AIPIS 129 - Joe Fairless - How to Negotiate Syndicated Deals, Evaluating General Partners

This show is produced by the Hartman Media Company. For more information and links to all.

Our great podcasts, visit hartmanmedia.com.

Welcome to the AIPIS show for accredited income property investment specialists and those who aspire to be. If you're a real estate, mortgage or financial professional, the this is the place for you. We'll explore innovative investment analysis, sales, marketing and income generating strategies for the most historically proven wealth creator income property. Learn from the experts as they show you how to build a better business and a better life.

Welcome to the AIPIS show for accredited income property investment specialists and those who desire to be. This is your host, Jason Hartman where we we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income property. We have a great interview for you today and we will be back with that in less than 60 seconds.

It's my pleasure to welcome Joe Fairless back to the show. He is a syndicator, an investor and a podcaster and we're going to talk to him today about syndications. He just closed his second round, I guess is the way to say it, purchasing a $14 million apartment building in Houston, Texas and raising the money for that. He was one of four general partners on the deal and let's dive in and see what it was all about. Joe, welcome. How are you?

I'm doing well. How's it going, Jason?

Good. Give our listeners a sense of geography. Where are you located?

Well, I am from Texas and I moved straight from Texas. New York City was there for 10 years and then about two months ago I moved to Cincinnati.

Cool.

And what brought you to Cincinnati? Is that where you're from?

I'm from Texas but I had a deal here in Cincinnati, 168 unit, the first syndicated deal that I did and just I've been working on a development deal here as well. And then the combination of the real estate opportunities plus just ready for a change of pace.

New York City being there for a decade, it's just a different type of lifestyle and I was ready for kind of a more.

Just a different, different type of lifestyle.

So I just want to ask you, like I, I've always wanted to live in New York City for like three months in the spring and three months in the fall. I don't want to be there in summer or winter. I would say six months. But I want them to be separated.

Yeah.

From my friends that either live there or have lived there. They say that living in New York City ages You. Because it just. It wears you out. Is that true? You say different type of lifestyle. I'm kind of really curious as to what exactly you mean by that.

Yeah, well, what I would say is.

I personally wouldn't say it ages you because I think how we control basically anything that happens to us, we control the meaning. And it doesn't matter where you're living or kind of what you're exposed to. What I will say is, what I mean by different lifestyle is, you know, I was living in the same apartment for nine years in the East Village and not having a vehicle. And it's just a different type of, you know, culture, energy. And when you go outside of New York, it's just a little bit slower. And while I still want to be a high achiever, I was looking for a different type of more relaxed atmosphere.

Yeah, right, right. Okay, Good. Good stuff. So tell us about your deal, the one you just closed and closed. You mean raised all the money and closed the purchase of the property, right?

That's correct. Yeah, we closed, we raised the money. We purchased the 250 units. It's in Houston. For anyone familiar with Houston, it's in the Klein School District. So it's a really good school district. It's the 10th fastest growing in all of Texas. And we raised a little over $3 million for it.

I personally raised over a million 1.1 with my business partner. And we had about 60 days to raise the money. It was presented to me by actually a client of mine and his buddy, his friend. They had the deal, but they didn't have all of the money that they needed for the deal. So they reached out to me and I'd been looking at opportunities for about two years. As you mentioned in the intro, this is my second deal. This one made a lot of sense. It's just the numbers worked out.

I was like, well, I don't know if I can raise.

At the time, they needed 2 million. And by the way, they needed to have a commitment of raising that 2 million in two weeks. When the earnest money went hard, I was like, I can't guarantee that I'm able to raise 2 million and be confident within two weeks that that will happen. But what I can do is I can do my best for two weeks and we'll see where it shakes out. And what happened is I found somebody who could raise the other million. And then I raised a million. And so collectively, we raised the amount. And then my client and his friend, they raised a million. So we all together raised 3 million and made it happen.

Fantastic. And is that why you were one of four general partners? I mean, that's, that's kind of interesting to have so many general partners on a deal.

Yeah, that's, that's why. So us three, myself or my company, my friends and clients company, and the person, the other $1 million raisers company, plus our local partner who is managing it and overseeing it locally, he's the other gp.

Okay, how do you structure your deals? If someone is listening, Joe, and they want to raise money for real estate deals, what do they need to know? I mean, there's a lot to know. We're not going to have time to cover it all. This is by no means going to be exhaustive, but I guess maybe the first question is, where do you learn.

How to do it?

Well, did you read a great book? Did you go to a workshop? What do you do?

How I initially learned how to do it is I read books on apartment investing. I only know of one book on syndication. I think it's by Gene Trowbridge, and I haven't read it and I think it costs like $10,000 or something. I mean, I'm being sarcastic, but it is expensive. I think it's like $1,000. I haven't read that, but I've heard it's a good book. Where I learned is I read apartment investing books first. I knew that I had to know how to underwrite deals and evaluate multifamily because before you can raise money, you obviously need to know the business. After that, I started reaching out to people. One of the people I reached out to was an author of a book that I read and he actually taught me how to do syndication, how to raise money and buy apartments with investors and then share in the profits. And then after I learned from him how to do it, I went off on my own. And I started just after I did my first deal. The second deal, it really didn't need any help from an education standpoint for how to do it. But obviously I'm learning something new on every deal. Different nuances, but basically from books and from people that I've come across.

So Gene Trowbridge's book, it's a whole new business, the how to book on syndicated Investment Real estate is not $10,000, but it's close. It is 74 bucks okay on Amazon. And then there is another version which is $296. So that's probably the out of print version, I'm assuming. And so you're right, that's an Expensive book, maybe that's.

Yeah, I think I was thinking of the $201. At the time, I had maybe no money in my bank account.

So you thought it was $10,000? Relatively speaking, yeah. Right. Good. Good stuff. And then the principles of real estate syndication. Oh, that's not him. That's another guy. Okay, good deal. Well, I remember many years ago I read some syndication books. But you know what's interesting is it took from 1933 until just recently for some of these securities laws to change. And with the JOBS act and the crowdfunding revolution, it's a lot easier now, isn't it?

Yeah, it is. I mean, you've got to make sure that you've got the right legal team in place.

To draft up your private placement memorandum, which essentially is a document that tells the investors it's the end of the world and you're going to lose all your money. And here's all the different ways why or how you're going to lose your money, and.

Making sure that we're adhering to all the different regulations that some of them, they're kind of gray and gray and fuzzy, others are more clear cut. But, but yeah, it's. It's definitely. That in itself is a much longer and deeper conversation with.

That. That is. Has some gray area from. You know, I've been interviewing people on my podcast and one of them is an attorney, a securities attorney. And some of the, some of the questions that I asked them, it's like it's still open for interpretation because the government hasn't established guidelines.

Right, right. Yeah. And I know that's a tricky area because the government can always sort of say, well, you did something wrong.

Sort of after the fact, which is really scary. But how much does it cost, Joe, to have your private placement memorandum done and all of your legal documents? I have heard numbers all over the board. Many years ago, I did a PPM to sell stock to some of my agents within a real estate company I owned. Boy, that was a lot of work. You know, it's complicated stuff.

Yeah, I'd say it costs between 6020, $25,000, depending on the uniqueness of the offering and what's involved.

And take us through the different types of, like the really broad 30,000 foot level view. What types of deals are there? And I don't mean the property or the investment underlying it, but sort of what formats there are. For example, you know, maybe just to help tee this up for you, you can say, okay, I have this deal, an apartment building In Houston, for example, and I need investors and it's based on this deal specifically. Or you can say, well, you know, I want to go out and find deals. And you're basically looking for investors to invest in a blind fund. Right. So those are two sort of general formats. What else is there though?

Well, you named two of the main ones where you, where you invest, where you raise money for a specific deal, or you raise money for a fund, and then you go find properties based on predetermined criteria that were listed in the fund. Another, the only other one I can think of is a joint venture where you partner with somebody and you are joint venturing with them and you each have divided different responsibilities within that venture. I'd say that the progression that's typical is you might do a joint venture initially with somebody and then you're like, I want to kind of go out on my own and I've got a track record. So then you raise money for a particular deal.

And then after you get a track record within your investor network, then you kind of graduate to raising money for a fund. And from what I've heard, I have not done a fund yet, but from what I've heard, the cost for that tend to be.

More than doing a PPM for a specific deal because there's.

Probably a lot more disclosures and a lot more that can go wrong when it's blind, the investor's taking a lot more risk. They really got to have faith in the promoter. Right? Yep. Yep. Okay. And how do you know, like take us through what the deal is that you do with the investors. For example, you know, do you guarantee them a preferred return? If so, how much, how much do you take as the general partner? Like, you know, are there acquisition fees, disposition fees, management fees, you know what, what, what? There can be a lot of little things that, you know, both sides need to, need to look out for. You know, the, the promoter wants to make sure he's making enough and the investor wants to make sure he's not making too much.

Yeah. And, and it's a balance and ultimately it ties back to alignment of interest to make sure that the people who are in the deal are all investing money and all want the same thing based on how it's structured. That's ultimately what it boils down to. And what I would say is the first thing is you want to know your investors goals. You want to know, and this is conversation that needs to take place prior to sharing them, sharing a deal with them. You want to know how do they define success. What is a rate of return that they are receiving in current investments, what type of risk is involved with those current investments, and then have an understanding so that you have context whenever you share with them a new deal, because you want to be able to speak their language and the past experiences and current experiences they have with their investments. Now, specifically, as far as how it's structured, again, it depends. But typically there's a preferred return. Specifically with this Houston deal we just closed on, there's an 8% preferred return. As you said, we can't guarantee anything in real estate if anybody does and you run the other way. But the next best thing is preferred return. The preferred return basically states that the investors receive a return on their investment before the general partnership, in this case me, received payment on the cash flow of the property. So the investors receive a preferred return. Then you can have hurdles. You can have performance hurdles, and we have performance hurdles. Investors. In this Houston deal, there's an 8% preferred return, and then everything above 8% is 70, 30, which limited partnership to general partnership. 70, 30. Then there's a second hurdle at 20% internal rate of return, and then everything above. That's 50, 50. So the split goes down once the investors receive a 20% internal rate of return. You asked about the fees. As far as fees go, it depends on the deal. It depends on what the business plan is for the deal.

Typically, there's an acquisition fee. Acquisition fee can be anywhere between 1 to 3% of the purchase price. And then.

There could be, as you said, a disposition fee whenever you sell the property. There could be an asset management fee based on the asset, a percentage of the assets that are managed.

And if there's major renovation involved, then there could be a fee on the renovations, the total cost for the renovations. But ultimately, you know, going back to what I said initially, it depends on the investors want to make sure that. What I found, at least from my experience, investors want to make sure that there's an alignment of interest and that we're investing alongside with them and we're compensated for the most part.

After they receive a return. Now, the exception to that would be the acquisition fee, where that's paid at closing. And how I look at an acquisition fee is it's a. It's a reimbursement for the time that we spent to put the deal together and to find the deal and kind of. Kind of herd all the cats to make it happen.

Yeah, okay, so we. I get that conceptually, and that was a good outline. So what are These fees and numbers, like, let's talk about it from your side as the general partner. So you acquired this property and you have to find the deal. And let me tell you, that's not easy. It's a lot of work. You know, it's easy to find crappy deals, but it's hard to find good ones and doing all that due diligence and so forth. So what do you charge? What did, what did you charge? I know the next deal may well be different. It may be lower, maybe higher. What did you charge as an acquisition fee on your Houston deal?

It was. In total, it was 2%.

So 2% of 14 million. And then you split that with four general partners, right?

That's correct.

Okay, and then what else do you charge? Because the general partner. Are you putting in money or do you not put in any money and. But you still take a percentage of the overall deal, right?

Yeah, we're putting in money. So in this deal.

Let'S see, my company put in $200,000 into the deal. The. Let's see, another general partner, I think they put in 100,000, and then another put in at least 150. I'd have to double check that, but.

Okay, but let's assume, just to keep it simple, because that's going to be pretty hard to follow. Joe, if you didn't put in any money, what would you take as your cut? What would the general partners take? Typically?

Well, I don't know. It depends on the. I don't think there's.

Well, on that deal, you can't tell me because you put in money, but yeah. Did you buy your shares at the same price the investors bought their shares at?

It was probably not, right? I mean, you should get a preferred deal because you found the deal or did you just buy at the same price? For example, if it cost $100,000 to get X percentage of the deal, did you get the same percentage for the same amount of money that the investors did, or did you get more?

Yeah, we got more and it was a 70. Basically, we own 30% and they had 70%.

Okay, but you, you put in money, though?

Yes.

So the money you put in went further than the money they put in, right?

Yes.

Do you know that ratio? I'm just curious about that now.

I'd have to look it up.

I don't know. Okay, I got you. Okay, so what else do you charge? Do you charge a management fee?

Well, the property management company charges a management fee, and that's 4% of rent or income. That's collected. But the general partnership will charge an asset management fee. Typically it depends, but it could be upwards of 2% of the assets that are managed.

And the other fee that we talked about was the disposition fee. That could be ranges, but half a percent, 1%, 2% of the purchase price or the sales price once it's sold.

Okay, and are there any other fees that the general partner is making in that deal, your Houston deal? No, that. The four general. Okay, so that's it. I wish you didn't put money into that deal because I'm curious, like on your next deal, when you don't put money in, how much will you take as the general partner? Just for being the general partner?

Yeah. Well, on my next deal, I will still put in money because going back to what I was mentioning before, having money in and investing alongside of invest with investors is what I might approach is. Yeah, I mean, I don't want to be in a deal where I'm talking to people about a good opportunity and not putting my own money on line.

Right.

But let me tell you, a company that I did this with, Caliber Properties in Phoenix, Arizona or Scottsdale, Arizona, you know, I did a couple deals with those guys and we didn't like them. We got out of that deal, we, my partner and I, because we thought they kept nickel and diming us all the time. So we weren't too happy with that. But you know, they take, they take a big share of the equity for when they put no money in the deal. And I'm talking about 20 to 35% with no money in. No money.

Yeah. Well, it's.

You can come up with any structure. You're only limited by your creativity.

Right. And your persuasive techniques, what you can get investors to do, you know, and.

The goals of your investors. Exactly. That's just not our approach.

And the reason I wanted you to share this, Joe, is so that investors would know how to shop for a general partner a little bit. You know, because this is such a niche area. You know, there's a zillion books and seminars and gurus out there. I'm one of them. You're one of them that, you know, will teach people how to buy, find, evaluate properties, that kind of thing. Right. But I don't know of anybody that teaches investors how to evaluate a general partner. Right. That would be a good info product, a good course.

Oh, absolutely, yeah, absolutely.

Yeah.

And the number one thing, you know, whether it's real estate investment or if it's, you know, you're Investing in a startup, I think the number one thing to look for is who's the team first and foremost. Before, before you even hear the business model, you want to know who are you dealing with and do you know them and kind of what's your, what's your level of trust with them?

That's for sure. Okay, so what else should people know? Okay, so you talked it, let's talk about it from the investor side. Okay, we talked about it from the general partner side. So thank you for sharing all that. From the investor side, you talked about the different ways they can make money. Of course they can get a preferred return. And a lot of times, I mean, it's certainly only limited by imagination and it can be all over the board. But a lot of times I think you'd have to admit you hear 8% pref return. You know, that's a pretty common number, something in that area that It'll just be 8% as a monthly check, as a pref return on their investment. So if they put 100 grand in, they're going to get 8% annually, but it's going to be in monthly payments. I hear that one a lot. Okay. Would you agree with that, by the way?

Yeah, I think 8% preferred return is pretty typical. And what I've heard and what we do, maybe 7%.

You know, I've heard 6, 7, 8. I don't think I've heard over 8 too much.

Well, I have on development deals and then they just kind of roll the preferred return over when the property is actually cash flowing when it's built. So to kind of mitigate some of the risk for investors. If there is a development deal, then what they'll do is they'll say your preferred returns 10% or even higher. Well, you're not getting that money the first couple years while there's just ground and not buildings and residents there. But it rolls into next, the subsequent years, whenever you have something.

Yeah, because on the development deal there's no money in the beginning, so that you're not going to get that pref return. But it's accumulating. Right. In the example you gave. And then the investors make money when the deal sells. When you liquidate, you have that liquidation event and what, what does it look like there? It's all over the board, of course. Right. Because depends how much the general partner is going to take. And I talked about that number of 20 to 35% with no money in the deal. But like you guys have money in the deal. So it's it's different, but any. Anything. What, what else do you want to share there that the investors.

Well, you, you covered it. It's the ongoing cash flow and it's whenever the property is sold. I'd say two.

One is if there's a refinance. And you. For example, with this Houston deal, we've got a bridge loan and once we complete the renovations, then we're going to get it reappraised and then determine if we want to put long term debt on it. So long term financing, and if we do, then the investors will likely get a portion of what they invested originally back, plus keep the same ownership percentage long term or if it's sold then at that time, then the return would happen. The other thing I wanted to mention is tax benefits. My highest net worth investors are most focused on the tax benefits of investing. And I obviously have to do a disclaimer. I'm not a cpa, but I do know that when you invest in a larger opportunity like a $14 million property, then the depreciation based on your percentage ownership, you get a portion of that. And on paper it shows that you're losing money when you receive your K1 because of depreciation. In reality, you're likely, if things are going as projected, receiving checks throughout the year. Now, with any type of tax, the government's going to get you one way or another. So if they're not getting you now, then what that's doing is it's deferring the depreciation to when you sell. And that's why, as you know, Jason, the 1031 exchanges are so valuable and such a nice tool for investors because what the passive investors can do is they can exchange the proceeds that they have on the sale of the property and put it into another property similar to this. Or they could do, you know, if they're looking to buy like a duplex or something, they can buy their own duplex with those proceeds.

So they can do the 1031 themselves. Now is the structure, it's an LLC, I assume, right?

You assume correct.

Yeah. And so you set up a single purpose LLC and then everybody's in and out of the deal. What is your typical time horizon? I mean, you've done two big deals now and you're onto your third one, I assume pretty quickly here. Do you have sort of a time horizon in mind on these deals?

Yeah, they're usually about five years. We say five to seven years. But in reality, like this Houston deal, we're going to finish renovations in 18 months. Likely. And then we're going to make a decision based on where the market's at, where the property's at. So, you know, it could be as soon as 18 months or, you know, it could be longer. But we set expectations at five to seven years.

Right. And what if the investor wants to get out early, like say they need the cash for something else. Is it possible for them to do that?

Yes. Yeah. The first, all they need to do is find a buyer for essentially their shares in the llc. And it's likely that the investors within the investment already would be interested in buying it from them should they want to sell. And then if they don't want to buy from them, then they can go on the open market and sell to someone else.

You know, Joe, I got to kind of just take a little bit issue with that. I would assume those shares aren't very liquid. I mean, in other words, it's possible to do that. But I mean, I don't know, the liquidity, like, you know, see, the thing is, I think that like, if they want to sell, maybe it's because there's a downturn or something. And sure, the other investors, if they like the deal and everything's going along well, you know, a year or two into it, they might jump in. But if there's an overall downturn, you know, they might want to, they don't want to double down either. You know what I mean? So, I don't know. That's the way a lot of the ticks got into trouble. The 10, you know, the tenant and common deals that were so popular 10 years ago, you know, eight years ago.

Yeah. Under, under your scenario, you didn't mention that there was a downturn and they were wanting to sell because it wasn't a good investment. I think that's, that's a, that's a, I think that's a different scenario.

And, and I'm not, I don't know what happens. Yeah, I, I, I agree. I understand. And, and you know, if, look, to be fair, if they owned a property and they wanted to get out of the property they owned by themselves and there was a downturn, it might be difficult to do that too. Okay. So, you know, a downturn hurts everybody, you know, in that scenario. But, but I just think that when it's a full ownership deal, I would just have to think there's more liquidity than on a, you know, a, a deal that's syndicated. Right?

Of course there is.

Yeah. Right, right.

Because you're the only one that controls it.

Right. Yeah, well, what else should people know? And you know, what are, what are you working on next? What are you excited about?

Well, what I'm working on next is I've got. Well, right now we're just kind of focused on this Houston deal and making sure that it performs and the dust is kind of settling on that. So focus on that. And got the podcast Rock and Rolling. Doing that daily as you're aware of. And yeah, doing well.

Good, good to hear, good to hear. Where can people reach you, Joe?

Well, real simple. My name Joe Fairless. You can go to joeferless.com, i've got a free crash course, real estate investing and then the daily show, my daily podcast, best real estate investing advice ever.

Awesome. Joe Fairless, thanks again for joining us.

Thanks a lot, Jason.

You know, sometimes I think of Jason Hartman as a walking encyclopedia on the subject of creating wealth.

Well, you're probably not far off from the truth, Penny, because Jason actually has a three book setup on creating wealth that comes with 60 digital download audios.

Yes, Jason has that unique ability to make you understand investing the way it should be. It's a world where Anything less than 26% annual return is disappointing.

I love how he actually shows us how we can be excited about these scary times and exploit the incredible opportunities this present economy has afforded us.

We can pick local markets untouched by the economic downturn and exploit packaged commodities investing and achieve exceptional returns safely and securely.

I also like how he teaches you to protect the equity in your home before it disappears and how to outsource your debt obligations to the government.

And the entire set of advanced strategies for wealth creation is being offered at a savings of $94.

That's right. And to get your Creating Wealth Encyclopedia series complete with over 60 hours of audio and three books, just go to jasonhartman.com.

If you want to be able to sit back and collect checks every month just like a banker. Jason's Creating Wealth Encyclopedia series is for you.

This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or email mediaartmanmedia.com Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and and the host is acting on behalf of Platinum Properties Investor Network, Inc. Exclusively.