Risks in Multifamily Real Estate Syndications

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Money Monday$ with Ben Suttles and Feras Moussa!

Today we walk through the risks of investing in multifamily real estate syndications in this episode you will learn:

-Risks for passive investors

-Risks for GPs

-Steps you can take to mitigate risk in multifamily syndications

VIDEO TRANSCRIPTION

00:00
my money is my sorry my i’m betting
00:02
money that ben is not going to like the
00:04
movie
00:05
but we’ll see it’s a very it’s uh i
00:07
didn’t i like her i like christopher
00:08
nolan i like christmas i don’t
00:09
want to do the batman movies i just did
00:11
it i didn’t like the movie as much as i
00:13
thought
00:13
i think it had a lot more potential it
00:16
just needed about another
00:17
10 minutes of clear dialogue to kind of
00:19
explain a little bit about what’s
00:20
happening maybe
00:21
there’s too many assumptions the audio
00:22
is a little quiet but um
00:24
yeah so that’s what we’re talking about
00:25
but when it comes out on hbo or
00:27
something maybe they would have you know
00:28
re-edit it sometimes they’ll do that
00:29
after they get bad feedback
00:31
bad feedback right you know they’ll kind
00:32
of come back yeah but we’re not here to
00:34
talk about we’re not talking about that
00:35
we’re talking we’re going to talk about
00:36
we’re not here to talk about ted it
00:37
we’re here to talk about tenants
00:39
right very very close so uh you know
00:41
setting up for that i like it but
00:43
so what are we talking about today man
00:44
we’re here to talk about risks in
00:46
multi-family syndications right
00:47
i thought it was a no risk proposition
00:49
but i’m starting to lose my hair that
00:50
wasn’t outlining the
00:52
you know that’s one of the risks there’s
00:53
definitely a lot of risks and i think
00:54
we’re going to go through it from
00:56
both a passive investor standpoint right
00:57
when somebody’s trying to put their
00:58
money to work
01:00
what are the risks and i’m also going to
01:01
say where the risk in comparison to
01:03
let’s just call it the stock market too
01:04
right
01:05
and then um what are the risks as a
01:06
sponsor too right this is not a
01:08
no risk proposition from from our side
01:11
of the table either
01:12
yeah right and so you know i mean this
01:14
is something important i think a lot of
01:15
people like to talk about the hurrah
01:16
hurrah
01:17
raise a bunch of money close a bunch of
01:18
deals own a bunch of doors
01:20
right all the sexy cool fun stuff right
01:22
but what people need to understand is
01:23
this is
01:24
first first and foremost a lot of work
01:26
and there’s a significant amount of risk
01:28
here
01:28
right but there’s high reward high high
01:30
risk right yeah that’s kind of how i
01:32
look at it right
01:33
and so you know you have to put in the
01:34
work you have to take a certain level of
01:36
risk
01:37
to obtain wealth and so as long as you
01:39
can mitigate
01:40
risk through certain things you’ll
01:42
usually be all right right so we’re
01:43
going to kind of go through some of that
01:45
so i’m going to go ahead and shut up
01:46
you’ve done more passive investing than
01:48
i have i can’t get you man
01:49
that’s all it takes to get you to quiet
01:51
down i’m trying to ask you a question
01:52
going keep going all right so you’re a
01:55
passive investor
01:56
right because you you’ve had a lot of
01:57
money in the stock market at the
01:59
beginning and you’ve done a lot of past
02:00
investing
02:00
in apartments and other stuff right what
02:03
is a risk as a passive investor for a
02:05
multi-family syndication let’s just
02:06
let’s just start there
02:07
okay i mean the biggest risk in my mind
02:09
is the sponsorship team right
02:10
execution is you know that really
02:12
applies for anything right whether if
02:14
you’re going to do invest in oil wells
02:16
you want to invest with a group that
02:17
knows what they’re doing and knows how
02:18
to avoid the pitfalls
02:19
so i think with most risks you know the
02:22
same with multi-families the sponsor of
02:23
team is the biggest risk right
02:25
but let’s take that aside right that’s a
02:28
part of that is an emotional thing you
02:29
can measure what they’ve done
02:30
results-wise but again every deal is
02:32
different
02:32
so let’s take that out of it right i
02:34
like to look at how do i mathematically
02:36
start to assess risk
02:37
and a big one what i love about this
02:38
business is that it’s a numbers game
02:40
it’s a people’s game so we just talked
02:41
about the people aspect
02:42
but for the numbers aspect right i think
02:44
the debt right and looking at the debt
02:46
that is chosen and how that assesses
02:48
relative to the deal and what i mean by
02:50
that right we did a deal
02:51
that where we decided to go down 65
02:54
leverage yep right most deals today are
02:56
75
02:57
80 leverage right that is the norm we
02:59
had a deal we went down 65
03:01
leverage and basically reduce the
03:04
leverage so we can get more interest
03:05
only
03:06
so not only are we lower risk because of
03:07
low leverage we also are lower risk
03:09
because we have more years of interest
03:10
only
03:10
and i think and what was what was the
03:12
result we saw what what happened in that
03:14
deal right in terms of relative char and
03:15
passive investors we had
03:16
i actually had we had a lot of people
03:18
come out of the woodwork yeah so you
03:19
know which was interesting because
03:20
we weren’t quite sure how it was going
03:22
to you know
03:24
from a demand perspective from our
03:25
passive investors were they going to
03:26
like a lower leverage deal or were they
03:28
were they really looking for that max
03:29
proceeds right which affects returns in
03:32
in different ways right and so but we
03:34
actually had some people that had never
03:36
invested with us
03:37
that actually liked that because they
03:38
looked at it as a lower risk proposition
03:40
right you know ultimately the numbers
03:42
kind of spoke for themselves anyway too
03:44
right
03:44
you know but you know you have to kind
03:46
of look at that right so you’re weighing
03:47
your different debt options i’d say that
03:49
that’s definitely
03:50
pretty important yeah so so now kind of
03:51
maybe to keep going right so
03:53
the the team yep the debt right
03:56
the asset on the location right we do
03:58
pick areas
03:59
this all the way from the market to the
04:01
sub market right yeah because you know
04:02
we invest in areas that have job growth
04:04
population growth
04:05
right you’re not wanting to know yes we
04:08
could make money in detroit but again
04:09
that’s risk right and so i expect higher
04:12
returns if i’m going to do a deal in
04:13
detroit i thought you’re going to say
04:14
topeka kansas
04:15
because kansas is usually usually my
04:16
whipping boy you know but
04:18
not not to say anything to anybody that
04:20
lives in topeka or is from topeka i
04:22
actually like to pick up yeah
04:23
but you know so so kind of again the
04:24
market there’s risk
04:26
and you know fundamentally to even the
04:28
play right what type what is the play is
04:30
it a
04:30
clean stabilized deal or is it a deep
04:34
you’re trying to you know turn around
04:36
it’s a deal that’s on the edge of a war
04:38
zone and you’re trying to make that edge
04:39
be behind you not in front of you kind
04:41
of situation
04:42
there’s a lot more risk in that again
04:43
you need to get more reward right and so
04:45
i like to talk about any deal we do
04:47
right we’ll look at c’s b’s and a’s
04:49
but ultimately we’re looking for risk
04:50
adjusted returns yeah
04:52
right and so i think for a pass investor
04:54
that you know i’m ignoring some of the
04:55
other risks which is
04:56
if you’re investing with a group you’ve
04:58
never invested with
04:59
are they a legitimate group are they
05:01
going to take your money and disappear
05:02
right i mean there’s other
05:03
soft risks that are kind of you know
05:04
we’re glossing over but ultimately
05:06
with trusted groups right it’s about the
05:08
deal the operation the play
05:09
the team behind and the gusto to go get
05:11
things done right no i agree i’m trying
05:12
to think you know and then maybe you
05:13
know again to remind people right
05:16
with debt the lender is the first note
05:18
holder
05:19
right so that’s one thing so realize
05:21
that they will get paid
05:23
first for anybody let’s say the deal is
05:24
totally sucking when and it gets sold
05:26
for half of the price
05:27
god forbid right well in that situation
05:30
the lender is going to lose money but
05:31
the investors are going to lose all
05:32
their money yes right
05:33
now in addition to that it’s good as a
05:35
passive investor to understand
05:37
is there going to be any second lien
05:38
holders right there’s a lot of these
05:40
deals that are being structured
05:41
as you know with multiple interesting
05:42
instructions multiple class structures
05:44
right
05:45
and as a passive investor you should
05:47
understand you know who
05:49
you know you’re basically your
05:50
investment is supporting it to who right
05:52
so the lender we all understand that one
05:54
is there another tranche of people that
05:55
is coming in essentially as debt that
05:57
they get their money before
05:59
you know any of the investors get their
06:01
money well their money is pretty much
06:02
low risk as well
06:03
so basically you know and you look at
06:05
and even returns wise right i see deals
06:06
that are
06:07
structured with you know let’s say class
06:09
a b and c structures right
06:10
yep and in some of these deals they see
06:13
while they might have the most
06:14
upside right model they get their best
06:16
return but they’re also the most risk
06:18
because a has to get paid and then b has
06:20
to get paid
06:20
and then c is whatever’s left over and
06:22
so again realizing your margin for
06:25
mistakes by the sponsor is very low so
06:27
just being aware of these and it’s not
06:28
to say one’s good or bad but it’s just
06:30
being aware
06:31
as an investor right that it’s not just
06:32
about the the number that gets presented
06:35
oh this deal looks fantastic it’s a 14
06:37
irr
06:37
right it’s more about you know how much
06:40
risk is there and who do i sit behind i
06:42
think that’s one thing that a lot of
06:43
people gloss over
06:44
that is critical to understanding these
06:45
deals and i think the one thing just to
06:46
kind of
06:47
you know uh add on to what ferris is
06:49
talking about too risks from
06:50
you know a passive investor standpoint
06:52
is too the one thing that syndications
06:55
you know are not great at is liquidity
06:57
right you know we talk about
06:59
the stock market versus the syndication
07:01
right what is this indication you are
07:03
investing your money to buy
07:04
shares of an llc which is a business and
07:07
it’s a very illiquid
07:09
investment so say you put a hundred
07:11
thousand dollars in god forbid you lose
07:12
all your money you need that hundred
07:14
grand to live and you know provide for
07:15
your family
07:17
is there mechanisms in place to buy you
07:19
out
07:20
whether we buy you out or whether the
07:21
other passive investors buy you out
07:23
yes but that is not a foregone
07:25
conclusion right you know you
07:26
you have to realize that if it’s if it’s
07:28
tied up for seven years it’s tied up for
07:30
seven years right
07:30
and so that is a risk that past
07:33
investors need to understand too and
07:34
i’d also say another risk is you could
07:36
lose your whole
07:37
your whole investment too yeah and that
07:39
goes back to you understand for a reason
07:41
though right i want to make that crystal
07:43
clear right your your
07:44
your risk is limited to the investment
07:46
that you put into the deal right
07:48
so you’re not gonna they’re not gonna
07:49
come after your house if the deal goes
07:50
upside down and something happens right
07:52
you’re just gonna lose that 100k that
07:53
you invested in the deal yeah and again
07:55
it just
07:56
goes back to yeah understanding that if
07:59
the thing makes an exit that’s an
08:00
unexpected exit who’s getting paid when
08:03
yeah right and then
08:04
other other things so we talked about
08:05
classes besides that i mean you know
08:07
just understanding
08:08
mess right is there a mess because those
08:09
guys sit above that well that’s what
08:11
you’re talking about today the world
08:12
gets really complicated because there’s
08:14
there’s a senior lender and there’s a
08:15
junior lender and then you so they could
08:17
be called they could be called mezzanine
08:19
lenders they could be called preferred
08:20
equity yeah right they’re kind of
08:22
synonymous right but what ferris was
08:24
alluding to earlier which is their sec
08:25
their second note right
08:26
and they’re usually structured as debt
08:28
and they’re usually going to get paid
08:30
before
08:30
any of the other lps or the passive
08:32
investors get paid so say the senior
08:34
note gets paid
08:35
the mezzanine gets paid and there’s no
08:37
more money for the lps
08:38
that’s just how it’s structured yeah and
08:40
they have they have a superior position
08:42
in the capital stack than the lps do and
08:45
you need to understand that when you’re
08:46
investing in these deals because
08:48
then at the end of the day you could get
08:49
nuked out yep right because all the
08:51
money has to go back to the mezzanine
08:52
lender and the senior letter
08:54
so from a passive investor standpoint
08:55
you just need to understand that
08:57
and where do risks where are they all
08:59
outlined in the paperwork
09:00
and the ppm all right you need done it’s
09:04
usually a long it might as well be what
09:06
watch a paint dry but please read that
09:09
or have your attorney read it understand
09:11
that
09:11
that is where all the risks from the
09:13
from the deal um are going to be
09:15
outlined and so it’s right there crystal
09:17
clear and blasphemy
09:17
good question if you’re doing mezdet do
09:19
you have to outline that at a ppm
09:21
i know i know the lenders always ask the
09:23
lenders
09:25
the lenders ask what if it’s in the ppm
09:27
no they ask is part of the application
09:28
process
09:28
right they know the lenders yeah they’ll
09:30
know the lenders ask if you’re doing
09:31
mess that’s fine yes
09:32
i’m wondering do you have to disclose
09:33
and so we’ve never done
09:37
ask your sponsor candidly in a written
09:39
email form so you have it documented
09:41
if there’s any other you know what
09:42
they’re doing on that side so you know
09:44
they really should be
09:45
wondering i’m wondering if because the
09:46
sponsor is usually allowed to approve
09:48
things like that
09:49
that’s what the ppm says but the
09:51
question is do you have to actually
09:52
disclose that i would imagine as a
09:53
passive investor there’s a lot more risk
09:55
if you’re drinking
09:55
we usually have to disclose our fees and
09:57
the structure i would assume that that
09:58
would probably be a big one
10:00
but once again actually tip mmt
10:08
so that’s that’s for the passive
10:09
investors going so money mondays we do
10:11
this every monday 3 30 central
10:13
today we’re talking about risks and
10:14
multi-family syndications right if
10:16
anyone’s tuning in for the first time
10:17
usually we go about
10:18
20 minutes or so of presentation 10
10:21
minutes of open q a so feel free to ask
10:23
questions you have to ask them now we’ll
10:24
read them live we’ll go through them at
10:26
the end
10:26
and if anyone has topics suggestions for
10:28
future topics let us please
10:29
please before
10:32
so our buddy ronnie of course will try
10:35
to trooper he basically said ben is
10:37
wearing
10:38
is he’s kind of wearing plaid today for
10:39
those of you that don’t know ronnie
10:40
likes to make sure we are wearing plasti
10:42
no that’s that’s plaid
10:43
yes uh chat says hello hello chat
10:47
hey chad ronnie says and preferred
10:48
equity absolutely we just talked about
10:49
that yep
10:50
yep and chad says at the end of the day
10:51
you have to know who you’re investing
10:53
your money with these indicators
10:54
i would say i would ppm and hire an
10:56
attorney if necessary absolutely
10:58
and then she says also before i’ll let
11:00
you continue is if there’s a very
11:02
complicated ppm i usually ask the help
11:04
of
11:04
my counsel to have the full
11:05
understanding of the deal yes you should
11:07
and that is
11:07
that is a pro tip in itself you need to
11:10
understand what you’re getting yourself
11:11
into
11:12
right so read that before you have your
11:14
lawyer 300 200 000
11:16
spend a couple hundred dollars to have
11:18
an attorney look over stuff for you
11:19
please
11:19
please because it outlines all those
11:21
risks folk but you know we’re just kind
11:23
of we’re
11:23
talking about the the most obvious ones
11:25
right you know and some of that might
11:26
not be outlined in the ppm like
11:28
do you like the people that you’re
11:29
investing with right that’s not going to
11:31
be outlined in a ppm
11:32
so all right so we’re looking at it from
11:34
the past investor standpoint
11:36
and we’re open to suggestions if anybody
11:38
else if we forgot some stuff people
11:39
please put it in the comments
11:40
there’s people that watch these videos
11:41
months afterwards so we like everybody’s
11:44
kind of participation we want this to be
11:45
interactive so not only questions but
11:46
comments too so
11:47
forgot something just slam it in there
11:50
risks for the gps right
11:52
you know i think a lot of people once
11:54
again like i said at the beginning
11:56
you know they want to talk about the
11:57
sexy stuff about the fun stuff right
11:59
about
11:59
you know the doors that everybody buys
12:01
and the deals that are closing and the
12:02
amount of money that you’ve raised right
12:04
and that’s the fun sexy stuff but
12:06
the fact of the matter is is there is a
12:07
fair amount of risk right and so i’m
12:09
going to start with the beginning part
12:10
of the process
12:11
there’s there’s risk in that you’re
12:12
going to spend six to 12 months
12:15
of your time maybe flying around the
12:17
country to do property tours maybe
12:18
spending a bunch of money trying to
12:20
underwrite deals and just time wasted
12:22
opportunity costs
12:23
internet flights tools tooling council
12:27
creating llc’s people get overworked up
12:28
and all these other minutiae stuff but i
12:30
mean but fundamentally about the deal
12:31
first
12:32
yeah but my point and you’re 100 right
12:34
right but
12:35
you when you’re starting off right then
12:37
very rarely do i fall to 98.95
12:40
right sometimes right but my point is is
12:43
that you can spend six to 12 months
12:45
and you don’t find anything then all
12:47
those property tours and those flights
12:48
and those hotels and all the money that
12:49
you spent flying around the country
12:50
trying to find a deal was
12:52
money that was just lost right but so
12:54
that’s kind of
12:55
it’s that’s tangible but somewhat
12:57
intangible right but let’s talk about
12:58
the more tangible things right
13:00
say we put up earnest money right or we
13:02
have one of our partners put up earnest
13:03
money
13:04
and something goes wrong and we can’t
13:05
close the deal covet happens whatever it
13:07
might be
13:08
right you know that is at risk capital
13:11
that’s what people are talking about
13:12
when they say that right oh i’ll put up
13:14
the at-risk capital
13:15
that’s because it’s at risk right so you
13:18
can spend six to 12 months to find the
13:19
deal
13:20
then you put up let’s just say a quarter
13:21
million dollars in earnest money which
13:23
is at risk
13:24
and then something happens and the deal
13:26
isn’t closed not only have you just lost
13:27
six to 12 months of your
13:29
of your life trying to find a deal but
13:30
you also just maybe potentially lost
13:32
a quarter million dollars too right but
13:34
on top of that
13:36
not only do you have to put up money for
13:37
the earnest money but you also have to
13:38
put up a lender application fee which is
13:40
usually
13:40
depending on the lender anywhere from 10
13:42
to 50k right then you have to pay for
13:44
due diligence right sometimes that’s
13:46
free
13:46
sometimes it’s not a good rule of thumb
13:49
is anywhere from 25 to 50
13:50
per door for uh for a good site
13:53
inspection and
13:54
lease audit right so that could be
13:56
thousands of dollars right there
13:57
all of that can completely blow up
13:59
before you even close the deal
14:01
right so that’s just the front end of
14:02
the process right now let’s talk about
14:04
the back end you
14:05
got something across the finish line
14:06
right what risks are there to us after
14:08
the fact
14:09
just man you’re losing losing your hair
14:11
working through these deals right ben
14:12
already lost that so
14:14
clearly blood pressure can go up hair
14:16
can be lost right
14:17
you know it’s 20 pounds ready for the
14:19
deal
14:20
right i mean and that means working with
14:22
investors fielding questions they have
14:24
and doing distributions and
14:25
tax paperwork to just dealing with
14:28
operations your property management
14:29
company and
14:30
all of that right i mean it’s all
14:31
headaches honestly in a lot of ways so
14:33
it’s about systematizing and getting
14:34
ahead of it
14:35
and you know learning to not make
14:36
mistakes right and i’d say risks right
14:38
that’s that’s just more so just the the
14:40
the process i would say risks
14:43
on top of that right would be you know
14:46
say for example something is needed at
14:48
the property right
14:49
or your lender is taking six months to
14:51
get you a draw
14:52
and you can’t execute your business plan
14:54
ask us how are your taxes triple and you
14:56
protect
14:59
what are you going to do you’re going to
15:00
go back to your investors and say well
15:02
or linda’s still waiting to
15:03
give us a draw and we’re jammed up with
15:05
a general contractor
15:07
you know we need a quarter million
15:08
dollars right that doesn’t go over so
15:10
well with your passive investors folks
15:12
so as a gp what do you have to do most
15:14
of the time
15:15
the gps have to stroke a check and we
15:17
have to get the thing unjammed
15:18
right now it’s a loan to the property
15:20
you’re god willing you get it back when
15:22
you close or when you refinance or when
15:24
there’s
15:24
when there’s enough money to pay back
15:26
the loan but that is money that’s
15:27
additional money that’s tied up
15:29
right or like you said your tax is
15:31
triple right and you
15:33
and you get blindsided by by tax
15:35
reassessment
15:36
nobody is ever underwriting taxes being
15:38
tripled and a good one that ronnie said
15:40
and we’ll come back and read comments
15:41
on facebook here in a second but you
15:43
know the a really good one
15:44
is that basically there’s always the
15:46
risk of the non-recourse loan becoming
15:48
recourse right
15:49
i was getting into that yeah so that’s
15:51
yes yeah i would say that’s probably
15:53
from a gp standpoint that might be the
15:54
worst
15:55
um but if if that happens then you
15:58
you’re you’re probably
15:59
so going oh the debt that we’re doing is
16:01
non-recourse but to ben’s point
16:02
it can be recourse with the bad boy
16:04
carve out you’re going to jail or
16:05
something
16:05
yeah someone in the group did something
16:07
they shouldn’t have and got everyone
16:09
else in trouble so
16:10
let’s go let’s call it fannie and
16:11
freddie bad boy carve outs right or bad
16:13
girl
16:14
you know you know bad people car bad
16:16
people carve outs right
16:17
um and that’s what they’re talking about
16:19
right there it’s like 10 20
16:21
ask anton matli at peak financing he
16:23
knows those things left and right
16:25
um you know of things that if if the
16:28
sponsorship team does or the kps do the
16:31
people are signed on the loan
16:32
if anybody does this it will trigger the
16:35
non-recourse loan
16:36
to now become potentially recourse and
16:39
if something goes wrong
16:41
right say that that the market turns on
16:43
you right we’re in eight nine and ten
16:44
again and and
16:45
property values plummet right you could
16:48
potentially be underwater and what would
16:50
now they can come after you personally
16:51
because you you screwed that
16:53
up you screwed up the non-recourse debt
16:56
and that 15 million
16:57
loan might become called right that’s
16:59
why they have kps on these deals that’s
17:01
why they ask about net worth and
17:02
liquidity folks right because
17:04
it’s not the people are always like well
17:05
if it’s not recourse why does it matter
17:07
it’s because if you screw up and it
17:09
becomes recourse they’re going to come
17:10
after the person with the biggest
17:11
pockets
17:12
right and so that is a big big risk
17:16
for gps kps on the deal right because
17:19
they’re not necessarily one of the same
17:20
right uh kp could be
17:22
you know um just deciding on the loan
17:24
but maybe they didn’t get any uh of the
17:26
gp equity
17:27
so you know i think kps need to be very
17:29
very they
17:30
need to do some due diligence there
17:31
absolutely so let’s go through some
17:32
comments but for those who tuning in we
17:34
do this
17:34
monday mondays every monday 3 30 central
17:36
yep right um today we’re talking about
17:38
risks and multi-family syndications
17:40
if anyone has any topic future topics
17:42
let us know we’re happy to kind of you
17:43
know talk about whatever man ben
17:45
we can’t get ben to stop talking so it’s
17:46
just you know we need to keep him filled
17:47
with this plate with myself whenever i’m
17:49
taking the sip of my coffee i’ll usually
17:50
shut up so speaking of ronnie says uh
17:52
where’s your starbucks ferris you’re
17:53
right i left in the other room that was
17:54
an accident
17:55
um rodrik on linkedin says it’s always
17:57
best to over disclose when being a
17:59
sponsor actually i totally agree
18:00
right so you know you want to protect
18:03
yourself as a sponsor too so
18:04
lay it all out yeah um ronnie says risk
18:07
with gp upfront cost legal dd expenses
18:10
time staff pay earnest money et cetera
18:13
savion says next week’s topic can you
18:15
talk about how to utilize tax benefits
18:18
offsetting cash flow income as a loss as
18:19
an lp from my understanding it’s
18:21
different than a gpu would love an
18:22
example
18:25
we should probably do once so shannon
18:27
let’s make a note in january
18:29
let’s do one maybe we have like a cpa
18:32
get on and hopefully we can catch them
18:33
in january before they start getting
18:34
really busy yeah they might be getting
18:35
better
18:36
you know to kind of do tax strategies
18:37
for people to line up with their
18:39
you know it’s tax time so i’m good with
18:40
that good one that’s one of the reasons
18:42
why we like
18:43
you know commercial syndication real
18:45
estate so jefferson says what’s up guys
18:46
what’s up hey
18:47
this is another risk as an honorable
18:48
okay talk about that savannah said if
18:50
you don’t have that money
18:51
for the upfront cost obviously we need a
18:52
partner from your perspective
18:54
what would you like to see from
18:55
potential partner who is essentially
18:57
broke
18:58
uh just to be blunt so hey man we
19:00
appreciate the candidness i mean i i
19:02
think
19:03
you know not everybody starts off with a
19:05
ton of money in their bank account when
19:06
they get into this business right you
19:07
know i mean i always i always say
19:09
we won’t we won’t go down too far a
19:10
rabbit hole here but if you don’t have
19:12
any money do you have time
19:14
if you don’t have any money do you have
19:15
the skills to go find a deal right and
19:17
those
19:18
usually if you can find a deal or you
19:19
have time to go find a deal
19:21
you can usually find somebody that has
19:22
money that doesn’t have the skills or
19:24
the
19:24
time to do you find a deal and then
19:26
that’s a part of yourself can you
19:28
manage a deal yeah there’s a lot of
19:29
people can you do construction
19:30
management
19:32
so we are doing our multi-family
19:34
investment network conference february
19:35
28th
19:36
7th whatever that saturday is really 27
19:38
yes okay but for some reason
19:39
yeah 27th saturday and one of the
19:41
presentations we do do is basically how
19:43
to get started we go through all the
19:44
different things
19:45
that are required in gp and all the ways
19:47
people can help contribute to that so
19:49
monday uh sorry february 27th here in
19:51
houston check out mf investor network
19:53
dot com
19:54
boom um let’s keep going so uh
19:57
uh iggy says what’s up what’s up uh why
20:00
that’s why it’s important to be careful
20:02
being kp i see a lot of people doing it
20:03
for fun absolutely
20:04
definitely understand who your vetting
20:06
is right i think people throw that
20:07
around
20:08
way too loosely folks like i i you know
20:11
we we do it because obviously we’re on
20:13
the gp side and we sign on every single
20:14
one of our loans
20:16
but you know you need to be very you
20:18
need to be very careful whenever you’re
20:19
you’re
20:20
offering your net worth and your
20:21
liquidity and understand who you’re
20:23
doing that with
20:23
because if they screw up and they commit
20:25
fraud your your net worth and your
20:27
liquidity can be at risk
20:28
yeah so you understand that chat says in
20:31
other words it’s not all fun and dandy
20:32
the excitement isn’t when the deal
20:34
closes the real world starts only
20:36
after closing absolutely closing is the
20:38
easiest part of it all honestly no no
20:39
people like oh if i close and it’s like
20:41
a sigh of relief and then i’m like yeah
20:42
now the hard part starts
20:44
yeah you know you thought that was hard
20:47
you know and really that’s the f i’d
20:49
really consider that the fun stuff right
20:50
you’re finding the deal you’re putting
20:51
it together you’re raising some money
20:52
talking all your friends investors
20:54
that’s that’s fun that’s easy you know
20:56
it’s the operating part that’s the hard
20:57
part right
20:58
so so that’s kind of some of the risks
21:00
and once again
21:01
ronnie or anybody that’s listening that
21:03
has experience on the gp side please
21:05
comment i’m sure i’m probably missing
21:06
some but those are kind of the major
21:08
ones that i wanted to talk about
21:09
so um they wait really quickly uh so we
21:11
got a question if your engineering
21:12
report comes in much higher than assumed
21:14
a lot more money will need to be
21:16
escrowed for immediate repairs throwing
21:17
off your initial
21:18
projections absolutely that’s a good one
21:20
there are risks with
21:22
the debt changing we need to talk about
21:23
that right where all of a sudden you
21:25
need to raise another million dollars or
21:26
the lender is making you do more work
21:27
than you realized and
21:29
knowing that now you have to scramble
21:31
that’ll change returns
21:32
and you need to be ready for that or you
21:34
just need to be ready to walk away
21:36
right you know i mean like some people
21:37
yeah i mean you need to realize that
21:39
that is a true risk and we have seen
21:41
that happen ask us how we know
21:43
right hasn’t been where it’s
21:44
fundamentally changed our deal but it’s
21:45
changed our deals
21:47
right and you need to be able to
21:48
disclose that and you need to understand
21:50
that hey is this still a good deal or
21:51
should i walk away and not lose any more
21:53
money
21:53
right and so that is a risk as a gp
21:55
right you know that your lender totally
21:57
screws things up and
21:58
you know ask us how we know right so
22:00
steps you can take
22:01
to mitigate risk right you know i’m
22:04
gonna i’m gonna throw one out
22:05
right because you know this has been
22:07
this has been a problem on every single
22:08
one of our deals
22:09
you know you have to be very very smart
22:11
about this insurance right you have to
22:13
have the right insurance in place
22:15
you have to have the right level of
22:16
coverage and you need to make sure
22:17
you’re actually covered for some of this
22:18
stuff too
22:19
right you know there’s people that you
22:21
know um
22:22
are underinsured or their deductible is
22:25
wildly high
22:26
and they go to go go make a claim and
22:28
they have to do
22:29
fifty thousand dollars we’ve had flood
22:31
insurance whenever we didn’t have to
22:32
have it so thankfully we have flooded
22:34
insurance or
22:35
realizing if it’s a per building
22:36
coverage versus the total place and so
22:39
let’s say you have to do roofs yeah well
22:41
if you have a per
22:42
building kind of deductible guess what
22:44
you’re probably paying for the entire
22:45
roofs
22:45
out of your deductible you’re paying for
22:46
the full cost yeah versus if it’s one
22:49
so really understanding that and luckily
22:51
we we we’ve
22:52
avoided making the the real mistakes we
22:55
got dan
22:55
strategic insurance group check him out
22:58
you know strategic insurer.com i mean
22:59
he’s kept us out of a ton of trouble
23:01
even when we’ve had a claim he’s
23:02
shepherded the whole process
23:04
definitely insurance is one that’s a big
23:05
thing i think i think getting the right
23:07
debt and having the right debt broker on
23:08
there because that’s
23:09
they’re going to be an integral part of
23:12
making sure that you get the right debt
23:14
and that the that debt that was quoted
23:16
in that term sheet right
23:17
actually gets to the closing table right
23:20
because a lot of things can happen
23:21
in that 60 or 90 days that it takes from
23:23
when you get the term sheet
23:24
to when you actually close right and you
23:26
need somebody there
23:28
once again we use anton matley
23:29
peakfinancing.com
23:31
he’s a great guy he can help shepherd
23:32
that process too but that will help you
23:34
mitigate the risk of your lender jerking
23:36
you around
23:37
and we tried to go we tried to go direct
23:39
on one deal and it was a bad experience
23:41
i’m not saying that you can’t get a good
23:42
experience we love our
23:43
we love our lenders but we prefer to
23:46
have somebody that that’s their job
23:48
that’s how that’s how they get you know
23:49
compensated and they do a great job
23:51
doing it and then that allows us
23:52
to stand back and how do we you know
23:54
formalize our business plan
23:56
how do we raise the equity right so that
23:57
takes that that burden
23:59
and that um that stress off our
24:01
shoulders right yep
24:02
so that’s another reason what else man
24:04
what else can we do you know it’s just
24:05
having more capital than you think you
24:07
might need that’s like that that’s a big
24:08
one we’ve learned that the hard way the
24:10
first couple where we struck those
24:11
checks the lowest money
24:12
but now being smarter about more
24:14
reserves and depending and
24:16
and tying the reserves to the play
24:17
you’re doing stabilize simple deal don’t
24:20
probably need as much reserve you’re
24:21
doing a deep value add a reposition
24:22
regarding the property
24:23
you want even though you’re sure your
24:26
your quotes are going to come in a
24:27
million dollars
24:27
you should have a million and a half
24:29
just on hand because again it might take
24:31
six months for the lender to give you
24:32
your money why did we say that because
24:34
we’ve had that happen
24:35
and so being kind of more conscious of
24:37
that and that’s tough we were doing
24:38
a heavy value add and it took six months
24:41
and this wasn’t like us just
24:43
i mean we were pounding on them every
24:44
other day and they’re ghosting us and
24:46
they’re making up excuses
24:48
and they’re outright lying to us it was
24:50
a bad shot we’ve probably had this
24:51
discussion on
24:52
on the show before but um you know at
24:54
the end of the day right
24:55
if we didn’t stroke that check the
24:57
property would have been in some real
24:58
trouble
24:59
right so having your reserves that’s
25:00
probably one of the biggest ones to
25:02
mitigate your risk right
25:03
so having the right insurance having the
25:05
right debt in place right
25:07
having reserves um you know and i always
25:10
go back to
25:11
you know real estate is a location
25:14
location location
25:15
if you’re in the right pocket with job
25:17
growth
25:18
population growth all all ships rise
25:21
with the tide right you know versus
25:23
you’re kind of playing that you’re on
25:24
the cusp but maybe maybe the path of
25:26
progression goes the other way and now
25:28
you’re
25:28
you’re left you’re in the hood right and
25:30
so you need to be
25:31
you’re going to have less risk in better
25:34
parts of town
25:35
right and so that’s a way to mitigate
25:37
that you you know your your property
25:38
doesn’t get the rent pops that you want
25:40
or
25:41
you know maybe you’ve you’ve over
25:42
improved it and you don’t get your money
25:44
back whenever you go to sell it right so
25:46
those are some ways to kind of mitigate
25:47
risk and multi-family syndications too
25:50
so you know i think we covered most of
25:52
it right
25:53
i agree you know i don’t know like i
25:54
said add some stuff to the comments
25:56
folks there’s a people
25:57
comments questions let us know we’ll go
25:59
through them here live so we did have a
26:00
few more
26:01
uh let’s see
26:05
uh when you are stress testing a deal
26:08
what are the what is it what are the
26:10
three ways you do it
26:12
stress test i mean exit cap is one with
26:14
occupancy exit cash
26:16
rent different debt pushes rent growth i
26:18
mean we got more than three
26:20
you know i mean i would say the biggest
26:22
ones right it’s gonna be exit
26:23
exit cap right your reversion cap rate
26:26
you know
26:26
um how much pops and rents can you get
26:29
right
26:30
what’s your physical and economic
26:31
occupancy gonna be right
26:33
and then obviously debt right play
26:35
around with your debt because once again
26:37
folks i have i
26:38
cannot stress this enough that that term
26:40
sheet is just
26:41
a very loose proposal think of it like
26:43
it’s an loi it’s non-binding
26:45
they will they will come and talk to you
26:47
about i mean they’ll tell you
26:49
after the fact oh well we’re within the
26:51
range and that’s the reason why it’s
26:53
different than it was right and then you
26:54
go look and you look at the fine print
26:56
and the fine print really is you know oh
26:58
crap the right
26:59
you know um that noi came in 50 000
27:03
less than what they had underwritten it
27:05
at and so that gave them
27:07
you know um you know carb launch to go
27:09
off and
27:10
and jack around with your leverage your
27:12
risk or your your interest rate or your
27:14
io
27:15
and once again ask us how we know that’s
27:16
the one time that we we went with the
27:18
lender directly when we were kind of
27:19
noobs on the whole thing
27:20
and they blew up on our face right they
27:22
ultimately came back and
27:24
they they whacked our proceeds by i
27:25
think 250 grand they went from three
27:27
years to one year
27:28
and that happened a week before closing
27:30
right so
27:31
you have to be really really careful
27:33
there um so let’s keep going then
27:35
um what else we got maybe let’s see
27:39
now there’s more i was just reading that
27:40
question uh how are you getting risks on
27:42
deals moving forward in 2021
27:44
more capital less growth um better
27:48
yeah better parts of town i think i
27:51
think that really
27:52
how we’re mitigating risk i mean we’re
27:53
going to follow the same process we have
27:55
the right teams in place for
27:56
insurance and debt and property
27:58
management and then we’re just going to
28:00
try to buy some better
28:01
deals newer deals and better parts of
28:03
town i mean that’s you know
28:05
not to say that class c you know we’ve
28:07
we’ve weathered the storm
28:08
probably as good as anybody can expect
28:10
given the circumstances with cobid
28:12
but um you know the workforce housing
28:14
market has has taken
28:16
a hit anybody that tells you otherwise
28:17
is lying you know
28:19
so you have that b class or that a minus
28:21
asset
28:22
where there’s still some meat on the
28:23
bone right that you can still do some
28:25
value add but you have tenants that
28:27
could maybe work from the house versus
28:29
if they’re that retail shop or that
28:30
restaurant is closed or that bar is
28:32
closed
28:32
they’re out of work absolutely so that’s
28:35
that’s how we’re kind of mitigating risk
28:36
in 2021 and have a lot of working
28:38
capital b well capitalize on rehab so we
28:40
talked about those and then last but not
28:41
least
28:41
have enough metrics in the underwriting
28:42
model to have buffer for things that not
28:44
going as planning yeah absolutely no no
28:46
you have to have you have to have a
28:47
buffer you have to have reserves
28:48
you know that’s all the costs yeah
28:50
that’s all the comments questions so if
28:51
anyone has any more comments questions
28:52
let us know
28:53
what are we doing today man monday
28:54
monday is 3 30 central
28:57
right we do this every monday for about
28:58
30 minutes and then we basically present
29:00
a different topic
29:01
and we’ll spend about 10 minutes at the
29:02
end do an open q a what are we talking
29:04
about next week
29:05
yeah why are we are we running out of
29:06
time yeah we might have to book through
29:08
this one all right so
29:09
what are we talking about next week five
29:11
easy ways you can structure gp splits
29:13
in multi-family real estate and
29:15
syndication so we’re getting in the
29:16
splits again right
29:17
i think this is not two ways not three
29:19
five five
29:20
that’s about as that’s the highest bank
29:21
account so it’s on one hand
29:24
i didn’t really want to go to six yeah
29:26
you know i had to use the other hand
29:27
but no there’s there’s a thousand
29:28
different ways we’ll probably go over
29:30
the ones that are most
29:31
you know i guess customary most standard
29:32
that we’ve seen right because i think
29:34
we got some feedback you know obviously
29:36
from last week’s show or was that a
29:37
couple weeks ago i don’t know
29:38
everything’s blurred together when we’re
29:39
talking about fees and structures it’s
29:41
important people need to understand that
29:42
if you’re going to do a deal you need to
29:43
understand how to structure it properly
29:44
and then soon we will do one about
29:45
underwriting deeper dive on that as well
29:47
yeah we’ll do another underwriting one
29:48
we got a lot of good feedback on that
29:49
one too right and we rushed through that
29:51
one so we’re gonna try to do a little
29:52
bit deeper of a dive
29:53
so i do have a multi-family cheat sheet
29:55
yep all right so definitely if you
29:56
want to check out a multi-tube where do
29:58
you go ben disrupt equity.com
30:01
mf cheat sheet all right so
30:04
you know once again not trying to sell
30:05
you anything you know
30:07
it’s just some of the tips and tricks
30:08
that we’re going to kind of put out
30:09
there yeah and then a reminder right we
30:11
do have our
30:12
big conference coming up so last night
30:13
we are going to try to sell you
30:14
something yeah we are well it’s not
30:15
really yeah
30:16
so last year you know we’re talking
30:17
about tickets multi-family investor
30:18
network conference something we started
30:20
about two years ago
30:21
yes we’ve had done several of them the
30:22
last one we did was in february right
30:24
before covet really took over
30:26
400 people came out we had the mayor of
30:27
houston and all sorts of presentations
30:29
we are going to do the next one again at
30:30
the end of february we’re getting some
30:31
good traction
30:32
we’ll get a lot of tickets outside they
30:34
might sell out there’s some there’s some
30:35
pent up demand all right
30:36
we’re gonna do it right we’re gonna
30:37
we’re gonna stay safe right got social
30:39
distancing in place i’ll get a bigger
30:41
hopefully a bigger room so we’ve got a
30:42
more spaced out masks february
30:44
27th definitely check it out at
30:47
mfinvestornetwork.com
30:48
i’m going to make this up but use the
30:49
coupon code disrupt to get a discount
30:52
so she didn’t have that on the slides
30:54
but i think so
30:55
definitely if you hopefully take it
30:57
please use it disrupt to go grab a
30:59
ticket but you guys
31:00
check it out great way and really the
31:01
idea what’s the vision right it’s a one
31:02
one-day crash course where people can
31:04
learn the ups and downs of multi-family
31:06
real estate we’re not selling anything
31:07
at the thing no we’re not we don’t even
31:09
we barely spend time on the stage it’s
31:11
really about bringing on
31:13
most people don’t even realize that
31:14
we’re the ones putting it on yeah until
31:15
the very end
31:17
because we’ll come and speak for like
31:18
five minutes at the beginning so if you
31:19
got there late
31:20
you wouldn’t even know that we were the
31:21
ones putting it on until the very very
31:23
end when
31:23
when kenny and ferris do a little bit of
31:25
uh uh it’s not about
31:27
it’s not about us right it’s about
31:28
educating people networking and really
31:30
helping people get in the business yeah
31:31
our speakers our vendors they’re the
31:33
ones that are
31:33
really the pros and the whole thing and
31:35
so we’re trying to prop them up and and
31:37
allow them to provide that education
31:38
that we’re very we’re very passionate
31:40
about
31:41
and then put something in place where
31:42
you can kind of do some networking
31:43
because once again you need to learn the
31:44
business but you also need to have
31:46
contacts yeah you’re not going to be
31:47
able to go out there and do it on your
31:48
own a lot of people think that they can
31:49
but they can’t you have to have a team
31:51
right so you know check us out at
31:54
mfinvestornetwork.com
31:55
yeah so monday mondays every monday 3 30
31:57
central we are at the top of the hour
31:59
savion go ahead and send us that email
32:00
appreciate it yeah buddy hey pacheco
32:02
says thank you gentlemen thank you
32:04
hey gotta see you here soon and um
32:06
that’s all i got
32:07
that’s all we got so we’ve got any more
32:09
comments questions we’ll stick out
32:11
another minute or two otherwise we will
32:12
call it a wrap and we will see you guys
32:14
next monday
32:15
at 3 30 central we’re talking about deal
32:17
structures once again everybody
32:18
yeah we’re talking about we’ll talk
32:19
about how to split the gp how to split
32:20
the gp and i also i want everybody it’s
32:22
really a
32:23
it’s a holiday theme right it’s like a
32:24
pie right there’s a lot of pies right
32:25
now people are eating
32:26
so we figured we would talk about the gp
32:28
yeah dessert i would love a pie if
32:30
anyone out there wants to send me a pie
32:32
disrupt equity you guys can check out
32:33
our website it has our address
32:35
here in houston so um but no we’ll have
32:38
some fun we’re kind of trying to keep it
32:39
light and bright we’re trying to educate
32:41
people so if you have stuff that you
32:42
want us to talk about
32:43
once again we want to be interactive you
32:45
know message us you know or email us and
32:47
we’ll take it into consideration try to
32:48
roll it out next year awesome let’s call
32:50
it a wrap then thank you all very much
32:52
appreciate it everyone see

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