The Wealth Elevator Syndication eCourse

Secrets of Syndications: Part 3

Video Notes – Stabilized vs Un-stabilized Deals

Stabilized

• Stabilized: defined by Freddie/Fannie to be 90%+ occupied, but can be either a value-add or a yield play
  • Stabilized value-add: reno units as they become vacant

Value Add

• Value add: defined by how much rehab/unit
  • Light value-add: less than $4k/unit (can include exterior reno $ spend)
    • Ex: $1k/unit + $60k pool reno/20 units = $4k/unit
  • Medium value-add: $8-10k/unit
  • Heavy Value add can be a full reno or a development project: can be $90k/unit that rents for $1,200-$1,300

• Turnkey: no value-add component, just fixing issues as they come
• LP won’t have insight into actual numbers but will know generally x/unit being spent
• Can generally go into a deal and double your money after 5 years with cash flow, or forgo cash flow and double your money in 3 years
  • Will ultimately make more money if can forgo the cash flow and wait for the upside potential of the development/value-add deal at the end – typically get out of the deal sooner than cash flow-type projects
• If going into a market that is very up-and-down (like Phoenix), if there is a market downturn in a heavy value-add deal, you can control project costs (get rid of projects you don’t need), renovate slower, and stabilize for cashflow, can hold until the market goes back up

Unsophisticated Investors

• Unsophisticated investors will invest in a project due to what they think is a hot market – this is why they add the boring market slides on the webinars
  • Not hard to investigate the market for themselves – should go visit if unfamiliar
• Rule of Thumb: 1/3rd of a person’s income goes towards their rent

GP Perspective in Looking for a Project

• Looking for the discount: how can we increase the income or decrease expenses
  • Are the markets undervalued, and rents undermarketed
  • Looking for bad property management, bad reviews, inefficiencies 
• Lane fills in his spreadsheet with the numbers and if they work the deal can continue
  • Class B to C: rent play
  • Class A to B+: about other “ income” and extracting every dollar you can
  • Normally want to assume that you are going to increase the expenses, and don’t want to see operating expenses under $4,000/year per unit (too low)
    • Will be improving the property somehow so naturally expenses will increase

Distributions

• Where does the initial cash flow go when investors aren’t paid out for the first 3-6 months?
  • Sometimes, toward reserves if there is uncertainty or a dip in occupancy during a value-add or improvement of the community by forcing out/evicting bad/non-paying tenants
  • Banks usually control capital accounts: need to show receipts and submit “draw requests” to be reimbursed from your capital account through the bank that holds it
    • The bank will sometimes send an inspector to make sure the work actually happened
  • Operators need to have flexibility for the first few months
• Banks require a certain multiplier of cash reserves before a sponsor is allowed to take money out to pay investors
  • Banks are the biggest investors in the deal, owning 70-80% of it, depending on the deal
• All payments go out via the property manager’s accounting system so the sponsor stays out of it – Investors are paid out like a vendor

$4.5 million threshold

• $4.5 million threshold, where if you can yield/invest your money and make 1-4% it should be sufficient to create enough income for your heirs to be financially free
• After this amount, most people lose motivation and become just a score for them

Insider Tip from Lane

I noticed that Non accredited LPs like to post on social media that they are in certain deals to show off…

On the contrary, Accredited investors are in so many deals that they don’t get too excited and they want to keep their privacy. Which is why they want to be an LP in the first place. Money talks… wealth whispers.

Syndication analysis on deal

1. Break down of cold deal pitch (from LP View)
2. Missing tedious P&L/Rent roll data collections and filtering
3. Questions I am asking once raw numbers are put into the model (My GP view)
4. Discussion of Reversion Cap Rate Sensitivity Analysis

Files to accompany including Co-Star Report (PLEASE DO NOT SHARE)