INVEST IN?

Understand the city and what is happening and understand the exact location. I see sponsors calling C class areas B class, but that doesn’t make it so. Do your homework. C class carries the most risk, A class carries the least risk.

QUESTION #14: WHAT AGE OF PROPERTIES DO YOU INVEST IN?

The newer the property, the less that goes wrong. I’ve purchased 1930’s through 2010 built product and the older product always has more issues. If the sponsor is buying 1980 or older make sure they have a lot of money set aside for plumbing, electrical and HVAC. I would want a minimum of 8 months reserves and also mechanical reserves of at least $2,500/unit (this covers plumbing, electrical, and HVAC issues)

QUESTION #15: HOW LONG WILL MY MONEY BE TIED UP?

Some sponsors flip apartment buildings and others have a long term buy and hold outlook. Which one fits you? Do you like cash flow and paying less taxes or are you looking for the highest potential returns with a bit more risk? Both are common and profitable strategies, so invest in the one you like best.

QUESTION #16: DO YOU ALLOW FOR SOLO 401K’S AND SELF-DIRECTED IRA’S?

You can often use your IRA/401k money in syndications.

QUESTION #17: DO YOU PAY DISTRIBUTIONS BASED ON CASH FLOW OR DO YOU PAY IT OUT OF RESERVES?

Paying you a “distribution” out of reserves is just giving your capital back to you. Often sponsors mask that as a return.

QUESTION #18: HOW ARE INVESTORS PAID AND WHO IS PAID IN THE CAPITAL STACK BEFORE ME?

You want to be first or 2nd in the capital stack if possible. 1st would be a cash purchase and 2nd being behind a loan. If there is mezzanine debt and/or preferred equity, then you’ll be paid 3rd or even later.

 Real estate traditionally is on a 16-18 year cycle, so we are arriving now. There have been 4 crashes in US history - 1837, 1873, 1929, 2008. The rest of the time the market corrected by less than 10%. 

It's not out of the question, but a crash of greater than 10% is highly unlikely. 

Well, how is it failing? Did the sponsor stop distributions? Are they doing a capital call? Is it being foreclosed on? Did they commit fraud? Did they run away with your money? 

Hard to answer your question without context. It is possible that hiring an attorney to sue the GP is necessary, but also possible that would be a poor choice. 

The LP's could possibly step into the GP position, but would that help? Is there a capable LP? Is that allowed? 

I agree with what you're saying, but as others have mentioned, it still matters. What I wish people would stop saying is, I own 1,000 doors, when they actually own 5% of 1,000. 

I met a group a few years back that owned 2,000 units. They brought a deal to Endurus to partner with them. After talking with them, I found out that they needed us for our experience, liquidity and net worth. When I asked how much liquidity and net worth they had, they said less than $100k liquid and less than $1mm net worth. How do you own 2,000 units and not have well over a $1mm net worth? The only answer is that you own a fraction of the units. 

Raising $5.6mm is no easy task if you have not raised capital before. You're likely best off wholesaling the property and using those funds to invest in the deal or invest in something else. Raising capital takes building relationships and growing your network. It also takes experience in the asset class that you're raising money on. This sounds like a development, so you and your team should have years of experience and a track record of success before you take other peoples money. 

Lastly, be sure you hire a good securities attorney. 

Good luck

I think you have a good approach. I would not focus so much on the returns, as I would on the experience of the sponsor and team, location of the property, and overall business plan. 

Plenty of sponsors showed big returns, but then got floating rate, high leveraged debt and overpaid for properties. Those "big returns" have turned into big losses. 

My best piece of advice is to educate yourself first, talk with a lot of sponsors, and underwrite a lot of deals. Once you've done that, then consider investing. 

STR and syndication are completely different worlds. If you're wanting to invest in STR's, then you likely cannot use your solo401k. STR's are very labor intensive and need your consistent attention. Profits can be great with good management and the right location. They can be very poor with a bad location and/or poor management.

A syndication is a great product for a solo401k and is a completely passive investment. $30k is a bit light on the dollar amount to invest in a syndication. Certainly there are groups out there that allow for that check size, but $50k is more common. My group and many others on BP offer syndication investments, but being accredited with at least $50k certainly gives you more access to opportunities.