Real Estate Syndication VS a Joint Venture

 

If you have put a few smaller real estate deals together by creating partnerships and raising money, chances are you may have created a Joint Venture to get the deal done. But if you plan on taking it to the next level and raise capital for larger multifamily deals, you will want to know a little more about your options. Doing so will not only protect you as the person putting the deal together, but will also protect the investor in terms of understanding the risks when it comes to investing.

There are two common partnership structures: The Syndication and the Joint Venture. Each has their own advantages and disadvantages, but executing the right one is absolutely important to how you execute and build your real estate business.

Before I go on, please note that I am not an attorney. I am only offering some high-level information for educational purposes only. You should talk to a real estate attorney and a securities attorney to determine what structure works best for the project you are working on.

Back in 1946, a case was decided by the Supreme Court where the SEC challenged a man named William John Howey because of the manor he sold off pieces of his land as an investment contract. The result from the case is something called ‘The Howey Test’. From this test, you will be able to determine whether you are forming a syndication or a joint venture.

There are four questions to the test:

1. Is there an investment of money?
2. Is there an expectation of profits from the investment?
3. Is the investment of money in a common enterprise (that is, investors pool their money or assets together to invest in a project)?
4. Do any profits come from efforts of a promoter or third-party?

We know that in both syndication and joint ventures, there is “1. An investment of money” and “2. There is an expectation of profits from the investment”. You can also say that the third rule is true. The main difference is the fourth part: “Any profit comes from efforts of a promoter or third-party”. If this fourth rule is true, then the deal can be classified as an “investment contract”, or syndication. If the fourth rule is false, then it could be a security, or joint venture.

If this is a joint venture, the investors are actively involved with the ongoing management of the deal. They need to have a named role in the deal and you must be able to prove they actually performed their duties to the job description. The individuals or companies in the venture are pooling their resources to work toward a common goal and all parties involved are managers in the deal.

An example would be if three contractors got together to work on the electrical, HVAC and plumbing on a fix-and-flip deal. All three contractors have defined roles and are actively working on the project. And since they are all managers, they have unlimited liability. Any decisions need to be done by majority rule and a single person cannot override the other two.

A joint venture is much easier to set up and are less expensive to form as there is no registration needed with the SEC. Regardless, you should still have your attorney draft the documents so everyone on the team is clear on their responsibilities.

If this is a syndication, then you are selling a security and you must have your attorney register with the SEC as regulated securities. While the “general partnership” portion of the syndication is a joint venture, the partnership between the general partnership (the syndicators) and the limited partnership (the passive investors) is a syndication. Unlike a joint venture, a syndication adheres to the fourth rule – “Any profit comes from efforts of a promoter or third-party”, with the third party being the general partnerships, or the syndicators. The investors are not actively involved in the management of the project and they are passive.

It’s also worth noting that setting up a syndication is a bit more expensive because of the supporting paperwork that needs to be drafted along with the registration with the SEC. Again, you should talk to your securities attorney about this part and don’t skimp on hiring a good attorney.

Finally, it is important to remind you that you should talk to a securities attorney before forming a partnership to take down a deal. If you form a joint venture when a syndication is actually needed, the non-compliance with the securities laws can cost you thousands of dollars in fines with the SEC or even land you in jail.

If you liked this, go ahead and give it a thumbs up. Also, check out the Bulletproof Cashflow podcast on iTunes or Stitcher, and subscribe to our YouTube channel. We are working on getting new content out all the time to help you build your success in the world of multifamily.

Be great.

5 Tips To Attract New Tenants

 

When it comes time to find new tenants to rent that freshly turned unit you just spent money on, you need to make sure you know who you are renting to. Regardless of the market, you want to perform the proper underwriting upfront to avoid problem tenants. You want to attract good, strong tenants that will be happy to rent from you and stay in the property for as long as possible. There are many ways to attract a tenant to rent from you, but here are 5 tips to attract new tenants to rent your vacancy:

1) Focus in Curb Appeal

When prospective tenants roll up to your property, they expect to see a clean property that looks well maintained. This doesn’t mean it needs to look like a Class A community. Rather, you should strive to make sure there is no trash on the premises, the entryways are clean and maybe even decorated. You want to make the place as welcoming as possible to a prospective tenant and make it feel like home. If you are not great at taking photos or videos, spend a little money on a photographer to take photos of the interior and exterior, highlighting the features of the property.

2) Make the Place Great, but Remain Neutral

Using a neutral pallet on the surfaces of the units will appeal to a wider market. By that, I mean sticking with modern colors that people like. For instance, these days, it’s about light grey walls with white trim. Years ago, it was all about eggshell paint on the walls, which you can still get away with today. Landlords are installing dark grey laminate flooring which looks great as well. Update your kitchen counters and flooring. And make sure the place has natural light to brighten the room.

3) Target the Features of the Property to Your Demographic

Depending on the target group you are looking to rent to, make sure they are aware of the advantages of the unit. For instance, if you are targeting families to move into your vacant unit, you will tout easy access to school and leisure facilities, parks, and other family-favorable places. If you are targeting business professionals, tell them about gyms, spas, office hubs, and restaurants nearby. If you are targeting students, advertise your proximity to the local university and social hubs. The point is, consider who would want to live there and describe how your vacancy will solve the problem they have today.

4) Green is Good

Depending on the asset class you are promoting, you will want to make improvements to the exterior to include nice green spaces and places for people to congregate and enjoy the outside. This could be a small barbecue area, fire pit, garden, or playground. Make sure that in all these cases, you consider the distance from the property and any insurance you may need for these features.You can also market what you are doing to the interior of the units to “go green,” like switching from traditional lighting to LED lights, providing recycling services, and installing low-flow showers and toilets that use less water. Sustainable properties are not only popular for resale as it improves NOI, but it is popular with Millennials and older Gen Z’s.

5) Increased Security

For some areas and asset classes, having security in place will make the tenants feel better about living at your property. Consider investing in high-def cameras to cover high traffic areas, bright lighting, visitor registration, key-card access, and possibly a security guard if you are repositioning a property while putting all these features in place. For tenants to feel truly at home, they need to feel safe. If you would like to keep that tenant long-term, this is something you just can’t overlook.

Anyway, what do you do to pull in new tenants to your property? How do you keep them happy? Please let me know and leave a comment. I’d love to hear from you.

If you liked this, go ahead and give it a thumbs up. Also, check out the Bulletproof Cashflow podcast on iTunes or Stitcher, and subscribe to our YouTube channel. We are working on getting new content out all the time to help you build your success in the world of multifamily.

Be great.

What Happens to a Multifamily Property in a Downturn and How to Prepare for it

 

The “ups and downs” in the U.S. economic cycle are defined in terms of periods of expansion or recession. During expansions, the economy, measured by trends like production, sales, and job growth. Recessions are periods when the economy is contracting or shrinking. In this case, you will see mass layoffs, a massive dip in home prices because of no demand and a decrease in business investment.

Having been in the real estate business for over 15 years, I personally experienced many cycles in the market. Through these phases, I’ve noticed a variety of trends, but there is one, in particular, that is interesting: The landlords & owners that operate their properties with a strong management team typically forecast the market turning and prepare in advance. These landlords are connected with their teams and track the occupancy, rent levels, competition, and time to rent numbers. Armed with this information, they are able to anticipate market turns.

Of course, the market you are operating in will determine how the properties are affected. New York City, Los Angeles, Chicago, and other popular metros will typically only see a slight drop in overall valuation of a property while other areas will experience a larger drop. It’s important to understand the market you are buying. Sure, we are always buying for cash flow, but appreciation will vary depending on where you are buying.

When we are going through a real estate downturn, multifamily properties that are cash flowing, have cash in reserve, and are run very well will have the highest chance of surviving. The consensus is that we are still years away from a correction, but it’s best to prepare now and budget for downturns and difficult times.

Here are 8 tactics for you to consider:
1. If you are due for a refinance and it makes sense, do it sooner than later. It is easier to refi now while your cash flow is healthy. After you do, push for a longer amortization.

2. Before taking on an extra expense, consider the benefit you will receive. By performing a cost-benefit analysis, it will keep expenses under control, and give you a bare minimum to watch for in case the local economy goes from bad to worse.

3. Keep emergency fund/reserves in each property to cover tenants that cannot meet their monthly expenses and for unexpected expenses.

4. If your multifamily has multiple leases that are coming up at the same time, you will want to renew their lease early. You may also want to incentivize them to sign on for a two year in exchange for painting a room or installing a ceiling fan. The cost of those items is small compared to the benefit of maintaining a high occupancy in your building.

5. Update your break-even point. You probably calculated the minimum number of units needed to cover the mortgage, any required utilities, and formal obligations. If not, find what vacancy rate will result in the property’s monthly cash flow equaling the mortgage payment plus the additional required expenses. Know your number and protect your break-even point.

6. Try to find ways to create additional revenue streams. Aside from updating finishes internally, such as upgraded countertops and accent walls, you can also offer door-side trash pick, covered carports, and cable.

7. Work on the major repairs and upgrades before the downturn. Borrowing money for improvements is much easier during an expansion.

8. Make sure your tenants are happy. Whenever you have a turn, you are not only losing on that rental income, you also need to turn the unit, increasing your expenses.

The feel of a market downturn will be different depending on your asset class and location. The properties that will see the most fluctuation are those that are already in weaker markets, C- and D Class properties, as well as properties located in areas of low population and job growth.

Properties in high growth and high activity markets like New York and Los Angeles will still feel the downturn, but not to the magnitude these other properties will. While a C Class in New York City will be felt, they will still be able to pull in the rent level they did the previous year. They just will not have the ability to increase until the market turns again.

Finally, remember, never buy on speculation. Always buy for cash flow. When you are in uncertain economic times, it’s the cash flow that will keep the property from getting into trouble.

What lessons did you learn going through a recession? Have you implemented anything of what I just mentioned? Let me know in the comments.

If you learned something from this video, give it a thumbs up and check out our podcast Bulletproof Cashflow on iTunes or Stitcher, and subscribe to our YouTube channel. We are working on getting new content out all the time to help you build your success in the world of multifamily.

Be great.

5 Qualities of 5 Real Estate Beasts

In my podcast, I often speak to my guests – real estate investors, most with thousands of units – about what it takes to be successful. And I hear the same thing time and time again, not only from them, but from successful CEO, speakers, and authors in other fields.

That one thing required to build success is to have an unstoppable mindset.

They not only decided WHAT they were going to work on, but also that they would be successful at it – the same way an athlete visualizes themselves winning a race before it has even started.

So, here are 5 qualities to you must cultivate if you want to become a real estate beast:

1) Maintain an Obsessive-Like Focus
In one of my podcast interviews, Stefan Aarnio, a successful real estate entrepreneur and author of 6 best-selling books and training programs on real estate, emphasized the need for focus and control to get what you want out of life. He said that focus was his key to building his multi-million dollar portfolio.

Like looking through a clear telescope to a distant object, you must have focus on what you want. That focus will pull you to where you want to go. Notice what I said: it will pull you, not push you toward it. You need to ask yourself, “What am I focused on and will what I’m doing now support where I need to go?” If you lose that focus or are distracted, you begin drifting and wandering and never meet your goal.

The thing is, whatever we focus on, expands and when you focus on the right things, great things happen. This is why you must pay attention to what you are saying to yourself and your team on what you want to happen and when. If you and your team are all focused on the same goal and the message you are delivering is clear, that is how you develop certainty.

I personally spend my time on things that pull me and support my focus and reduce or even eliminate things that do not support what I am focused on. For example, I stopped watching TV or movies that are unrelated to my focus. I want to reduce any chance of getting knocked off my path. I work at building my unstoppable mindset.

2) Take Time Out to De-stress and Eliminate Negative Emotions
In my interview with Ivan Barratt, he specifically took time out of running his 3,500-unit portfolio to train for Spartan Races. For him, it’s a source of de-stress and he understands that a healthy body will support a positive life.

You see, you are in control of a great tool: your own body. To manage this tool properly, you need to remove stress and eliminate negativity when you encounter it. If you allow negative and stressful scenarios into your life, you will not be performing at your best.

One thing you can do is to work up a sweat at the gym every day. There is nothing like getting an early workout in before the day and concentrate on building the strength you need to take on the day. If you maintain a healthy body, your mind will stay healthy as well.

3) Build Your Emotional Quotient
One of the great things I’ve noted is that these successful people were not only excellent leaders, but they also had great interpersonal skills and they know how to communicate clearly whether it be verbal or nonverbal.

As real estate entrepreneurs, we deal with people all day, every day. Your Emotional Quotient is one of the most important skills you need to master as it will undoubtedly affect your bottom line. Aside from being self-aware and conscious of how you are interacting with others, you need to communicate your opinions and needs in a direct way while still respecting others, utilize active listening skills and empathize with people with differing opinions and situations.

As you start building these skills, your leadership skills will emerge as well.

4) Don’t be a Perfectionist and Remove all Negative Self-Talk
While in the green room speaking with Reed Goosens I recall him saying that he left his home in Australia for the United States, it required that he believed in himself enough to succeed. Since moving to the States in 2011, he has been involved in the acquisition of over $60MM worth of real estate. But, it wasn’t without learning some lessons along the way.

If you, in contrast, tell yourself “That was so stupid” or “What the hell is wrong with me?”, you are losing control of your mind. You are self-sabotaging yourself without even knowing you are doing it. We’ve all been guilty of dwelling on the negative. It’s part of the human condition. But if we let that gloomy self-talk become a habit, it will make you depressed, anxious and stressed and keep you from your goals. So, rather than going negative, re-frame the negative thought into a more positive one.

5) Use Powerful Imagery
As an experienced life coach and real estate investor controlling over 1,000 units, Gino Barbaro has helped many of his students achieve new heights in their real estate business. A big part of this was creating an image of what you have in mind and making it real. He spends time thinking about what his world will be like before creating it.

So, write down your goals in the present tense as if you already have in your possession every single day. Then, create a vision board that supports your goals. You may not know how you will get there, but once you have the vision in place you will ask yourself if whatever you are doing is supporting those goals you promised yourself. If your mind and body are aligned – and you create a vision of what you want to happen – your brain will want to take you there.

Anyway, what are you doing today to make you into a beast? Let me know in the comments. Also, check out our podcast on iTunes and Stitcher and subscribe to the new YouTube channel. We are working on getting new content out every day to help you build your success in the world of multifamily.

Be great.

Buying Investment Properties In a Flood Zone

I kicked off my real estate career in Virginia Beach about 15 years ago. If you know anything about Virginia and the Carolinas is that they are prone to hurricanes. I was living in Virginia Beach when one of the biggest hurricanes, Hurricane Isabel, hit in 2003. It caused over $1.9 billion in damages. More recently in 2017, Hurricane Harvey and Irma devastated Texas, Louisiana, and Florida all in a two-month period and $175 billion in damage. In 2018, Hurricane Florence did almost $19 billion in damage in the Carolinas.

The economic losses caused by hurricanes are no joke. As real estate investors, we must consider the possibility of flood damage in certain regions where we buy properties. A property located in a flood zone doesn’t necessarily mean we shouldn’t buy it. However, you need to perform deeper due diligence so that if a flood or hurricane hits, you are prepared, and the investment isn’t negatively impacted.

You can purchase insurance for properties located in high-risk flood zones. In some cases, it is required by federal law to have insurance. There are maps that outline where the flood-zones are in each area.

However, with super hurricanes, like Katrina, many neighborhoods were not even considered flood-zones. Since it wasn’t required, people didn’t buy any. After that hurricane hit, many families were hit with not only the financial burden of losing their home but also putting their lives back together. According to the Federal Emergency Management Agency, or FEMA, over 20 percent of all flood insurance claims come from areas outside of designated flood zones. If you have an investment property on the border of a flood zone or in an area of a state prone to hurricanes, you will still want to consider flood insurance to protect your asset. There are resources online where you can check if an address is in a flood zone. If you are not sure, ask your insurance agent if the property is at risk for flooding.

When you compare the potential loss to your premium, it’s inexpensive. Over the past 10 years, the average flood claim has been more than $46,000 with annual totals averaging $3.5 billion per year. When you consider the damages done to a large multifamily deal, this figure will be much larger. For residential people out there, a flood policy may run you $600/year for a small residential building. Among all the natural disasters, I chose to talk about flooding in this video because according to FEMA, approximately 90% of all disaster-related property damage is from flooding.
As for considerations you need to take into account when buying the insurance: Again, you need to determine if the property is in a flood zone during the underwriting process and get the cost before you buy the deal. Also, make sure you are clear on the coverage and the limits of a flood policy. Depending on the size of the deal and your investment targets, the cost of insurance may eat up a larger portion of your expenses, so due diligence is important.

It’s worth noting that flood insurance is not covered with your basic policy. And if the property is in a high-risk flood zone, you may be required to have insurance by the lender before you can close. Again, if you are operating in a place prone to hurricanes and other adverse weather conditions, know what you are getting into during your due diligence phase.

If the property is in a moderate to low risk flood zone, or even on the border of one, get a quote for insurance. I personally would build it into my expenses and purchase it. Having personally lived in a state prone to hurricanes, I’ve seen it displace families and businesses alike. I still have properties in Virginia and my policy covered damages of over $100k to one of my smaller properties. It not only covered the physical damage but also the loss of rents as it was uninhabitable while under repair. It was well worth the investment I’ve made over the years.

As real estate entrepreneurs, we need to take time to plan. The same way you underwrite, perform your due diligence and line up financing, insurance needs to be closely considered. Take the time to figure out if you need insurance and how much. Err on the side of caution if the premium makes sense. Doing so can save you tens of thousands of dollars and countless hours of time.

Have you ever been hit with a flood? How did you handle it? Please let me know in the comments. Also, check out our podcast on iTunes and Stitcher and subscribe to the new YouTube channel. We are working on getting new content out every day to help you build your success in the world of multifamily.

Be great.

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FEMA Flood Map Service Center: https://msc.fema.gov/portal/home

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