How Does Syndication Works In MultiFamily Real Estate With Chris Larsen

Hey, it's Mark Podolski, the land geek with your favorite niche real estate website, thelandgeek.com and on today's podcast, we've got a real estate superstar. But before we talk to our guests, I'd be remiss if I didn't properly introduce my co host. You know him, you love him. Scott Todd from Scott Todd.net, landmodo.com learn anything about anything. Investor ninjas. Scott Todd. How are you?

Mark?

I'm great.

How are you?

I'm interested in getting smarter about real estate because today's guest is Christopher Larson, and he's the founder and managing partner of Next Level Income. He dedicates his time to helping others become financially independent through education and investment opportunities. And he is not a rookie. He's been investing in and managing real estate for over 20 years. He completed his degree in biomechanical engineering and his MBA in finance at Virginia Tech. Bought his first single family rental at age 21. Then Chris expanded into development, private lending, buying distressed debt as well as commercial office and ultimately syndicating multifamily properties. He began syndicating in 2016 and has been actively involved in over $400 million of real estate acquisitions. And in addition to real estate, Chris has invested in equities, oil and gas, and small business lending. Chris Larsen, Welcome.

Mark, it's great to see you again. Scott, great to be here.

It's great to see you. So, Chris, let's just rewind the tape a bit and tell us a little bit about how you even got started in real estate and investing.

Yeah. So go back to high school. I was interested in racing bikes. I started racing bikes when I was 14 years old. Then I was just a pure nerd. So I love, I love talking to you. I loved having you on, on my show. Mark the Land Geek. I'm like, oh, this is like, I feel like I'm in. I'm in good company here. I was in. I was in the. I went to band camp. I was like math club. I was reason. I feel like I was reasonably smart. But then I spent a bunch of my career, which I'll talk about here around neurosurgeons. And I don't feel like I'm that smart anymore because you get to work with geniuses every day. So you're like, it's like, you know, they talk about, don't be the smartest guy in the room, be the dumbest guy in the room. That was that. That's what I felt like most my career um, but I was racing bikes. I went to college, you know, for engineering. I really didn't want to be an engineer. I wanted to race bikes. I thought, this is cool. I get an engineering degree, I'll come back to school, I'll figure out what I want to do, but I'm going to be a professional cyclist. Along that journey, my best friend, my training partner, my college roommate passed away. He had a brain hemorrhage between my freshman and sophomore years and race for another year, but kind of, kind of set me back. I ended up quitting, quitting cycling. I thought, like, this is not really what I'm meant to do with my life. And I felt like I had this gift of life and I had to make the most out of my life, but also honor my friend's life. And that year, after I quit, I started investing in the stock market because I thought, okay, if I'm going to make the most out of my life, I have to have financial independence. And I was always kind of entrepreneurial. I had a paper route, I sold wrapping paper when I was young. I had a little lawn care business. I never really had a, a real job. I tried to avoid that my entire life up to this point, although I had quote unquote, real jobs. But I was investing in stock market day trading, making, and sometimes losing a lot of money. But ultimately I found real estate because for me, Mark, being risk averse or having some certainty and being able to plan, I'm a big planner, so having something I could plan around and also invest in something where I didn't have a ton of money made a lot of sense. And you mentioned I bought my first property age 21, started in single family rentals. And ultimately, as I held that portfolio and managed it for over a dozen years, I realized that there were better options out there. And again, being a numbers guy, always being analytical, I was thinking like, okay, can I tweak my portfolio? And after dealing with the headaches, the tenants, the toilets that they talk about in that, and I know you've kind of figured out a way to avoid all that with your business, which is amazing as well, I thought, okay, there's got to be a better way. And I kind of stumbled upon multifamily through an introduction. And when I looked into it, the demographics, the ability to tweak the numbers and have kind of a force multiplier in terms of the income versus value that you can achieve was amazing to me. And ultimately I sold all those single family rentals, put it all into commercial Real estate. And we've been doing that for nearly a decade now. And now we share the opportunities that we start investing in with others as well.

Fantastic. Scott, Todd, with your thoughts.

You know, it's funny because so many times you underestimate the annoyances of the tenants, the termites and all that stuff. Right. And you know, in your brain as you're looking at this, you're going, oh, you know what, I'm going to do it differently. I'm going to get a property manager. Hate to tell you, you still have that stuff, right? Like, you may have delegated to somebody else, but it still becomes your nightmare, your hassle. And I'd like to know more about what you're doing on the commercial side.

Yeah, I mean, it hit me in the face when I was on my honeymoon with my wife in 2006 and I was on the phone. It's like I had a property manager. I'm like dealing with this tenant issue and spending 20 some dollars a minute for this phone call from Costa Rica in my little honeymoon suite. So, yeah, multifamily, it has a lot more scalability, so makes it a lot easier.

Yeah, let's talk about that. Let's dig a little bit deeper. Let's talk about those force multipliers that you like so much for multifamily. Can you walk us through it?

Yeah. So the best way to think about it, so if you buy a house and it's in between two other houses, so let's say you're listening and you own your house, I said, what's your house worth? You said, well, it's 2,000 square feet. It's worth $300 a square foot. That's $600,000. Easy math. $200 or 2,000 square feet, $300. $600,000. How do you get that number? If the neighbor on your right is worth 350 a square foot and the neighbor on your Left is worth 250 a square foot, the bank, the realtor, they average those out, they get $300 a square foot. That's how you determine the value of a piece of residential real estate. If you buy a multifamily, an apartment building or you buy a commercial building, it's not valued like that. And this was surprising to me. There was these things that I knew that was in College. I read 250 business and investing books as I started my career. So I read about it, but it just didn't resonate because it was one of those things that I was going to look at in the future. And when I look back at it, an apartment building or a commercial piece of real estate is valued like a business. A business is valued on net operating income. So the profit that a business makes and then it's multiplied by some sort of cap rate or equity multiple. So, you know, if you sell a business, if you've. If anybody's listening, you're a business owner, or even you bought stocks, there's a multiple, and that's the cap rate. So the cap rates in multifamily are typically like 4 to 6%. And what that means is you take whatever the net operating income is. So if it's a dollar, and that cap rate is 5%, you divide $1 by 5%, and that's 20. So that means that every dollar dollar, you increase in income, you multiply the value by $20. And to me, that's just, like, amazing that you could save $30,000 in water and increase the value, $600,000, just by doing something that everybody should be wanting to do anyway.

Scott Todd, I can see the wheels turning.

Well, here's the dilemma, Mark, is this is where shiny object syndrome kind of kicks in, right? Is like, if I were gonna go do something other than land, I probably would look at something multifamily. But, you know, I do like land. Like, I like land. And because you don't have. You still don't have some of the other components of it. But multifamily definitely is enticing, especially when you think about, like, the depreciation or what we just talked about, that forced appreciation. There's. Because there's no better way of getting a bigger bang for your buck than to cut something or change something or raise the rents. And, man, just think about all this value that just came rushing to you. If you're just even diligent about raising your rents every year to keep up with inflation, that's half the battle, because most people don't even. They're afraid of asking the tenants for more money a month, even though everything else is going up.

What I love about what Chris is doing, though, is because, like, you and I, right, we don't want to get shiny object syndrome. We don't want to start our own multifamily business. And we also don't want to compete with a guy like Chris who's just got more experience than us. So this problem is solved with something called syndication. So, Chris, can you kind of explain to us what is syndication and what does a syndicator do?

Yeah, I'd be Happy to talk about that. And Scott, let me address something. First off, I'm a big believer in my coaching clients. I say, hey, have an active real estate business and a passive real estate business. So for me, the multifamily has become active, but it began as a passive business. And that's where the syndications come in. But if I rewind a little bit further, say, okay, why did I sell those single family rentals? The scalability issues. Scott, you were alluding to this. It's like you deal with one house or two. It's not that big of a deal, but you have a dozen or 20, and next thing you know, it's like, all right, you're getting calls every day for turnovers and different things. So the nice thing about multifamily is it's scalable. So whether you're a passive investor or an active investor, you can own 100 units, you can own 1,000 units. You can have a property manager or a management team manage all of those units. So either active or passive, that's an important point. It's very scalable. And I talk about that in my book, which I'm happy to share with the audience, how to get here shortly. But what's a syndication? A syndication is simply bringing a team together to buy a property. So what we do, we find a property. We announce that to our investors, our investors, and us pool our money together, and that allows us to buy much bigger properties than we would on our own. So I might be able to go down the road with a couple friends and buy, say, a $2 million property. Like maybe it's a, let's say a 10 unit multifamily property. Okay. And maybe it costs $2 million. That's pretty nice. Pretty nice property. It's $200,000 a unit. And let's say we all get together. Let's say the three of us get together and maybe we bring one of my business partners around. So that's four of us. And we say, okay, we need 20% down, that's $400,000. We each put in $100,000. So we each own a quarter of that property. We do the exact same thing with syndications, Mark. We just bring in, instead of four investors, it's 40 or sometimes 400. That's a pretty extreme example. But the. It's the same thing. Now there's general partners. So our passive investors, they're limited partners. They don't have to pick out the carpets, the tile, the paint, the fixtures. They don't have to deal with the property management, the day to day, any of that, it's totally passive. So it's a little bit different than just saying, hey, the four of us are going to get together and manage it and buy it. But if you think about kind of the ownership structure, it's not too different. So for if you're new to syndication and you think like, well, okay, that sounds great, but why shouldn't I just go do it myself? The answer is, if you're a busy professional, like, I have a lot of surgeons that I used to work with, spent 18 years in the medical device industry. They're making some of these surgeons half a million dollars a year. They're very good at what they do. They help out people every day by providing them a better quality of life. They want to keep doing it, they love what they're doing. But they invest so they can own real estate without having the headaches. So that's the nice thing with the syndication. You have the general partners manage the property, and then you have the limited partners that get the benefits without the headaches. And then we are compensated on the back end of these projects. So people say, well, why would I do that? I'm going to lose out. We pay our limited partners first, we get paid at the end, and we're compensated on performance. So that's how that's structured in a very simple way.

So all the incentives are aligned. Scott Todd.

We try. Yeah.

What happens? So this syndication, the way it's working is I'm getting all of the same benefits as if I were out there doing it my own. I'm paying you a management fee to manage that component of it, Right. Or you're just getting a percentage of the profits, right?

Yeah. Or some combination thereof. Correct.

All right. And then the unit sells in three to five years, we hit pay dirt, and then everything else just flows back out the same way it came back in.

Right.

Pro rata basis. And I think the biggest challenge for somebody is, do you want to be the active person or the passive person? And there's a fee to be the passive person. Someone's got to do the work.

No, that's exactly right. And I tell investors, like, look, if you're doing this yourself, you certainly should get a better return than if you're investing passively. What I find, though, is a lot of investors, they say, hey, I'm getting a 30% return, Chris. And they're like, I invested $100,000 and I'm getting $30,000 in rent. I'm like, well, okay, now, how much are you paying in a management fee? Oh, I'm managing it myself. Like, okay, you're managing it yourself. So they don't account for the management fee. And then I say, well, what did you spend last year in maintenance? Oh, it's a new property. We don't have any maintenance fees. So they're not putting aside reserves for maintenance. They're not putting aside reserves. For instance, say, hey, what's your vacancy? Oh, we have no vac, fully leased for the next year. Well, there will be vacancies. So they don't account for that. And what I found is when you take that 30% return, and I'm using my own personal experience when I talk about this example and you strip away, you say, well, we're going to keep 10% or 5% or 10% for management, we're going to keep 10% for maintenance, we're going to keep 10 percent for vacancy reserves. Then you find out why banks only give you credit for 70 or 75% of the rent you're collecting because they expect you to put aside 20, 25, 30% for those reserves. So you strip all that away and you find out, okay, maybe you're not making 30%, maybe you're making 10% or 5%. I was making 7% on my portfolio before tax, after I managed it for a period of time that was on my equity, and it just didn't make any sense for me to do it any longer. So I think whether you're successful, Scott, and you enjoy, you know, having that active role, you're getting great returns. Just make sure you're accounting for, you know, the prop, like we account, if you're not accounting for it like a business, if you're saying, hey, I'm getting a 30% return, but you're not checking off all those boxes, you have to make sure it's an apples to apples comparison.

So what happens? I mean, because obviously we are, you know, as you're, as you're doing that and you're taking those reserves, you put them in, you know, into a bank account, whatever does, those funds get released back to the investors at the end of as it unwinds. So even though on paper those reserves exist, the reality is that they're just going to go back to the owners anyway.

Right? That's right. So again, I'm saying you manage it yourself, make sure you're getting a higher return, but also make sure you're not fudging your numbers and doing that. But you're exactly right. Yeah, that Money ends up in a bank account, sits there, and we typically have 6 to 12 months of reserves in operating reserves to have a nice cushion.

Let's say I'm listening to this podcast and I own my own active land investing business. But I also want to be passive and I want to diversify. Do I have to be an accredited investor?

Oh, good question. And what is accredited investor? So if you're not familiar with what an accredited investor is, it's an SEC definition and there's some nuances here and there, but if you make over $200,000 a year or over $300,000 as a couple historically, and you expect that to go forward or, and I messed this up, it's or your net worth is a million dollars, not counting your primary residence, then you're by definition accredited. So there's a couple different kinds of syndications out there. You don't necessarily have to be accredited. The types of syndications that we offer are under Reg. D and these are SEC exemptions, so Regulation D. And there's a 506B offering which does allow a certain number of unaccredited investors. So if you understand real estate, you're sophisticated. So I'll go through the process with an investor. Let's say they're not quite there in one of those metrics, but they're on their way. We sometimes let non accredited investors in those 506B offerings. There is a nuance. You have to have a relationship. You can't just bring somebody in off the street and be like, hey man, here's this new property we're buying. You're staying outside of a restaurant or something like that. Do you want to invest? The SEC does that for a reason. It's for safety reasons. They want to make sure that you're qualified to invest. Then there's a 506C. You have to be accredited to be in those. And we have, most of our offerings are 506C. And you have to approve accreditation either via a professional. So whether that's a CPA or your financial advisor, they can sign basically a letter and affidavit that proves your accreditation because of your finances, or you can go through a third party. So we also have a third party service that we use so people can be accredited. It's not that onerous. Takes usually about 30 minutes and then you have that on file for five years. But these are a good fit for accredited investors in general. That's a good rule.

That makes a lot of sense. And as far as your criteria, let's just say, when you're looking in the world of multifamily assets, what separates you as a syndicator apart from all the other syndicators in the world?

That's a great question. And you guys kind of alluded to it earlier. You want to stay in your lane. So we are focused on B. These are properties that are built in the last 20 years. They're typically running for $1,000 or more, all the way up to luxury A assets. So these are properties that are built in the last year. They have really nice amenities. We just bought a property in Orlando, Florida. I mean, the clubhouse is gorgeous. I would be happy living there. The pool is just amazing. So those types of assets in the Southeast, so we're focused on secondary markets. So we're talking about like Raleigh, Charlotte, Charleston, South Carolina, Greenville, South Carolina. Orlando is one of the bigger markets we focus on. And we have built our team to scale, Mark. So we have relationships in those markets. I have partners that have construction experience. They have commercial estimating experience. I have other partners with business experience. So we become experts in those markets. Like you take the property that we're acquiring in Charleston. One of my partners lives in Charleston. The other one of my partners that has the commercial insurance expertise and experience, that was one of his markets. So he knows those properties very well. He understands the cost of those very well. And then we have best in quality management, so our property management teams as well. So the hard thing today, and you kind of mentioned this, Mark, well, why would we want to compete with your group? It's hard to win these deals. So essentially a seller's going to say, hey, we're going to sell for this price now. We're going to put our line in the sand and say what we're going to sell it for, Somebody may come in and pay more than that, but if everybody is on the same level playing field, they're going to say, hey, can you guys get this deal done? So we win these deals because we have surety of closing. So we have a great track record of closing on time. We're able to come in there and understand where the metrics are and where the numbers are. We have some, not proprietary, but some techniques that we use that allow us to squeeze some margins where not everybody is looking at some of those opportunities. And then I think if you're looking at it from an investor perspective, we try to make things really easy and really investor friendly. That's why my slogan is we put investors first. So we try to have monthly communications Monthly distributions and just make it very easy to access the information. Transparency, all those things, as well as education, which is at the core, at the base of what we do.

Absolutely. Scott Todd.

All right, you convinced me. How big of a check do I have to write?

All right, what did Tommy boy say? Don't kill the sale. And somebody's like, all right, we're good. You just stop. Typically our minimums are $50,000, Scott. So again, if you're listening, you're like, hey, I'm accredited. This is something I want to do. We're typically looking at a $50,000 minimum.

Okay, okay. Well, Chris, this has been phenomenal multifamily mentorship. But unfortunately we're at that point we're going to put you on the spot and ask you for your tip of the week. A website resource, another book, something else actionable for the auto passive income listeners to go improve their businesses, improve their lives. What do you got?

Yeah, so I'm a big fan of Dan Sullivan. He founded Strategic Coach. And my theme of the year has been who not how. So if you haven't read it, who not how. If you're looking to scale your business or you're looking even for something like, hey, like, my wife and I were like, we could really use a who to help manage our children from two to five o' clock at night so we can get some work done and really value our family time. Who not how is a really nice concept to figure out how to make the most of your time. How to value your. To find others that are doing what they love and what they're really good at and freeing you up to do the same.

I love that book. Absolutely. Before we get to Scott Todd's tip of the week, I just got to give a shout out to our sponsor, which is flight school. Learn how the next 16 weeks can literally transform your life. Go up that mountain, investing that mountain of land, investing with Scott Todd as your flight school Sherpa. He's done it thousands of times. He'll take you up there quickly, safely, efficiently. Oh, yeah, that flight school tuition ain't going to cost nothing. Guaranteed you're going to make back that money. 180 days or less, cash or terms, deals. Learn more. Go to the landgeek.com training thelandgeek.com training Scott Todd. What's your tip of the week?

Mark?

I know you like to eat. I think we all like to eat. And look, if we're just being honest, sometimes you look at a menu, you're like, I have no idea what that is, but. But maybe I want to know. So check out this iPhone app, all right? It's Cibo Sibo Sibo Visual menu Translator right now. And you point your phone at a menu, and it will look at it, and it will start to show you pictures of what you're about to eat.

This is perfect for me.

Yeah, because there you go.

You know, oftentimes I'll be intimidated by the foreign ingredients, and I think I would like it. And then I'm just a little too shy to ask the server, like, what is, you know, this word? Or how do I even pronounce it? And then you just pass. You're like, okay, I'll just get spaghetti. I can pronounce that right. And then you end up, like, missing out on a whole range of culinary delights. I love this tip of the week.

So when you're. When you're trying to feed me something, I'm gonna be like, just show me a menu first. Just show me the menu. And if I take out my phone, well, then you know why.

That's right. That palak paneer, it's calling your name. Oh, yeah, the chana masala. Don't be afraid, Scott Todd. Don't be afraid.

You lost me. You lost me at Indian.

Whatever. This app is going to change it and look. Great tip, both of you, but only my tip is really going to move the needle in your life. Sorry, guys. Nextlevelincome.com check it out. Learn more. And there's a great book. Talk about the book a little bit.

Yeah, real quick if you want to learn more about my story. I touched on it a little bit. Learn about our strategy and how we built the team. You guys asked phenomenal questions. We go into depth in all of those. And the best thing, just like your training, the book is free. So go to nextlevelincome.com, click on the book link. I will even send your audience a copy, Mark. So if you're listening Today, check out NextLevelIncome.com, click on the book link.

Yeah, and he's not kidding, because when I was on Chris's podcast, which is also a great podcast, I got the book, and so I have it as well, and it's phenomenal, so definitely do that. Nextlevelincome.com Chris Larson.

Are we good, Mark? Scott. We are great. Thank you guys so much. Thanks for everything you do. I know my audience loved your podcast. And, Scott, it's a pleasure to meet you today. Thanks for all you guys do and all the value you provide for everyone out there.

Thanks, Scott. Todd, are we good?

We're good, Mark.

Well, I want to thank the listeners and just remind them the only way we're going to get the quality of guests like a Chris Larsen from NextLevelIncome.com so that, I mean, let's face it, Chris is the smartest guy in the room, which is saying something.

There's nobody else in my room here.

Do us the favor. You follow the podcast, rate, review the podcast. Send a screenshot of that review to supportlandgeek.com I'm going to send you a signed copy of Dirt Rich as a thank you. Even if you have the book, why not get another one? Signed copy, Give it to a friend who knows.

I like that. I don't know if I've rated your podcast yet. I want to sign copy, Mark.

Chris, absolutely. You don't even need to rate it. I'll just send it to you for fun. All right, thanks, everyone. And 1, 2, 3, let.

Let freedom ring.

Ring.

There you go. Thanks, everybody.

Gentlemen, thank you so much. Thanks for listening to the Art of Passive Income podcast. Start your journey at www.thelandgate.com and www.scotttodd. read and review the podcast and email support@thelandgeek.com your screenshot for a free Passive Income launch kit.