In this episode, Michelle Bosch discusses the questions you need to ask when passively investing in an apartment syndication. Meaning, there is someone that is sponsoring a deal and presenting an opportunity to invest to you, and they’re requesting that you invest your capital with them. You might be too busy to learn over a long period of time what it takes to actually do these types of investments – apartment investing and repositioning or value-add type projects – on your own. And if you wanted to start learning about it, passive investing is the way to go. So, if you are planning to give your hard-earned money to someone, here are a few questions that you need to ask when it comes to apartment investing.
Listen and enjoy:
- Learn about what passively investing in an apartment syndication entails
- Discover the 15 questions you need to ask before embarking on one of these deals
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Hi. I’m Michelle Bosch, real estate investor, mom, wife, and host of the “InFLOW” podcast, and I’m passionate about helping women invest in land and apartments. If you’re tired of the ups and downs of the stock market, or the hassles that come with investing with houses, and are looking for investments that actually produced passive cash flow, safely and predictively, join me each and every week for real estate investing strategies and interviews with thought leaders that will leave you inspired and ready to step into flow for inflows of cash, inflows of ease and inflows of grace in your life. Now, here on YouTube are the video versions of my podcasts, and in order for you to get my latest information, please go ahead and subscribe. And now let’s go. Welcome everyone to the “InFLOW” podcast. I’m your host Michelle Bosch, excited about today’s episode. Today, I wanted to discuss with you all, what are some of the typical questions that you need to ask if you are planning on passively investing in an apartment syndication?
Meaning, there is someone that is sponsoring a deal that is bringing a deal and opportunity to invest to you, and they’re requesting that you invest with them your capital. Whether that be 50, 100, 200 grand worth, whatever it is, that you’re planning on investing passively with someone because they have the expertise, the knowledge, the know-how, they do all the heavy lifting for you, you know, especially if you are a busy professional and do not have the time to go and learn, you know, over a long period of time what it takes to actually do these types of investments, apartment investing and repositioning or value-add type projects on your own. And if you wanted to start, you know, learning about it passive investing is the way to go. You get to learn about, you know, how others are doing it and learn from their experiences. But in, regardless of you know how you…what you’re looking at if you are planning to give your hard-earned money to someone, there’s a few questions that you need to ask when it comes to apartment investing.
And I would say that the very first question that you wanna ask is, are they investing their own money in this deal? Do they have blood, you know, in the deal? Because I find that there’s a lot of syndicators out there, and there’s…it’s not a problem that you can syndicate entirely the equity from someone else, but they don’t put any, they have no blood in the deal. And I feel like in order for someone to have their interest aligned, you know, even if it’s a smaller type of investment, that’s some kind of a…that they’ve invested, that they’ve put some kind of their own money in whatever, you know, level that it is possible for them and have those goals be aligned as a result of that investment, of them having blood in the deal as well. So, that would be my very first question that I would ask. The second question that I would ask is, you know, are you…why did you choose this market? You know, there’s many reasons why people are investing in certain primary markets, secondary markets, submarket within a primary market, and I think it’s very important for you as a passive investor to really understand why that person has chosen that market. Do they have experience in that market? Do they have economies of scale in that market already? You know, do they have a team? Are they able to turn units very quickly because they have already a crew. Like, for example, us, you know, in our market of Oklahoma City, we already have a crew there, we have a first in class property management company there. We already have, you know, a 147 unit apartment building there. And so for us, we’ve done a lot of the legwork, a lot of the research, we know a lot of the brokers, we know a lot of, you know, the industries that correlate, you know, to our area where we have this asset and we’re very familiar with the market. We know if there’s, you know, stable basis of employment, or what I like to call cones of prosperity, whether it be, you know, an Air Force Base from the government, or a big government agency or so on and so forth, or a big company.
A big company that you know is going to be solid no matter what is happening in the economy and no matter what…where in the market cycle we are, you wanna know, you know, why that person has chosen that market. If it’s because it’s hot and that’s where everyone is going, you know, and they haven’t looked at anywhere, you know, whether population growth, you know, is going to sustain and is going to help them achieve the, you know, economic occupancy, the net operating income, being able to, you know, command that rents that they’re wanting to command per unit, you know, for an asset, that is definitely something that you wanna ask for sure. So, you know, why did they choose that market? Yeah? So very, very important, their knowledge of the market, their experience in the market, and that they’ve had, you know, their bases covered in terms of knowing whether this is a growing market, where the growth, you know, trajectories and tendencies are there, where the employment base is diverse and stable, crime rates, etc. You know, this person needs to know everything about their market. So that’s question number two. Question number three, and I’m going to give you a total of 15, just so you know. Question number three that you should ask is, how did you stress test this deal? So, what’s gonna happen when, you know, bad things happen in the economy, if the economy contracts, or what happens, you know, if you’re not getting, you know, the market rents that you think you will be getting? Like, how have you stress test this deal? And it could be them telling you about whether their assumptions for market rent growth has, have been conservative or not, and you can compare those against actuals, you know, you can just Google and research some of these stats. You wanna know what, you know, has happened in terms of them being able to service their debt if economic occupancy goes down, if delinquency goes up, you know, will they be able still to serve as a debt and payout, you know, their distributions to investments, to the investors, I’m sorry.
You wanna ask, you know, in terms of team, what happens if a major person, a major player, you know, if the rock star of the entire team is the leasing agent, how are you planning if for any reason, you know, the bus was to hit this person, how are you planning to, you know, to replace this person? How will that affect, you know, the day to day operations of the actual asset, of the property? So, those are some of the questions that you definitely wanna ask. You wanna ask, who is part of a team, you know, who is operating this asset and managing the asset and what is their expertise, what is their track history, you know, what are what are their values, what are some things that they’ve done in the past that give me a sense of their ability and capability, character on how they’re going to manage and make this asset perform? So, that’s question number four was the team. You also wanna ask about economic occupancy, you know, because there is this difference between occupancy and economic occupancy. Occupancy is someone, you know, physically occupying a space, but not necessarily paying rent, you know. And sometimes people boast, “Oh, we have, you know, 90% or 95% occupancy.” But really, in fact, their economic occupancy sometimes could be closer to 80%, because not everyone is paying because their delinquencies are high. So, you wanna be able to ask those questions and know the distinction between just occupancy, which is taking up space in my opinion and oxygen and not paying your rent, or economic occupancy, which is actually, you know, if the people that are there are actually paying their rent. So, that would be the second or the fifth question. Question number six, you know, what is that syndicator’s, you know, that person who is bringing you this opportunity to invest with you, what is this person’s business plan? What are the things that they’re gonna do to the property that are going to improve, you know, the outside physical appearance, the interior, you know, as far as renovations? What CapEx, you know, they’re gonna be doing? And CapEx are usually capital expenditures, meaning things such as roofs, parking, lots lighting across the board, major landscape improvements, renovations of kitchens, of bathrooms, of AC units, you know, just major things like that.
You definitely, you know, wanna ask, what is their business plan and what are the first two to three things that they’re gonna do the moment they close on that property to start basically that repositioning of that property and that value add to that property? How are they going to start doing that? And you wanna know what’s their plan for Q1 after they close for sure and also into the foreseeable future for the term or the length of time that they’re gonna be holding a property. Yeah? Most people model for a five year, you know, exit. We do the same as well. And a lot of the things that we like doing at the very beginning when we start is we like using lighting, you know, really good lighting, across parking lots and all common areas. If there are any ,bad people doing bad things, we want to basically shed light on that right away and the moment, you know, people start seeing that, you know, a lot of the bad guys naturally go away on their own. We also want to be able with that to attract people that feel safe. Like if you’re a single woman and a single mother, you know, in a very well lit parking lot and that you feel safe at all times, you know, with your children coming into your home at night or early in the morning or wherever, you know. So lighting, for example, for us is one of the very first things that we like doing. And if there are major, urgent, you know, things like roofs, or renovations of interiors, those are the things that we look at doing first as leases come up, you know, come due for, to be renewed. And that’s how we slowly, you know, over a period of two, three quarters, start really changing the tenant base and start increasing market rents. So, that’s another question. So, question number seven, you know, as far as you wanna ask, what is the purchase price? What is the total capital raise? What percentage of that capital raise being used for CapEx? What percentage of that capital raise is being used for acquisition fees? Do they charge, actually, that’s another question. Do they charge…what kind of fees do people charge, you know, if they’re syndicating? Usually, a syndicator, you know, can charge acquisition fee which is for finding the deal and putting the deal together, which is a monumental job in itself. But there’s also, you know, a certain syndicators they charge for management of the asset.
We personally do not, you know, charge for management of the asset. We think that if we’re gonna be growing together, you know, our money with our investors, it is our duty to manage that properly and optimize the property and increase and align. So, we don’t necessarily, you know, charge management fees, but we do charge an acquisition fee for finding the property and putting the deal together, which usually takes anywhere from three to four or five, even six months, you know. So, another question that you definitely wanna ask are, what are the projected returns, you know? Is there a preferred component to the return? Meaning, preferred meaning do they, it’s not that they guarantee, but if the property produces enough income, you know, after servicing your debt, your loan and paying for operations, you know, of your staff and maintaining the asset running, you know, how is the excess cash flow going to be split between a sponsor and the investor, you know? When you have a preferential treatment, when you have a preferred return, it means that you as an investor gets paid first. And if there’s nothing left for the sponsor, then nothing gets distributed to the sponsor, but you have utmost priority in terms of, or preferential treatment in disbursement of any excess cash flow outside of operations and servicing of the debt for the asset. Another question, question number nine that you definitely wanna ask is, what are the equity splits upon exit? You know, there are some that are incredibly favorable to the sponsors, some that are incredibly favorable, we call it to the money, to the people that have brought the money in, you know, and some of them are split 50/50, you know. You know, one of the components of bringing that asset, you know, and fully optimized to its biggest potential is the actual operation, the know-how, the expertise, but without the money, you know, without investors, you know, helping you raise, you know, the equity portion for the acquisition of a property, I believe it’s fair, you know, for, you know, for a 50/50 split, for example at the end so that you can really be transformational to the people investing with you and have the opportunity for both of you to grow, you know, to grow and to do well, while doing good. You know, I don’t think those two things are mutually exclusive.
So, that’s another thing that you definitely wanna ask for, how long do they model as well. The typical modeling is usually for a hold of three to five years, you know, five years is kind of like the industry-standard out there. And yeah. So, those are some of the splits, and usually that split is the second component in the total return that an investor can expect, you know. Part of it is that preferential return which gets accrued every month and paid out. You know, some
syndicators decide, like us, to pay those out quarterly. So, we do quarterly payment of distributions basically to our investors on those returns, on those preferential returns. And then usually the projected overall return for the asset, that remainder comes from the equity split at the end when the asset is actually sold. So, those are some of the questions. Another question that you might wanna ask is, what kind of track history does that, you know, does that person have in bringing a property full cycle? You know, there’s a lot of people out there, syndicating properties that have not gone through an entire cycle of purchase, to optimization, to sale of the property, actually producing returns, you know, not just the preferential returns, but the splits at the end from the liquidation of the asset. So, you wanna ask people, you know, have you gone full cycle on an asset? What has happened, you know, in terms of investments that you have done in the past that you have operated in the past, in contractionary, you know, economic conditions? How have you handled those, you know? And so, you really want to understand and know that this person has the capability, the expertise, the know-how, and the ability, resourcefulness to be able to produce the returns that they said that they’re gonna produce but also preserve your capital, you know, that they’re being a good fiduciary of your money. And so, those are some of the questions that you definitely wanna ask as well is, what is their track history?
What have they done in a project in the past in a contractionary market cycle in the economy or, or have they brought an asset full cycle from purchase to optimization to sale, yeah? And another question that you wanna ask is what kind of loan are they getting? Right now we are faced right now at the bottom end of 2019 with a very possible contraction, we could already even be in that contraction, you know. But we are looking at a contraction in the real estate market. And so you wanna ask them what kind of financing are they getting? Are they getting, you know, ARMs? Are they looking at short term loans? Are they looking at, you know, more long term debt? What is the interest rate that they’re locking in for how many years? Because something very interesting happened in 2008 and 2009 when everyone was losing their shirts, and that is that a lot of these assets were actually cash flowing assets. But people were still losing these assets because they had ARMs, adjustable-rate mortgages that came to…that were due. And we were in an environment where, you know, that had contracted. Banks were not lending out. And so, even though the asset was producing cash flow, they couldn’t refinance that asset and they lost, you know, a lot of properties. So, you wanna know, are you getting into a, you know, long term debt? Or are you doing bridge financing with a bank that also provides, you know, long term debt specially Freddie Mac or Fannie Mae, which are the two types of agency debts that a lot of syndicators used. They’re really hard to be able…for you to qualify because you need to have been a key principal in the past, you know, in showing your experience in order to qualify for those loans. And it’s one of those things where, you know, chicken or the egg. “Well, how can I get the experience I cannot get a loan?” And, but you need to, in order to get a loan to have the experience. And so, it’s really…it requires a lot of hoops. They’re very strict in their guidelines of what, you know who they extend these loans out?
So, you wanna ask, for example, what kind of loans are they getting? You know, are they getting Freddie Mac, Fannie Mae, ultimately, or are they doing bridge financing with banks that offer this bridge to, you know, to term kind of loan? And that means that, you know, those loans will then convert into more long term debt without having to pay exorbitant fees, you know. And so, those are some of the questions on the financing side and you wanna ask. Another question and this question number 13 is, what is your ultimate goal with the asset, you know? I always, you know, the very first time that we got in into a passive investment, that was my very first question, and it gives me an indication of whether this person is being transactional or transformational to others. You know, my husband and I have decided that every single thing that we do will be transformation because that’s at the core of who we are, that’s part of our values, what we stand for. And so, you wanna ask that as well, you know, what’s their ultimate goal? And it could be that, you know, the response to that question can be really illuminating in helping you decide whether this is a person that you wanna trust your hard-earned money, you know, to or not. Question number 14, I’m getting towards the tail end. What happens if you get hit by a bus? You know, you wanna ask the syndicator, are they adequately…do they have adequate insurance, you know? Who else in their team is gonna take over the asset management of the property, of performance and what is that person’s experience doing that? And how is that property held? You know, is it held inside an LLC? How does that structure look, you know, the ownership structure, such that it always protects the investor, that it can protect your capital, your returns, if they have an umbrella insurance, if they have life insurance if something happens to them. So, you wanna definitely ask, you know, what happens to the asset and to this investment if you for any reason were to be hit by a bus?
It’s a very valid question to ask, you know. I don’t think anyone would be upset if you ask that question. It’s a very, very valid question. So question number 15 and that is, what are some of the biggest risks that you see in this deal and how are you mitigating them? Whether it be risks of operationally, you know, that you know, that they cannot recapture, you know, the rubs or the utilities that they anticipate quickly enough or that they are not able to catch, you know, the property to market rents quickly enough or that they cannot renovate the units quickly enough. Like, how are they mit-… What are the biggest risks and how are they mitigating them? And in terms of financing as well, you know, what kind of loan, what kind of terms do they have? What kind of insurance do they have? If you are specifically in an area that, you know, that is prone to hurricanes, or prone to earthquakes, or prone to twisters, tornadoes, you know, do you have loss of income insurance? Those are things that you definitely want to ask when it comes to risks and how is that syndicator mitigating them.
So, I have come to the end of today’s episode, which is, you know, the 15 questions that you must ask if you are investing passively in an apartment syndication. I hope this was a benefit to you, I’m excited to come to you with another episode of”InFLOW”. If you liked it, please leave me a review, subscribe on YouTube if you’re watching this on YouTube. If you’re listening to this on iTunes or Stitcher or any of the other platforms, give me a five-star review I greatly appreciate that. That really helps me get, you know, up in the rankings. And if you know that there’s someone in your life, an important person in your life that would benefit from the information that I share to you, please go ahead and share this, you know, this episode with them as well, I would greatly appreciate it. So, that is it for now. Thank you, and until the next one. Bye.
I hope this episode left you feeling inspired and ready to get inflows of cash, inflows of life, and inflows of faith in your life. I welcome your reviews on iTunes. Please leave me a review and help me create an amazing community of women in flow. Thank you as always for sharing your voice by going to michellebosch.com and joining the conversation about this show. And while you’re there, grab a copy of my “10 Commandments to Living a Life Inflow.” You can also follow me on Facebook at Michelle Bosch and on Instagram @michellehboschofficial. Thank you very much, and until the next one.
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