“I don’t always market for private money, but when I do I stay legal”
– The Most Interesting Investor in the World
From afar it seems daunting.
How in the world did they do that? How did they accumulate 2,000 or 5,000 or 50,000 units of multifamily properties? Surely they have more money than God to make that happen right?
Perhaps that’s the case, but for those of us with modest backgrounds there is a way to accomplish the same feat. In fact, I would venture to guess most, if not all, major operators of multifamily real estate use this same method that is available to you!
What is this method?
O.P.M. – which stands for Other Peoples Money. Most gurus may make it sound easy – and it can be once you learn the process. However, they often leave out that it will take determination and drive. No matter who you are this process involves setbacks, rejection, and learning by failure.
Additionally, it will be prudent to involve legal counsel. This area of securities law is rife with opportunities to make mistakes. As a consequence: most that undertake this plan lawyer up.
I will also assert that you must add some value to use this method. In other words: why should they work with you? Sometimes that may mean you are bringing money to the table. Sometimes that may mean you have scouted out an amazing apartment deal that is too sweet to pass up.
Side Bar on Gurus: Just starting out? Several teachers offer coaching for $10,000 or more. It seems to me this money is better spent on deal expenses. With the right experienced partner you will learn while you earn anyway right? As long as you bring either good deals or raise dollars or both to an experience operator you will be relevant. Besides that, this is how a lot of them got started too, right? The apprenticeship model is alive and well in the syndication arena.
So I have you geeked up to go get r done? All right! I will now lay out the master plan of how to market for private money and break you into the syndication game.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Syndication Step 1: Define Your Outcome
This step is a time to get specific about what market you want to invest in. Is your home market the right to place to syndicate? Places like Southern California, Denver, and Austin (among others) are really challenging to syndicate in. Heavy demand from other investors in those markets have forced cap rates lower. As matter of the mathematics – your cap rate must exceed 8% or more for it to work as a group deal.
Most of the syndications I am familiar with work in the class C space or class C properties in a class B area.
If you are unfamiliar with the “class concept:”
- Class A is new or newer construction, predominantly higher than median incomes in your tenant base
- Class B is generally 5 to 7 years old or older. The tenant mix is typically median incomes with a mix of white collar and blue collar employment.
- Class C is generally 15 to 20 years old or older in construction comprised of workforce tenant base.
Syndication Step 2: Go Big or Biggest?
The next step in the process is to determine if you want to elect a group investment strategy that is focused on member management or going with the private placement scheme? When you elect to go with a member managed group, you are able to avoid the securities regulation scheme but as a consequence you are relinquishing the full control over the deal.
However, if you would like to purchase a larger property or have need to access more capital, the private placement program is a great way to achieve your outcome.
Overall, before we delve into the specifics of the execution of the private money marketing campaign, it is important to understand the basic pattern of the SEC rules.
You must create a relationship first before you may offer investment opportunities generally for private placements. Kim Taylor, a prominent securities lawyer, once made the great analogy that it is like dating. You have to date before marriage in the private placement arena.
Syndication Step 3: Draft Marketing Materials and Business Plan
This step is essentially the business plan drafting stage that you would do for any start up. This a a chance to determine how you will articulate your exact investment strategy. Will you focus on riding momentum in a certain market? Will you look for management intensive turnaround opportunities?
The great part about this step is that it narrows your thought process on what kind of deal will meet you goals when you start marketing for it. You will know quickly whether a property will fit. Time is money right? This step is well served by doing a proforma of what your ideal property will look like over the life of the syndication.
Just starting out? This is a great time to start networking with experienced syndicators (BiggerPockets has several accomplished syndicators.) Additional places to meet other syndicators include apartment associations or searching LinkedIn for the right investor groups.
The work product you want to generate in this stage is a pitch book that will appeal to investors that highlights your experience and what you bring to the table. Its a great opportunity to tell the story of why you are passionate about the opportunity.
Some believe you need years of experience or the bank account of a Walton to syndicate. While those are great, of course, in the end it is ALWAYS (in my opinion) about PASSION. That’s what will get investors excited to invest with you.
Consider also starting a blotg – which can be a great way to create an internet presence to tell your story and what you are looking to accomplish.
NOTE: BE VERY CAREFUL ON WHAT YOUR BLOG PROMISES
It is easy to violate general solicitation restrictions by promising a certain return on your landing page: DON’T DO IT. You must password protect any deal specific information that has any indication of what returns you are looking to deliver.
This is also the best time to select a securities attorney. It is wise to consult with your counsel to review your marketing plan and internet presence before you “go live”. I recommend using an attorney who has experience in real estate syndication because your average lawyer that does divorce and bankruptcy is not going to be of much help in this area of expertise.
This is also based on what you believe your target property looks like and where you are located which are the best private placement rules to use. It seems the two most advantageous are:
The intra-state offering exemption
This rule allows you to claim an exemption from the SEC registration process if 1) You 2) the property 3) ALL of the investors all reside in the same state. Depending on the state law you have no restrictions on the amount of money raised under this exemption.
Regulation D Rule 506
This rule permits the sponsor to raise an unlimited amount of funds from an accredited investor pool and up to thirty five sophisticated investors without regard to the geographic location of the property or the parties.
The current decision that sponsors face is the new provisions that permit advertisement under 506 c. Under the new rule you MAY advertise if ONLY accredited investors are permitted in your deal. The current dilemma is whether the current method where accredited investors simply declare on your offering questionnaire that they are so qualified is worth giving up. Under the advertising rules you have a higher duty as a sponsor to verify the investors status. The questions is whether the true benefit of general solicitation is worth the additional burdens?
For this article we will assume not and address the existing method of marketing under 506.
For more complete discussion of the rules and definitions check out my prior blog on private money.
This stage is also a great time to start looking for lenders or a great commercial broker. By discussing your goals ahead of time before you got to contract you can establish a great idea of what the amount of equity you will need and how attractive your deal would be to the particular lender. Not all lenders are the same. Shop around. Make sure you seem to have rapport with the lenders agent as well. Most lenders like to see two year operating resume as well.
Syndication Step 4: Select Your Target Private Money Pool
It seems to me the best way to experience less stress in life is to start this side of your investment program first. Otherwise, if you go to contract and have zero private money lined up it seems you’re making life more difficult on yourself than it needs to be.
Networking with Friends and Family
Most gurus advocate starting here. I am not personally a fan of this method but acknowledge it has the benefit of working with people who know, like and trust you. Its not unreasonable to start here but again – if you are of a modest family heritage or prefer a more professional relationship with your investor base, there are other options.
Networking within Chamber of Commerce
Business owners are easy to meet and get to know at chamber of commerce functions. The opportunity to meet them and then offer to “coffee” at some point is a good way to establish the rational requirements.
Networking within REIA Groups
REIA’S are a great place to find money in that they already predisposed to invest in real estate. This aspect will likely low the resistance to your investment proposal.
Direct mail is a great way to micro target your campaign as well. To stay compliant, the way to execute this campaign is to conduct an informational seminar or presentation. Offering updates on which are the best markets to invest in or the benefit of real estate as an alternative investment are a great way to establish credibility and begin the relationship on the right footing.
Sources to consider:
- courthouse records for private money lenders
- Accredited Investor Lead List
- Other multifamily owners
Syndication Step 5: Conduct Your Private Money Presentations
This step is where you get face to face with to your prospect via one on one or group presentation. This will give them the opportunity to gauge your passion for the business and get a feel for your character.
Not often discussed by the guru crowd is your gut feeling on the person you meet. Are they going to make your life miserable once you have their money to invest with? This chance to meet also is an opportunity for you as well.
In this step you will conclude by giving them an suitability questionnaire to fill out to establish whether they are truly fit for your investment.
Syndication Step 6: Market For Deals and Go to Contract
Once you have laid the groundwork with with potential equity and operating partners you can attack your marketing campaign with gusto! Most deals will be either through direct mail or via a broker willing to shoot you a pocket deal to look at.
Syndication Step 7: Cool Off Before Offering Specific Investment
An interesting timing problem under the 506d is the requirement to cool off. Generally, you need to wait a period of time between obtaining a suitability questionnaire and contact with the investor or issuing a PPM. While no set time is required, 30 days is a commonly used time frame.
Syndication Step 8: Circulate Your PPM to Your Database
Its a great policy to number each and everyone of your PPM’s and create a control log on who they were issued to. This will create a record that you can use to show you are not just handing it out like candy.
Syndication Step 9: Close and Get Paid
Remember the great Chinese General Sun Tzu:
“Opportunities multiply when they are seized”