Vetting A Winning General Partner Made Simple

Passive investing in apartment syndications is great, but it's not without work.

Successful passive investors must perform two critical jobs:

1) Vet a winning General Partner
2) Analyze and fund potential deals

Most people jump straight to analyzing deals, but that's the wrong approach.

The most important first step is to find a General Partner you know, like, and trust with a successful track record, alignment of interest, and similar goals.

That's not a terribly easy task, but it doesn't have to be complicated.

Join us in this week's episode as Anthony and Dan discuss what to look for in a potential GP, what questions to ask, and how to know they're a good fit for you.

***

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***WHO ARE WE?***

Hey! We’re Dan Krueger and Anthony Vicino and we are apartment syndicators investing in Minneapolis, MN with a passion for real estate (particularly multifamily), financial education, and personal development.

Wait...what’s an apartment syndication? Click here to learn more: https://bit.ly/2zgc7o6

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Complexity leads to overwhelm, and when you’re overwhelmed, you don’t take action.

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Transcript

spk_0:   0:14
welcome to multi investing made simple where we take the complexity out of real estate. I am Dan Kruger and I'm here with my co host Anthony Casino. Our apartments indicators in Minneapolis, Minnesota and

spk_1:   0:28
this is Episode four of Multi Family. Messi made simple needed. Four.

spk_0:   0:33
Look at us already up to number four. That's almost a full handful.

spk_1:   0:36
Almost almost.

spk_0:   0:38
Yeah, and that's just a hop Skip away from episode number 100. Maybe we should start looking ahead and saying, What should we do for Episode 100?

spk_1:   0:46
I don't know,

spk_0:   0:47
for all our loyal listeners

spk_1:   0:48
a hard time figuring out what episode number five and six were gonna be. But

spk_0:   0:52
yeah, it's a good point. Let's focus where Right now, Next small step forward right there that these big the school is way off in the future.

spk_1:   0:58
So before we were talking about vetting a sponsor. So if you're a passive investor and you're looking at investing in a syndication deal and you're trying to figure out who you want to be investing with, who the operator of the sponsor is, how do you want to kick this off? If you just wrote an article around this topic. What do you think a good starting off point for for this conversation would be?

spk_0:   1:26
Let's just quickly lay the groundwork. Maybe for people who are listening for the first time. And I have never heard some of these terms of sponsor and syndicator and general partners and limited partners and all that nonsense and just talk about what is the deal sponsor our general partner or syndicator? Those air, all kind of synonymous terms that we're gonna use throughout this episode. So kind of lays the groundwork. What do they do versus what a limited partner does and just and just take it from there?

spk_1:   1:51
Yeah, So Sponsor Operator, general partner, That's basically the guy or guys or gals who are running the deal. They're going out finding property. They are pulling all the investors together, putting the loan financing together, and sometimes they are also managing the properties as well. Some groups will outsource that to 1/3 party. Other groups like US will have Internal Property Management Company that they have operated deal, and they also take care of all the investor communications. So what does that leave for the limited partner or the passive investor. Really, The only work that the past investor needs to do is their own due diligence on the deal Sponsor of the operator. So that's kind of what we're gonna be digging into today. This is really the one thing that the investor needs to do. Well, actually, there's by two things. One is educate themselves on the real estate business model. And once they've got a good handle, that and they decide that that is something that they want to invested. Step Two is finding an operator and making sure that that operator fits their parameters.

spk_0:   3:01
Yeah, I think that's a good summation. The ah, the thing with passive investing is that it is not passive. You actually do have a little bit of work to do, and this is the most important thing that you're gonna do in your entire journey. And if you listen to our previous episode, we talked about what its indication is and kind of walk through the steps of that. So if you're not familiar with some of the terms that we're talking about right now, go and listen to that episode. I think it'll a lot of the groundwork and explained the nuances. But one of the things will point out here is that if you're a passive investor, you're going to need to do two things. Like Dan said. You need to educate yourself, and then you also need to know actual operators. You know, like you have to have no somebody with the deal who's doing the types of things that a general partner does. And so there's two different ways. Ah, syndication can be structured from an SEC perspective, and it's really important to understand that right off the bat is, if you're not an accredited investor, then you need to have, ah, preexisting relationship with an operator. So let's let's break down what some of those terms are accredited investor and why? If you're not an accredited investor, you are gonna need to have a relationship.

spk_1:   4:08
There is a way that you can structure a syndication in a way that takes non accredited investors where there isn't a pre existing relationship. However, the requirements were doing that are a little bit, uh, more complex. You've got to go through a lot of red tape with the SEC where the SEC needs to vet you and your operation before they let you go out there, sir. Publicly advertising and taking

spk_0:   4:32
the nuance there and it's actually really a good one. That you're pointing out is that the the way that most syndicators register their syndications with the SEC is through Regulation D rules. Five of 6,000,000,005 or six. See, there's other ways that you could register your security, and they involve a lot more red tape there, quite a bit more expensive. And so apartments indicators typically avoid those you can do it. Like Grand Cardone is a good example. He set up a fund where he can take funds from non accredited investors. It's usually not worth all the rigmarole, and it puts you into a, I would say, a fairly risky position taking money from a non accredited investors that you aren't familiar with. So,

spk_1:   5:13
yeah, I would say it's not worth it. For most people who are listening to this, it is worth it. If you're like GC and you've got the following yeah, where there's a ton of people who are shopping at the bed, too. Invest money with him, so I think for him it's worth it. But for the vast majority of people out there know something's got less than a 1,000,000 followers on Instagram and you've got a track record of less than 10 years. Wait,

spk_0:   5:40
Do you have less than a 1,000,000 followers on Instagram? What? What do you have been doing? If you're if you have less than a 1,000,000 likes you even taking it seriously?

spk_1:   5:49
Yeah, I see you've got I mean, you've gotta have, like, a big pent up demands that investors you have to pay worth it so, but that's a little off topic. But to your point, there's basically for the vast majority people out there. There's there's. There's limitations on how maney not accredited investors you could take. And so that and then you need to know what you know what, what the distinction is between those those studio

spk_0:   6:13
and so an accredited investor is going to be somebody who I believe, is that making over $200,000 in the last two years of income, or is it to 50? I think it's 200 thousands.

spk_1:   6:26
It's $200,000 for a single person, $300,000

spk_0:   6:30
and or ah, having a net worth over a $1,000,000 not including the equity in your primary residence. So if you don't hit that, you know, somewhat high hurdle as an investor, that means that you are going to participate in a syndication of five or six B in that then they allow what are called sophisticated investors. And so to qualify as a sophisticated investor, you have to understand enough of the underlying fundamentals of business and finance and the deal to be able to make an educated decision. So you need to. As Dan pointed out earlier, You need to educate yourself, and you need to learn just like you're doing right now. Listening to this podcast, learn how these things work, learned the nuances of the numbers. And then the second caveat is having that preexisting relationship with an operator. And so we're gonna talk through how to vet deal sponsors today. And as you're going and trying to create these meaningful relationships with an operator, what types of things that you should be looking out for us, that you can be sure that you have an alignment of interest, that they're capable and competent and that they're not going Teoh just leave you high and dry the moment things start going south. So really understanding their personality and their trustworthiness. How's that sound to you, Dan? Do you think we can cover all? Sounds like a plan. Okay, so the very 1st 1 we're writing an article we're writing. Ah, quick start guide right now, too passive investing for for new investors like yourself. And so we're just gonna be riffing off of this. And the 1st 1 that we're gonna talk about is personality. So wouldn't were it is a big one. So when we talk about personality, are we looking for somebody who's charming and charismatic? Dan?

spk_1:   8:05
Oh, yeah, Yeah, I think know specifically when it comes to personality, the main thing that you want to be concerned with as a as an investor is the communication style. And personally, when When I've talked about this in the past, I've advised people to focus on operators that really prioritize education and put that at the forefront of their communication with investors. If someone is just fixated on trying to get you to invest, and they're just kind of bypassing the whole process of making sure that you understand the business model as a whole and or the actual deal. That's a pretty red, pretty big red flag. If you are not working with sponsors and find someone whose top priority is making sure that you understand the business model and or the deal, that's a good starts. And then from there you're also going to more than likely have questions throughout the investing whole period. So you're gonna want to find somebody who really prioritizes quality communication, is responsive and is going to provide you with the level of detail that you want as an investor. So I've heard about a lot of, uh, investments out there, not necessarily in real estate, but I've had an investor. Our last deal mentioned that he was investment with Guess what? Some kind of start up almost where the communication was almost not existent for almost two years on it, right. They got the initial investment for the first couple of years. It was like silence and then finally out. But you're two or three. Cash will started getting produced, and then these guys kind of came out from from under their their rock and start communicating. But there's there's situations with things like that happens so you want to try to identify those individuals early on and make sure that that is not something that you invested cause whether things going good or bad, you want to make sure that you're aware

spk_0:   10:11
I'm curious. Well, in that deal in particular, do you know? Was it going not quite to plan? Or was it going well? And they just weren't communicating?

spk_1:   10:20
No. Well, it was. It was just over a phone conversation. This guy's out in California. From what I remember, it wasn't a deal where there was a they were planning on making distributions in the first year or two, so I think that performance was kind of on part since this was it, just like a startup company. It wasn't like a real estate investment. So right off the bat, I think this individual, this investor, knew that this was a higher risk endeavor. It was just really the lack of communication throughout that that really kind of bothered it, you know, Unfortunately, I don't think that's uncommon, especially if there's ever any kind of changes to the business plan like Corona virus. Something like that. You know this. This might be a time when There's some operators out there who are kind of going silent on people because they either don't know exactly what's happening at their properties that they're still trying to get a handle on it. And they just kind of stick their head in the sand. And they wanna wait until they have good news. Or, you know, I'm not really sure what the thought processes for people like that. Honestly, I have been always been of the mind set where I just keep communicating with people, even if I don't have a really good answer for exactly what's going on at a particular time, At least pop in and say, Hey, here's what we know Here's what's happening And if you have questions reach out. We can chat, but just kind of like reminding people like we're still here. Or so we'll still working, even if there's like a whole bunch of new things happening right now, and we're just still trying toe get our get her head wrapped around.

spk_0:   11:48
Yeah, what would you say is, ah, good frequency of communication throughout a deal, because if your new investor new investors typically want to have their hand held a little more. They need a little bit more communication because it's a first rodeo. And so it's It's only natural that they're going to maybe reach out more frequently, have more questions, then maybe an experience investor who's done it more frequently, but just laying expectations. What should a new investor expect in terms of regular communications and and what the operator is communicating?

spk_1:   12:18
Well, I can tell you from the opera years perspective, I feel like monthly communications are nice. And the way we've been doing is it our monthly communications? We provide kind of a higher level update on pretty much how the business plan is working and not providing granular detail in the financial level until the quarterly updates. And from my perspective, that seems like a good flow, because then you just kind of remind people that, hey, we're still chugging along here. You know, not a whole lot has changed in the last 30 days, you know, that might be some minor little updates, but you know, as far as the performance of the asset, not a whole lot is gonna change 38 period. So it's is pretty much just like a popping in to say hi type update and providing any little business fine, nuanced updates and then on the quarterly updates providing financial performance information that corresponds with the distributions that are gonna be going out. And I feel like that's That's a good mix. The impression I get from investors is that may even be more than then they expect or require. But, yeah, we're still trying to field out. Honestly, I was feel like more is better to a certain extent, but I've talked to a lot of investors out there that that have invested in deals where they've had some more robust communications and they feel like it's unnecessary. Specifically, I was speaking with someone who was invested in a deal, and every month the sponsors put on a webinar, and it's like a 45 minute webinar and they go into the financials. But they go really deep into all the details, and he was pretty much saying, you know, that was kind of information overload. I'd obviously sit through 45 minute presentation to find out what the cash was gonna be for that, so that I was looking for like, one number and was, you know, I don't think he was maybe was irritated. I mean, I couldn't trying to pinpoint what his vibe was, but basically, he thought that was a little bit overkill. So you know the approach that we have been taken as we send out an email with a few paragraphs written of the updates. So for that person is looking for those two little data points, they could look at the email, pick it out in one minute and be good. And then we also have a link to a video where there's where I'm just explaining the updates pretty much everything and even help in a video. For for someone who wants that type of content, So we provide both. We try to cater to the people who just wanna, you know, poppet, and real quick, just see with the bottom line is and that cater to people who want you have a little bit more robust conversation.

spk_0:   14:53
Yeah, and this is exactly what we're talking about. When were trying to trying to understand the alignment between the investors expectations and our expectations of communication. Right. So we tend toe, I would say, if anything, living on the side of over communication. If you're the type of investor who values that, then you're going to be very happy, right? If you're the type of investor who's to get by with less information, well, the plus side there is you just don't have toe attend the Webinars. You don't have to open the information, so I would rather err on the side of giving too much. And the way that we do it in my other businesses, we do it. A month window is too small of a snapshot to be able to make any meaningful distinctions about what's happening in the business at large. You can say Oh, we're sales up or sales down in what areas where they upper down How did that trend compared to previous years? But it's really only worth getting into the numbers every quarter or so that you have a long enough snapshot to make meaningful decisions based on that data. But ah, month, the month check in is nice to say, Hey, are we Are we on pace? Do we feel like we're trending in the right direction so those regular updates could be more, more high level?

spk_1:   16:01
I think the monthly pieces most likely going to decrease. You know, like the deal that we just closed on that that is probably those monthly updates. I'll check the investors, but they might not be necessary once we get to the point of having the property position. Otherwise, it's basically just could be like me popping out and say, Hey, not all lots changed. We repainted a couple doors.

spk_0:   16:25
A lot of it probably depends a lot on the asset itself in what type of reposition you're doing. If it was a riskier and lift in general and everybody knows that going in, then maybe more frequent updates during the lift process is going to be critical, whereas if it's more of a yield play, nobody's really expecting any turbulence. Then no need to really over communicate on that one. Unless things were going sideways, then you definitely want over communicate that Yeah, and I think that

spk_1:   16:51
can also change as well, Like with what we're going on, right? With what we're going through right now with Corona virus, I think it it is wise to deviate from your usual structure when things change right. If we get into this type of situation, maybe you were doing quarterly updates before when something big changes on a macroeconomic level just pop in and say, Okay, we're still here. We're still good. I think that's wise. Do so be as faras, you know, limited partners. When you're betting operators, they should be able to provide some insight into what they're investor communications have been. You should be able to ask them for Hey, can you send me some of your investor updates for one year? Other deals for the past few quarters just so you can see what type of stuff they put out and make sure that it's it's robust enough for you. And if it's your communications up,

spk_0:   17:43
Yes. So that's gonna be a key question to ask is your vetting potential operators is really understanding what's their communication style? And that's what we're really talking about when we say personality is how do they communicate in the frequency and then you know it's OK to ask for referrals from them as well and say, Hey, can I speak to some of your past investors and you get the vibe from them and say, Hey, how do they communicate? Is it regular? Would they do communicate. What are they saying? And then the other part of personality that I wanted to tie into was trying to figure out How does this person deal with stress and the unknowns? And when things don't go quite to plan, are they the type of person that takes responsibility for that and then tries to learn from and adapt in the moment? Or do they tend to point fingers on? Look, externally? I think that's that's a hard one to vet when you're actually talking to the person because nobody's going to say, Yeah, I kind of get overstressed and then freak out and blame everybody.

spk_1:   18:38
Yeah, I think the way to uncover those situations is is we'll get to this at the next point, but in the track record, you know, if you see something on the track record where a deal was lower of a performer relative to the others, you can ask the you know, what happened there. Why was this one you know, only yielding five or 6% of the others were 12 or 15% so that might show up in their track record, and you can also ask them straight out you know a lot of some complications you've had in your prior deals and tell me about your tryto kind of fish Old whether or not there you are the type who's gonna take ownership or if they're going to say, Oh, we have property. Andrew, it was crap for that building are Oh, this bank did this?

spk_0:   19:21
Yeah, I think I want to. I want to tie this into a personal story of of your personal story. Actually, um, one of the things if you listen to Dan Story, if you go back toe or episode number one, we dive into our histories Dan talks about, I believe the 1st 2 or three properties. You had 1/3 party property manager,

spk_1:   19:40
first property for about six months

spk_0:   19:42
and it didn't really work out right? Like you weren't super happy with it because they couldn't deliver the type of quality customer service that you expected. And so Dan admits like it didn't work out with this person. But then Dan learned from that and said, OK, here's what I'm gonna do to fix that. I'm gonna take the control myself and build out the systems and the people around me. So that I can take control and ownership of that. And that's the difference between just pointing fingers externally and saying they suck. And they're the reason it didn't work out And taking that information and learning from and growing from it.

spk_1:   20:18
Yeah, well, that deal actually did work. Oh, quite well. But I will say that, you know, the the reason that relationship didn't work out is because no third party property manager relationship would have worked out there. I just didn't know that my first deal. I didn't realize that. Ah, small six unit value add property. Wasn't fiscally incentivized in enough. That sword there wasn't enough meat on there wasn't enough fiscal incentive for 1/3 party to give that small the deal. The amount of attention that needed to get up well, just took me six months to realize that. So, you know, I think you're right. I think a lot of people on their first deal might have looked at that said, Okay, this is this is not for Mies. Property managers are doing it. I don't have the time, so I'm just gonna sell it, scratch it. But, you know, find somebody who, when they're telling you about their experiences in the business can take responsibility for the lessons they've learned, as opposed to saying his fault. Her felt their phone. That's a good

spk_0:   21:21
taking responsibility. And then, um, clearly outlining what they learned and how they're they're protecting against that in the future what they're doing And that really ties into track record, which we might as well Segway into that. Next thing that you're gonna be looking for in a an operator is their track record. And that's both looking at their past deals and saying, Hey, how did this compare? Not just you're not just looking at the deal and saying, Hey, was this a good deal? Did they get good returns? They hit that you're trying to figure out. Did it live up to the expectations that the investor initially set right? Like if if the property of the deal returned 15% i RR to its investors. On the surface, you're like, OK, that's that's pretty good. But if that if the operators were projecting 20% well, it fell 5% short of what they're projecting, and so that tells you a lot about that. That operator tells you that maybe they're a little bit liberal in their underwriting or that something went really wrong in the production. So at that point, what I would say is, when you're looking at track record, don't just look at the total return but tryingto compare that against what they were actually anticipating from the start.

spk_1:   22:30
Yeah, and also, I think you should look at whether or not the assets they have in their track record are comparable to what they're showing you now, because maybe a track record for a particular investment group might be multi family buildings in Minneapolis. Able and I may bring you a deal for a building in Knoxville, right? Maybe their track record was great, but this is the first deal where they're going on a state. That's something that you might want to be aware of. Just be aware of anything that's different than what they've done before, because there's a little bit more inherent risk there, even if it's a great deal and they're gonna knock it out. The park you do want to be aware of. This is the first time that they're going on state. This is the first time that they're doing like a mixed use property, whether it's a retail component or first time, that they're using the third party manager like you want to see if there's anything that they're doing for the first time and then ask yourself, Is that risk that I'm comfortable with? And you know, what's their game plan? And how do I feel that

spk_0:   23:27
I think that's great and actually ties into what we'll talk about in just a second, with the next point being team members. If you're gonna be getting into a new asset class or getting into a new market, then that could be OK. If that, operators say, has experience and they have a team surrounding them that does have experience in that right? So I don't have any experience investing in Georgia. But if I had a partner who lives in Georgia and that's exclusively where they invest and they're coming on the team, then that might put your mind at ease. It's an investor saying, Okay, well, at least you have somebody surrounding him who knows that market, that area, and they're gonna boots on the ground or whatever it is that you're looking at, so I think That's a key. Now, Dan, what would you do in the case when we're looking at vetting people's track record? What kind of things are we looking for that point to? Okay, that's a successful track record. What are some things that raise some red flags?

spk_1:   24:18
There's a few things I think one thing that you wanna be aware of is whether or not the sponsor the operators track record in real estate is long or short. You also want to get some insight into where they're coming from prior to investing real state. Because you might be looking at working with the sponsor is fairly new. Maybe they didn't want to deals and they were syndications. You might be asking yourself. Okay. Is this, uh, someone who I think is gonna be ableto pull this off? You can get insight into that from looking farther back in their track. Look at their resume, for example, where they, you know, high school principal before this, Or were they a property manager for another company, where they working in finance in some capacity so you can trust their evaluation and their underwriting? Do they have some other Africa ble skills that they bring to the table outside of the real estate experience that could provide a lot of insights and be very valuable. What I

spk_0:   25:14
would I would tie into that is that everybody starts somewhere everybody's knew at some point, right there was a point where we had never done a syndication. And so if you were looking at our track record, you'd say, Well, can I actually trust these guys? Do they know what they're doing? Well, if you look at it from a pure, have they done a syndication standpoint? Maybe No. But if you look into the history and say OK, well, Dan has a finance background, so he really understands Number is underwriting acquisitions. He also has some real estate experience having you know, purchased at this 0.0.0.30 plus unit's been managing this himself, or Anthony doesn't necessarily have having done a syndication before. But he has business experience, has experience running operations in P and l's and logistics with careers and right, And it's not so terribly different than what you're doing in a syndication now. If our experience, you know, was less specific to the situation like we maybe came from working at Dairy queen or, I don't know, some, some other, some other field that really doesn't bear any resemblance to the skills and abilities you need. Tohave. Exactly. So in terms of track record, is there anything else? So we want to hit on that one?

spk_1:   26:25
I think reiterating the references is important because I don't know if a lot of people realize that they can ask for that. I offered that to some investors recently who just found me online through either YouTube or linked in, and they were asking about my track record, things like that. And I offered like, Okay, there's a few people who I could put you in touch with who invested in prior deals in you know, a few of them were fairly surprised that I offered that. You know, I don't know if it's common knowledge that you can ask a sponsor for investor referrals or references I should say from people of investment in previously, who are either current investors or private investors were, you can either give McCall or shoot him an email and say you invested in Victor's Capital, you know, tell me about what the experience is like any feedback positive negative. I think that's a pretty powerful tool as well. Because then you get this third party who's basically vouching for their for stand experience, as opposed to you just going off of everything that the operators giving you. More than likely, the operator's not gonna, you know, pull all the skeletons off the closet, show you all mistakes they've ever made. But if you get some feedback from current your prior investors, that could be very, very valuable information. You know, if there is some some skeletons in the closet, then you find out about. But more than anything, I think you just get a lot more comfortable having soon. Some reviews, basically.

spk_0:   27:50
And I'm gonna give a pro tip here something that I learned in the course of my businesses where we've hired have hard dozens of people and we have, ah, big emphasis on trying to vet out a player's versus be players or see players, and we have a specific way that we rank a players. B players see players and what that means. So we have a classification system and it's really difficult, incredibly difficult to find somebody in the interview process and make that judgment call. It's like the people that you think are going to be great are oftentimes not because they may be interview really well, but they don't have the technical skills to do the job you're hiring them for. So one of the tips here is when you call to do references. What you're looking for is somebody who enthusiastically encourages you to work with this individual like you're looking for somebody who's a cheerleader for that person. And here's why is because, say, you invested money with me and Dan and we exceeded your expectations and you were really psyched on that. And somebody called you up and said, Hey, I'm thinking about working with Anthony and Dan on this next deal. Should I do that? You're gonna be like, Yeah, absolutely. The exceeded my expectations. It was fantastic. It was great. You should definitely do it right. That's the type of response you're looking for. Not like, yeah, I was pretty good. It was OK. Was all right. Like those are those are fine. But that's the difference between a B B B operator and a operator.

spk_1:   29:12
Yeah, I don't think anyone is looking for fine.

spk_0:   29:14
You can do better than fine. You deserve better than fine. Yeah, go ahead. Splurge on yourself. You deserve it. Okay, so track record boom. Done moving on and you've kind already touched on a little bit. Was team building out a rock star team because real estate is west. A quote. It's ah, we game, not a me game. It's a team sport. Yeah, it's weeks. It's only sport a Nintendo Wii sports. This this episode is brought to you by Nintendo Wii. Nobody can do everything. In its indication, it is impossible for as much as Dan would like to, he can't do every little bit, right? He You know what? If you could, but he can't. So he has toe surround himself with some people who who can take some of that. So this is one of the most important things that you're gonna look for when you're looking at an operator is the people that they choose to surround themselves with. And so a couple of G key rules that you're gonna be looking at, actually, what do you What do you think are a couple of key roles that you should be looking at? An operator's team.

spk_1:   30:13
I think a property management is very important because that's what's going to take the the asset from point of acquisition to point of disposition. If you do sell it,

spk_0:   30:25
Yeah, that might be number one. Honestly,

spk_1:   30:27
yeah. I mean, that's what's really gonna make or break the investment is how well that property has managed assed faras boots on the ground. So you want to take a look at who they're using for that, whether it's an internal property management company like we have or 1/3 party. Hopefully, the operator has worked with the property manager they're using before, and they could provide some insight into you know what detail, what deals they have done with this group and how those went. And then if it's third party they've never worked with before, he could probably do some external due diligence on that group. See what they and it looks kind of use. They have

spk_0:   31:07
tying into which you had mentioned earlier about making sure that the specifics of the deal are. There's nothing new for this operator, whether that's an asset or a new location. The same thing with the property management team, right? Not all property managers do the same stuff. Some work in the commercial retail space and leasing some work in the single family space. So you really want to make sure, like, does this property management team have experience doing the type of lift or management on this property that the deal calls for?

spk_1:   31:37
Yeah, yeah. And in addition to Property management's asset management, which I think a lot of people might be looking piece about the difference between the asset manager in the property manager but essentially property manager. Our property management is the boots on the ground operations at the property level, answering maintenance requests, leasing units overseeing the We have projects that the steel has it, and then asset management is going to be at the investment firm level. That's going to be investor communications, bookkeeping, financial reporting, all that kind of stuff that that's that's who you're gonna be communicated with us and investors. The s a manager. So, you know, circling back to the communications style, that's the asset manager that you're trying event. Really, that might be different than the operator that might be a team member of the operator. The S and manager might be the same person. But in any case, the asset manager, whether it whether it is the operator or if it's a partner of there, is gonna make sure that that person is on their A game and their communication styles, your criteria and aligned with you. And then in addition to that, you're also gonna want to make sure that they have am, ah, good legal team because you know, these aren't simple deals to put together from a SEC perspective. There's a lot of nuances there that need to be hammered out duck correctly. So if you're looking at investing in a deal like this and it's it's just a basic, you know, Loc Structures syndication, it's like five pages long. Something's off there. You want to see that they're using an actual SEC attorney and someone who's got some experience of putting together syndications so that you could be sure that this deal is structured correctly and then obviously ah cp a Ah,

spk_0:   33:29
the old good old C p A.

spk_1:   33:30
Yeah, um, C p a

spk_0:   33:33
one other that I'm going to throw in there is It doesn't always have to be there, but it could be helpful. Is some kind of, I don't want to say mentor, but an adviser or advisory Ah, like a board of advisers. And what I mean by that is, does this person have somebody else who has a lot of experience that they can turn to? If things aren't going quite the plan, who do they surround themselves with? If they have questions, where do they go? And in a lot of cases, most indicators that I know have somebody that they would point to is kind of like their mentor or an adviser that they can turn to and so really understanding, like, who is that person? What's their role? Cause, you know, some mentors and advisers come on in and more official capacity, and some are no. But that could be also very helpful to know. Like, what resources does this operator have standing behind them, ready to jump in and help

spk_1:   34:26
you? Especially if you're looking at a cooking facilities you know, a little bit newer to the space if their track record is only a year or two long, but they've got some rock stars helping advise them on those who have been in the game for 10 plus years and are are way ahead of him. So that kind of circles back to the track to what else is for his team members?

spk_0:   34:50
I think that hit it. You know, I think the property manager is, as you said, the most important. Or for me, it's the most important, because it really is the team that's executing the business plan. And I've said it before. But there's and I'll say it again. There's a difference between a $1,000,000 idea and $1,000,000 execution, right? A 1,000,000? A $1,000,000 idea is useless without the execution. And so who do you have in place to actually creates the value that you're expecting? Teoh Return? Yeah, in the article that were we wrote for the quick start guide toe passive. Investing in apartments. We do talk about property management, contractors, lenders, lawyers and advisers and the contractors is different than property managers. Right? The contractor is who are these professionals that we bring in for these specialty things, Like an engineer for due diligence? Or if we're gonna, you know, build out some new infrastructure, things like, who are those people that we use? Do we even know are we going to go there? We're gonna go the yellow pages and just kind of open it up and put our finger down like those are important questions to know the answers to. All right, So next up in vetting the operator, you're gonna want to be looking at their education, and their resource is. And so when we're talking about education in particular, what we're talking about there is How well did they know their market? How well did they know this particular asset class? What resources do they have around them that could help facilitate that? So, Dan, what kind of things would you expect from from an operator in terms of their education and resources? Question

spk_1:   36:27
really thought about that before? So you're looking at their personal education as faras, like what's on their resume?

spk_0:   36:34
No, not so much the resume, but more from a perspective of like, do they really understand what they're doing here? Like in maybe another way of putting this is like knowledge of the deal. Tell me about what parts of this deal concern you. Tell me which part you're excited about. What are you doing to mitigate the risks? So thinking from that angle. Now that's a

spk_1:   36:54
really good point, because I have. Over the years I've spoken with so many potential investors, and I've had a few investors who have brought their personal financial advisors in on that conversation and some consistent feedback that I've gotten from some of these professionals and from investors as well is they enjoy. My Russians enjoy. But they are comforted by my expertise on the industry, and the business model is a whole as well as the deal in particular. So this is something where you're probably not could be able to just ask an operator like, How much do you know? But it's something that you're gonna be able to find out through the conversation, right? So if you ask them questions about the market or historical data or various asset types or deal specific questions, and they've got a very detailed and robust answer without any hesitation and without any blank stares or looking nervous, you know that's a good sign. If they're able to answer any and all questions right off the bat in a way that you understand it, that's a good sign and something that just popped into my head here from a conversation that I had with, um, a couple, that investor with me. One thing that they noted is they were previously speaking with somebody else about a potential investment opportunity here in Minneapolis. I'm not gonna say who it is. It's not a syndication deal, was it? Put him on the last. It's a specific, Uh, it's a little bit different type of deal in still a real estate thing, but something that they commented on was when they asked this other individual boat this opportunity. You know, questions about the numbers, questions about the risks, the rate of return when they get their money back. All these questions they didn't get straightforward answers, They got vague answers. And, um, you know, I don't want to say that there's a being dishonest going on. He was just I think the problem was that the answers to the questions didn't sound that great, right? So this individual who was presenting this deal didn't really want to give him the just straight bullet point. But here's the answer to your question, because it didn't sound that great, right? The deal wasn't that great, and they tried to kind of work their sales game around it, to present it in a way that sounded appealing. But then when these individuals started asking about some of the less than ideal parts about it, they got these sort of roundabout answers that work, really answering the question, right? So that's a pretty big red flag. If you get some really comprehensive, straightforward, easy and understand answer, that's great. And if you get something that's in direct and a little bit evasive sounding, or they tryto avoid the question almost are beat around the Bush, then that's That's a red flag.

spk_0:   39:55
Yeah, I would, I would add. You know, the whole point of this podcast is for us to try and simplify multi family investing to some degrees because it's not a complex thing. And I would say if your operator doesn't have the ability to explain the deal in the market and the risks and everything associated with this opportunity, if they don't have the ability to explain it in a simple way that you understand it, then they themselves maybe don't understand it as well as they need to.

spk_1:   40:20
Yeah, or they're trying to, you know, play that same game that's been played in the financial industry for a long time, which is keep a complex and just tell people, Hey, this is what you're supposed to do. Don't worry. You're not smart enough to know

spk_0:   40:31
this is how it always

spk_1:   40:32
is. I think that's huge. I think that's with huge because at the end of the day, this isn't a really complex business model.

spk_0:   40:39
Yeah, one of the one of the questions, I think would be really beneficial for people to ask of the operators is Hey, what concerns you about this opportunity, this deal and what are you planning to do to mitigate those concerns? And then what are you going to do or where where you go if things go sideways? If things do go exactly as bad as you know, this concern, because listen like there is no deal out there in the world that is so good that an operator is going to have zero concerns about it, there's always something to be aware off.

spk_1:   41:13
Yeah, and I think what, you're going undercover, what you're going on under uncover there is whether or not the operator is properly stress testing the deal because I know there's a lot of people out there who invest for themselves and or invest in a syndication format where they bring investors where they spend all their time looking at best case scenario. And if you ask that question and they have to think about it and kind of trying to scramble to give you an answer, that means that they haven't been planning for the worst, which is something that you always want. Ones when you're investing for yourself or someone else is invested on your behalf in the form of a syndicator, you want this guy to be actively looking for what, how the steel could break and how it can go wrong and whether or not it still works under those circumstances. So

spk_0:   42:06
something something I would, um, add into this because every underwriter should have stress tester deal to different degrees, and so there should be a worst case scenario. There should be a best case scenario, and then they should be this middle of the road scenario and what one things you can do is ask the operator Hate. Where is this deal in the spectrum? Is this the best case scenario? Deal is the worst case scenario and then most likely they're going to say, you know, this is, you know, a good case scenarios like we're fairly confident and our underwriting, and then you just say, Hey, that's awesome. Can I see those other scenarios? Can you show me your underwriting and show me what? What does worse case scenario look like? And what does best case scenario look like? I'm not gonna, you know, formulate my final decision off that I'm just curious to see how you underwrite this.

spk_1:   42:53
Yeah, I will say the operator may or may not provide you with the best case scenario because they might want to tread lightly around over promising in which I think is fine, you know, lead best case the mystery. You know, if that's what they want to do because, well, you probably don't want them to set the precedent of a 25% higher are.

spk_0:   43:12
Here's the thing, though, that is, and I know you well enough is that if somebody asked for a best case scenario, you would give them a good case scenario. But it would not be the best case scenario that

spk_1:   43:21
I would be your heart down. I would tell that that's best case. But exactly I'd leave out a little bit of the icing on the cake because I just don't want a I don't assume, as you say, 25%. However, anything less than that's gonna be disappointed. Expression? Yeah. The main thing you want to know about as a passive investor, that was the worst case. You know, You want to make sure that that worst case scenario still makes you money, And if that's the case, that and it legitimately is worse case, you know, they actually have factored in realistic downside factors. If that still works, then that's a good size.

spk_0:   43:57
Yeah. In another question, maybe to ask is just Hey, what other conservative assumptions are you making that you haven't factored into the underwriting, right? Like what? What aspects do you deep down think like, OK, I'm actually being really conservative, but I'm not gonna pointed out here because I just wanted toe fly under so that could be under rent, growth assumptions and, um saying like, Oh, actually, you know, we underwrite this at two, but realistically, that's it's it's gonna probably be at least three. Yeah, like we're being overly conservative here, but we didn't need to point that out. And so that could be a good question, too, and decide to bring this all around, then to the final. The final category of things that you're gonna try and suss out in an operator is their overall trustworthiness, and that's a hard thing. Toe Teoh. Get your your hands around. One of the things that you pointed out earlier was this feeling of like being sold to Yeah, like, If Does it feel like the operator is selling you this investment opportunity? Then maybe that isn't the type of relationship that you want to get into.

spk_1:   45:06
Yeah, I think that's a great point. I can say for myself that I've never asked any of my investors to invest in my deals. They've always started that conversation themselves, just from seeing what's going on and asking questions about the business model of learning about it. They always say, Hey, you know, can I invest in what you do like that's how it always starts and the reason that is is because I always lead with education because I want to make sure that anyone investing our deals really understands what they're doing first, for a few reasons. One, they're gonna have a much better experience onto. It's less work for me, right? If someone understands it before they get into it, they're not gonna, um, I get nervous after their in the deal because they saw a lot of questions that you'd be answered. So it takes the anxiety of Tim for them. And then also, you know, once people understand this stuff well enough, when Stig, you know, get a handle of the business model, it sells itself. There's nothing that needs to be sold. So that's that's my approach, all the times just to educate people and then they always want to invest. And that just got a That's just snatches works itself out. And so if you see someone who's aggressively pitching investment opportunities, that's not a good sign because this stuff is such a great investment for people that if someone actually is a good operator and they have good deals, they don't need to go on a road show and pitch people and try to sell you heart. This is something that, honestly, there's there's not that many good deals out there so when there is a good deal in front of you and you realize it, if they need to sell you on it, then there's either You don't understand it well enough or it's not really that good of a deal because good deals are flying off the shows.

spk_0:   46:55
Yeah, you want to find an operator that doesn't just look at you as though you're a dollar sign, right? You want to find somebody who takes an interest in you and your investment goals and your your education curve, right? Like a new operator probably doesn't want you in their deal if you know nothing about the deal. So they should be taking a pretty genuine interest in your level of sophistication and understanding because it only ba hooves them. If things later on get difficult that you know it's easier for them to communicate with you if you understand why that's the case. So look for somebody who respects you as an individual, not just as a means to getting into your bank account. And then I would say in the trustworthy category. One other thing that you're really gonna wanna figure out is the alignment of financial incentive is this person. If things go sideways and there has to be a compromise between giving the investors their full expected return or the operators still taking their fees and their cut, what happens in that scenario? Does the operator take their fees? Do they put prioritized the investors returns what's their approach and enormous and is a right or a wrong answer? It's just it's critical to know what is what is their expected approach, if that were to to occur.

spk_1:   48:08
Yeah, you want to make sure that the the fees are are fair, basically, because there are a lot of fees that go into these types things. And if if things are a little bit too heavy on the seaside for the operator and they're making a ton of money and regardless, father deal performs, that's not really good set up for you. You want to make sure that there's an alignment of interest there were there incentivized where they make more money. If the deal does better and they make less money if the deal goes worse, because some people don't structure them that way. So yes, we wanna be where, and that's something we should note that, you know, in addition to like looking at the team members for the operator and what they've got on their team, someone you do need have on your team as well as a good lawyer who understands the sense of deals because they get the the PPM documents, the legal paperwork, the sign he actually didn't this and make sure that it's structured probably for you, because that's something that you're not really gonna be able to tell from having an initial conversation with. Someone there could be able to tell you like Oprah for Birdie returns. This equity split is list, but that none of that really matters. All that really matters is what's in the actual contract, and that's like 40 pages long

spk_0:   49:19
that, and it's full of legalese. It's hard to understand. You need a legal professional to go through it and make sure that it's written in a way that's favorable to you because you just you just never know. You never know what could be slid in there, and it could be intentional. It could be not intentional. It could be just misunderstanding, but make sure that you have that person on your team at minimum, so yeah, I think we We did it. We covered it, if you can. If you could figure out these five aspects of an operator the personality track record, team, their education or knowledge, maybe of the deal in the market and then their overall trustworthiness, then I think you're gonna be in a much You're gonna be a very strong position to know. Is this the person that I want to work with in the future? And and that's the final thing I'll end with Here is thes deals. They last between anywhere between three and 10 years on average. And so you're gonna be stuck in it with your operator for a while. So you want to be certain from the beginning that you're working with somebody that share you're eager to stay with for that period of time? It's kind of like a marriage. It's easy to get into really hard to get out of. So anything to add to that before we move over into the book recommendation for the week? I don't think

spk_1:   50:22
so. If I have to emphasize anything, I'd say education,

spk_0:   50:26
educate, educate, educate, always

spk_1:   50:28
get educated. Everything about what we just had a vote is gonna be that much easier.

spk_0:   50:33
Absolutely. And you're doing it right now just by listening to this podcast. So kudos to you guys at home I'm gonna bring the book recommendation this week. It is the go giver by Bob Berg and John David Mann. Have you read this, Dan?

spk_1:   50:45
Yes, it's been a long time.

spk_0:   50:49
It's It's a simple enough read. You can get through it in an afternoon, and the concepts aren't revolutionary. I think it's just a good reminder that the that we received through the hole in which we give and really thinking about your income and your net worth is really tied to how much value you can bring to the people around you. And so I would highly recommend this book. It's not directly related to real estate investing per se, but it's a good mind set outlook book that could get you in the right alignment toe, I think so, make the most positive impact in whatever endeavor you're pursuing. I like it. All right, so great up. So, Dan, 10 stars out of 10 working. Where can people go? Kids. They're just chomping at the bit right now they want to leave the reviews. They want to leave their their likes.

spk_1:   51:37
We didn't offer any bad advice.

spk_0:   51:40
Now we skipped right over that.

spk_1:   51:41
Yeah. Do you want offer some bad advice?

spk_0:   51:44
Now, let's let's save for double double bad advice for next time,

spk_1:   51:48
Okay? Give you absolutely horrible advice next time. Yeah,

spk_0:   51:53
yeah. If you're If you've been sticking around for that bad advice, you gonna really look forward to the next episode. But, hey, we really appreciate you joining us and listening in while we ramble for over an hour here. If you have the time and energy and the desire, please go. Leave review for us. It doesn't have to be five stars, but Dan does insist on four stars. You know, today I'll take it three and a three year. Okay. Except a 3.5 day. But leave some feedback, some criticism. Let us know what we're doing poorly. What we could do better and how we can improve your listening experience. Your educational journey yourself. That's gonna do it for me, Dan. It's always been a pleasure. We'll get we'll catch you next week. Guys.