69 Doors from ONE Real Estate Deal Using Other People’s Money

Ashley:
This is Real Estate Rookie episode 345. My name is Ashley Kehr and I’m here with my co-host Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Our guest today just took down 69 doors across 12 different properties, all while working a full-time job at his W2 as a project manager. Now, he got this deal from a real estate meetup and almost had it sold them from him multiple times, but he bought a $6.5 million portfolio with $1 million in built-in equity at a 6% interest rate in 2023. And we’re having him back on the show after being on episode 267 before to do a deal deep dive and explore the lessons learned from his first time syndicating. So Andrew Freed, welcome back to the Real Estate Rookie podcast.

Andrew:
Thank you, Tony. I really appreciate being back. I’m very excited to tell this tale. It’s a tale of a lot of ups and downs, so it should be very exciting.

Ashley:
Yeah, Andrew, before we even get into all the nitty gritty of this deal, what was your favorite part about it? What did you love about it?

Andrew:
I loved that it was actually a deal. How many people give you properties out there all the time and they say it’s a deal, but is it actually a deal? Is it actually cashflow where it needs to be? And this particular deal, we got this under contract around $80,000 a unit when units traded in the area for around a hundred to $120,000. So that was the best part about the deal, but the even juicier part was doing our due diligence and coming to realize how good the deal actually was.

Ashley:
What do you think the worst part was?

Andrew:
The worst part by far was the capital race. I mean, this is my first capital raise to begin with, so it was already challenging. Additionally, trying to challenge during a quote unquote recession where people kind of want to hoard their money, it was very challenging indeed, and we’ll get into the challenges later and it almost blew up the deal, but we ended up kind of figuring it out.

Ashley:
Okay. Well, I’m very curious to learn more and thank you so much for coming on to talk about your syndication. I don’t think we’ve really had a lot of Gus that are able to come on as rookie investors that share a syndication deal that they’ve done. So let’s start off, what kind of property is it?

Andrew:
So this was actually a portfolio of properties. They were 12 properties ranging from four to eight units in a city called New Bedford, Massachusetts, which is a little south of Boston. And for this particular deal, we actually found it through a direct mailer. Well, I actually didn’t find it. Somebody who I befriended and eventually mastermind with at a meetup brought the deal to me because I kind of presented myself as the multifamily expert in my area, and I built a network and people knew I was in that sort of asset class. And that’s exactly why I got involved in the deal was primarily the capital raise.

Ashley:
Did you partner with this person then? They stayed in the deal with you?

Andrew:
That’s exactly correct. So they found the deal, they negotiated it, and they brought me in during the due diligence phase where they knew they couldn’t raise it. This was their first deal. And I kind of branded myself as the multifamily expert in the area. I host a meetup I own actively owned around 30 units in the area. So as a result, and this particular asset class, I already performed this asset class. It’s small multi ranging from 48 units, all 12 properties. So I already had this asset class, it’s just more of it. So I felt confident in my ability to perform on an asset management standpoint as well, but yeah, I was primarily brought into bring the capital.

Ashley:
I am curious as to your partner. You said they source it from direct mail. What were they targeting? Were they trying to go after a big apartment complex or is just because they went after one of this person’s properties and then they ended up saying, “Oh, we actually have 12,” if they didn’t have the way to fund it yet and needed a partner, what was their kind of marketing target?

Andrew:
That’s a great question. I mean, I think their goal was to take down bigger deals, but I don’t think they had the resources to do it right, but they also had the network, but what they actually targeted was they targeted multifamily owners that owned a lot of multis in the area, and honestly, it was just the right time at the right place. One of his mailers hit an estate sale. They were in the process of going through the estate sale. They couldn’t close until June 30th, and we actually scooped it up or essentially got it under contract before they could actually sell it.

Ashley:
So it wasn’t on market at all. You actually got it before it was even on market. Wow, that’s awesome.

Andrew:
Yeah, that’s exactly correct. We did get that, but we didn’t really have it under contract during a lot of the due diligence, which ended up biting us in the butt. And you’ll hear about that later, but more or less, that caused a lot of challenges in the deal for sure.

Tony:
I want to circle back, Andrew to the actual way that you found the deal. So it was a friend of yours who you met, and was this through the real estate meetup that you host yourself?

Andrew:
So my mentor hosts these meetups all over Massachusetts and New Hampshire, John Bombaci, and he actually hosted a meetup in Lowell prior to me hosting my meetup, and I met him there. So I met him at somebody else’s meetup. We stayed connected throughout the years and we actually were part of a mastermind, a real estate mastermind at one point. And that’s why I learned about a lot of this stuff is because hearing his deals on a daily basis, he’s hearing on my deals on a daily basis, and I actually partnered with him on another six unit as well. So that’s kind of why I was in the end, but more or less, he saw what I was doing on a daily basis and that’s why he thought I could perform.

Tony:
Gotcha. So two follow up questions to that. First, if you can remember that initial interaction, how did you guys kind kick things off, because I think this is where a lot of rookies get tripped up sometimes is breaking the ice at some of these real estate meetups? Did you go to him and say, “My name’s Andrew Freed and I hope one day you can send me a deal.” Or it was just like, “Hey, I’m Andrew, what’s your story?” And then second, how long had you guys known each other by the time he presented that deal to you?

Andrew:
So everybody talks about finding partners at meetups, but it is just like getting married. You don’t just go up dump somebody and ask them to get married. It’s a relationship that builds up organically over time. And that’s exactly what it was like for this particular partnership. And all of my partnerships, I actually knew Ryan Emrich, that was the guy who found the deal for years prior to this, and I actually mastermind with him for months prior to this. And to be honest with you, that was critical, right, because when I invest with somebody in deal, I have to trust them because everybody has their lane. If I’m going to be doing asset management, I should be trusted to do my lane if he’s going to be doing acquisitions likewise. So it’s incredibly important to build that trust and it doesn’t happen over one meeting, in my opinion. It happens organically over months or years.

Ashley:
Yeah. One thing that stood out to me that you said was you guys were in the mastermind together and you’d hear each other’s deals. And also in a mastermind you’re usually there to share your struggles to get advice from other members. So if there’s any more time to see someone vulnerable, it’s being in the same mastermind with them as they’re sharing what they’re struggling with in their business too. So I could see that as being an advantage as to why you felt comfortable partnering with this person on this deal too.

Andrew:
Yeah, I mean, to that point, he partnered with me on another six unit and I brought the deal, because I was having trouble getting the money, and he ended up bringing in a third of the money. So it worked both ways. I helped him on that deal, he helped me on another deal. It’s definitely kind of a full circle sort of thing.

Tony:
We set the magic keyword, which is partnership. So anytime we say that word in this podcast, we’ve got to plug the real estate partnerships book that Ash and I wrote together. So if you guys want to learn how Ash and I have used partnerships in our business, head over to biggerpockets.com/partnership. But Andrew, one follow-up question. How did you guys structure this deal between the two of you? Was it, “Hey, he’s going to hold 50% because he brought the deal, you’re going to get the other 50% for doing the rest.” Did you guys structure it some other way? What was the structure that made sense for this specific deal?

Andrew:
Yeah, I mean, that’s definitely a gray area for sure, especially with syndications. And that was a struggle, I’m not going to lie. It took some time to figure out the equity structure, but it was more based down on a certain percentage based on who found the deal, a certain percentage based on who was a guarantor on the property, a certain amount for the due diligence phase, a certain amount for the asset management. So you broke it down in percentages and you gave people responsibilities and you gave equity as a result. I mean, and obviously capital raise was a big part of that and is usually one of the largest components of that sort of breakdown. So that’s how we figured that out, but it definitely became an issue down the road when we failed to do the capital raise and we had to bring an additional partners as a result of diluting our own share, right?

Ashley:
Yeah, and I think that’s a great starting point as to how to figure out equity is write down what everybody’s roles and responsibilities are going to be, and that can be giving up equity or that can be how much someone’s going to be paid from the cashflow each month because of the jobs or the roles that they’re doing. And now you talked a little bit about how you guys set that up and then you ended up bringing in other partners of the deal, but when you first got this locked up under contract, did you have all of this set up before you went under contract or everything? Was this kind of put together as you were doing the due diligence on the property?

Andrew:
It was just I pulled my pants up, but I just went with it. And that’s how every real estate deal is, right? Nobody knows what’s going to happen when you go into a real estate deal, but what I did know is was I had people on my side who have done this five, seven times before, people in my network who I could rely on to fall back on. So I didn’t have all the answers, but I was confident that I knew people who had the answers.

Ashley:
So with your due diligence, did you start any kind of, before you even went under contract, let’s start there. Did you start any kind of due diligence on the property or was it just as quick analysis of like, “Oh, this is a deal,” let’s start there before you even went under contract or what are some of the things you did to determine what you would pay for the property for it to be a good deal?

Andrew:
So prior to even getting it under contract, we walked as many units as possible. So that was key. So we walked every single unit. We graded them from a score of A to F from a cosmetic sort of standpoint, and we did try to grade the tenants as well to see how many potential evictions we would have to deal with. And then from there, that kind of gave us an understanding of how much cosmetic upgrades we need to get to bring the rents to market. Additionally, we did review the actual properties to determine the CapEx or the large items that we need to fix, such as the roofs, such as the heating systems such as plumbing, electrical, foundation, anything of that nature. And then from there, once we understood the full scope of how much money it would cost to make this property perform in conjunction with the price per unit, that’s going to really give us a good understanding of the actual cash and cash return.
And then from there we can really determine what offer made sense. And then once we figured out what offer did make sense at that point, we submitted a letter of intent, which is essentially a non-binding agreement, but more or less that was just our intent to buy the property. And then from there, that’s when we kind of started the due diligence process of 45 to 60 days of verifying income, walking every single unit, looking at tax returns, talking with lenders, just all the due diligence associated with kind of ensuring that this property is what the seller says it is.

Ashley:
So let’s break that down. What you kind of just briefly went through some of the things you did. Was there anything that you weren’t able to get from the seller that you maybe, I mean, were there lease agreements in place for everyone? Did they actually have accurate tax returns? I mean, I’ve seen some landlords profit and loss statements where they have very minimal expense out of there, or they have so much expense out of there.

Andrew:
Yeah, I mean, you bring up a really good point, and usually the good deals come with mismanagement and with management comes bad records and that’s exactly what this was. I mean, this was an estate sale, the owner died, his inherited wife or whatever got the portfolio and she was managing it, but payments were going into Venmo or going into bank accounts were going in all over the place, very hard to verify where the money was coming from. Additionally, there weren’t a lot of leases in place, so we had to figure it out during the phase where we got the estoppels. So there was definitely a lot of bad record keeping, but that was primarily why we got a good deal. If it was managed well, they would’ve got a better cap rate, we had a better price per unit and we wouldn’t have got a good deal. So with problems comes opportunity, in my opinion and this was the case.

Tony:
Andrew, I’m just curious because this was a bigger project than anything you had taken on at one time before. At any point going through this due diligence period, were you second guessing maybe biting off such a big project? What was your internal conversation look like as you kind of stepped into this new thing you’ve never done before, at least at this scale?

Andrew:
Really good question. I mean, I knew it was a deal. I mean in multifamily for me to know what a deal is, it’s a price per unit versus pro forma rents where rents can be, right? So if I’m paying 80K a unit and the units can rent for $1,200 per month and the units are in good shape, I know that’s a deal. I don’t have to figure that out, but what was scary for me was I put my word on the line that I was going to capital raise this deal. And that’s what really worried me, that kept me up at night is because I… And me and my partner ended up doing a majority of the capital raise, and we really kicked gear when it came to, but I think we attended four or five meetups every single week. We reached out to probably about 300 people within our network. So it was a big pull, big ask, but that’s really what kept me up at night throughout this process was could I actually perform what I said I could perform to my teammates and my partners.

Ashley:
Before we go any further, if there are some terms that are maybe being thrown around that you don’t know, you can always head over to biggerpockets.com/glossary, where I just even recommend going to that page and reading every single definition of every word on there. We’re going to try to keep up with defining as much as we can, but that’s a great resource. Biggerpockets.com/estoppel.

Tony:
/Glossary.

Ashley:
Oh. I was reading in the thing. Well, that’s the one that we wanted to know. You can go to biggerpockets.com/glossary.

Tony:
Andrew, so you touched a little bit on this, but the challenges around the capital raise, I’d love to dive a little bit deeper into that because raising capital I think is a unique skill. And you talked about just in general, it’s a little bit challenging in this current economic climate to raise money from people because A, there’s all this concern of a recession, so people are just a little bit more cautious with their investments. People have student loan payments that are kicking back in right now, the government almost shut down over the weekend. There’s auto workers that are going on strike. I just got an email this morning from my insurance provider that the nurses that work at my hospital might even go on strike.
So there’s a lot that’s going on right now. And not to mention you can put your money in a CD, a certificate of deposit and earn like 5% right now, and it’s hard to get much safer than a cd. So all of that stuff is what you’re working against right now. So what was the amount of money that you had to raise? What were some of the challenges that you bumped up against and ultimately how were you able to take that whole raise home?

Andrew:
I mean, you bring up a lot of good points, which a lot of the investors that I brought this deal with brought up the same exact concerns. So we syndicated this particular deal, and when you syndicated a deal, you actually raise money from a bunch of different investors to buy a larger deal, and you actually have to go through attorneys for that because you’re getting an exclusion with the SEC. So it is actually considered somewhat of a security, so it’s a lot more regulated. But more or less, we syndicated this deal. We had to raise about $1.8 million for this particular opportunity. And for this particular deal, we offered a 7% preferred return and then a 70/30 split.
So everything after the 7% we provided to our investors, we split the profits 70%, 30%, 70% to our investors, 30% to us. And that’s the cash flow. That’s any refinance money we get. That’s the disposition of the sale, which in syndications and larger deals, a lot of the payout, a lot of the money is in the refinance and the sale when you suck up that forced appreciation that you created through raising rents. So that’s kind of the deal and how much money we had to had to raise for the opportunity.

Tony:
What were some of the challenges you saw as a first time syndicator going out into the marketplace to raise that money? You said you talked to over 300 people. I guess just maybe walk us through what that journey was like and some of those roadblocks you bumped up against.

Andrew:
So I think the first lesson I learned was talk to other people doing what you want to do. So the first thing I did was I talked to other capital raisers. I asked, “What do you do to raise capital?” And one really good tip that I got was make a list of everybody you think might invest and reach out to three people a day, and by the end of a month you’d reach out to a hundred people. So during the entire due diligence process, but prior to us even having it under agreement and going through the lender, I was reaching out to potential investors probably months in advance. So by the time we were actually ready to get this under contract and to seek lending opportunities, I already spoke to over 200 people.

Ashley:
Oh, wow. So you’ve set up almost like your database of clients, your CRM of not even clients, but people who have that interest in building that. And Tony, I know that you are in the process of your first capital raise for a syndication. How is that going and is it what you expected so far?

Tony:
Yeah, so this is actually our second time filing for the PPM, all the syndication paperwork. So we did it last year initially with a hotel here in Southern California, and we had to raise, I think $5 million and we got to like 3 million and it was so hard to get that last 2 million and then another buyer ended up coming in all cash and we lost out on the deal. So we learned from some of those mistakes last time in terms of what we’re doing this time. So we said, “Hey, let’s lower our raise amount.” Even though I have a pretty decent audience as a first time syndicator, there’s always some challenges there. So we said, “Hey, we’re not going to, if we raised 3 million last time, let’s shoot for 2 million this time.” So we lowered that raise down to 2 million.
There are rules around raising money from people around when you can kind of promote it publicly versus when you can only go to people that you know, and for the Big Bear deal last year, we focus exclusively on what’s called the 506C, which allows you to publicly advertise your deal, but then the only people who can invest in that deal are people who are accredited investors. And maybe just naturally me being a host for The Rookie Podcast, a lot of people maybe have capital but don’t quite chuck the boxes of being an accredited investor.

Ashley:
Can you just explain real quick what the requirement is for that?

Tony:
Yeah, so yeah, great call out. So an accredited investor, you either have to have a million dollar net worth or make I think $200,000 per year if you’re single, and then $300,000 per year if you’re married, there are some other ways you can get around it as well, but those are typically the two boxes that people check. So what we did for this new raise we’re working on right now, so we’re developing a campsite filled with geodesic domes in West Virginia, and it’s a $2 million raise, actually it’s like 1.9 is what we need. So we’re lowering that mark for us. We started off as what’s called the 506B, which allows you to accept up to 35 non-accredited investors, but you can’t publicly advertise for it. So we went to all the folks we knew first on the 506B, got the people in who are interested in that deal, and now we’re turning the switch to a 506C and now we’re going to be raising money from everyone publicly.
So it’s been a different process this time around because we know what to expect and we’re going much heavier into the marketing this time than what we did before. We’ve got emails going out, we’ve got social posts is going to be going out next week. We’re doing a weekly webinar pretty much every week until we get the money raised. We’ve got people on our team now that are focused on following up. So raising money, especially in this environment is a challenge, but when you kind of set the right foundation, it definitely becomes a little bit easier. And if you guys go to Robinsoncapital.co, we have the deal listed there. So if you guys want to see my investor deck, kind of how we’re presenting the deal to people, just go to robinsoncapital.co. You guys can see it all.

Ashley:
And I always go and look at other investors too, their pitch decks like Bardon Investment and AJ Osborne because it’s so interesting to see how they analyze a deal. So Andrew, what did it look like for you to put all of this information together to present to your investors? And was it actually you that did all of this?

Andrew:
Well, first of all, Tony, that’s a really cool strategy. Switching from a 506B to a 506C. I like that. Yeah, that’s a really good question. That’s why it’s really important to have a team. There were four of us. Everybody had their strengths and the strengths counteracted other people’s weaknesses. So me and another person, the person who filed the deal primarily did a lot of the administrative type items, including building the slide deck, which we actually, we took Brandon Turner’s as a template and we hired somebody on Fiverr. And we just essentially kind of revamped Brandon Turner’s thing to kind of match our deal because Brandon Turner’s a fantastic capital raiser or why recreate the wheel?
And that was another lesson I learned throughout the process of this is the power of virtual assistants. You can literally just hire somebody for $200 to create an amazing slide deck that can raise you millions of dollars. It’s really cool. And then I think you brought up a really good point, and I think Tony you touched upon is the power of a CRM. I was operating this manually in a Google Excel one by one highlighting people, and then now me and my partner are raising on a 32 unit property. We’ve got a CRM going and we’ve got everybody in there and one fowl swoop, we can shoot everybody an email. And I think we raised 600 K in one weekend just by utilizing the power of our CRM. So that was a big lesson learned is stop doing things manually, like leverage VAs, leverage technology, leverage CRMs to fill a gap.

Tony:
So one follow up question to that, Andrew, because you said you raised $600,000 in one weekend, obviously you’re able to eventually get to the 1.9 million for this deal. Where are these people coming from, because I think there’s a limiting belief from a lot of new investors that they maybe don’t have the ability to raise capital. Maybe for some people it’s true, maybe they truly don’t have the network right now, but what steps did you take to start building out this network so that you could go to these people and ask for 50, 100, $250,000 to fund your deals?

Andrew:
Consistent daily action posting on Facebook every single day what deals I’m doing, what I have going on, what’s closing, starting a meetup, being a subject matter expert. I’ve been doing that for over three years, becoming an investor focused agent. All of my clients are investors. That’s a great lead source also. So just like building a network methodically through daily, consistently over two to three years, kind of built that network. I mean, to your point, Tony, I wouldn’t give money to somebody who’s never done a real estate deal before who’s doing their first syndication. They have zero proven history, but the key is building credibility and showing people you can actually do what you say you’re going to do. And there’s many ways to do that, but I use kind of social media meetup showing what I do on a daily basis to kind of build that credibility.

Ashley:
So let’s move on to the bank financing piece of it. So you’re raising part of the down payment, what you need to actually close on the deal. What about the bank financing? Did you negotiate any of that? How was this different from you going to the bank and buying a four unit?

Andrew:
Great question. Great question. And I think this goes back to it’s all about who you know. My mentor has done six or seven of these types of syndications before. He has all the context. He has the attorneys, he has the brokers, he has the banks. So rather than recreating the wheel, I gave him a call. I said, “Do you recommend any brokers I should go with?” So he gave me a fantastic broker. And to your point, whenever you’re going for commercial property, you always want to try to negotiate better terms. And one key term, a couple of terms that I always try to negotiate is an interest only period. For this particular opportunity, we got a two year interest only period.
I try to negotiate construction money. For this deal, I think we’ve got a 300 K line of credit on top of our 250 K seller credit equaling around a $550,000 amount for repair or CapEx to kind of bring the portfolio to stabilization. And we got a 5.65 interest rate and we got a 30 year amortization. And that’s another thing, you always want to negotiate the highest amortization schedule you can, which is going to increase your cashflow. I mean, I’d take a hundred year amortization schedule if I could for sure.

Tony:
A couple of things just to break down there really quickly, because you threw out some terms. I want to make sure that we’re defining these from people. So first you said that you got two years of interest only. What exactly does that mean and why is that beneficial to you as the buyer?

Andrew:
So two years interest only means that we’re only paying interest on the loan and we’re not paying principal, right? So what that means is for the first two years that additional money we did pay towards principal, we can utilize that as additional cashflow. We can utilize that to enhance the portfolio and create forced appreciation. We can utilize that to enhance our business plan. So it essentially increases your cash on cash return if you give less money towards principal for the interest only period.

Tony:
And then the other thing you mentioned was a $300,000 line of credit. Just walk through, I guess how you were able to negotiate that, what those funds could be used for and how it played a role in your business plan?

Andrew:
So when you go for commercial products, you can ask for a construction portion or construction loan, and that’s exactly what we presented to this organization or the bank. We said, “Hey, we are getting the deal for this price. We want $500,000 to do these enhances these cosmetic upgrades, these roof repairs, these electrical upgrades, and once we’re done, then we’re going to be able to rent it for this and the portfolio is worth this amount,” right? So when you go to bank for construction money, a lot of times they do two type of appraisals. They do a before and after, but that’s critical because if you have to bring less money to the deal, if the bank can fund 75% of the construction money, that’s only going to enhance your cash on cash returns.

Tony:
And then the last thing you mentioned was a 30 year AM or amortization period. Just define what that is and also kind of what the benefit to you as the buyer is?

Andrew:
Yeah, so I mean an amortization schedule is more or less, how long is it going to take to pay off a loan? It could be 20, it could be 5, 10, 15, 20, 25, 30. I mean, if you buy a business, I think a lot of amortization schedules are five, 10 or 15 years, which makes it really hard to cash flow if you’re paying at that such a high rate, but for real estate, what makes real estate so magical is they have a very long amortization schedule allowing you to really maximize the cashflow. So for these larger deals, you want to get the longest amortization schedule, meaning your monthly payment’s going to be the lowest. So the additional money can be used to enhance the property to enhance the cashflow.

Tony:
And then the last thing you mentioned, Andrew, was a 5.65% interest rate, which is insane. I just refinanced a property over the summer at an 8.7. So we’re talking like a three point difference, which is a big spread when you talk about cashflow. So I’m just curious, man, because you also talked about presenting this deal to the bank. Was this a large national bank? Was it a small kind of local regional bank? Who was this bank? How did you end up negotiating with them and how did you get such a good interest rate?

Andrew:
All really good questions. I mean, the best banks for real estate loans are small local credit unions and banks, and that’s exactly who we went with. We went with a small local bank called Eastern Bank, and when we presented the opportunity, a lot of times I like to put my deals in what I call a loan request package, where I put where rents are, where rents should be, what is the debt service coverage ratio now and that’s essentially what the bank uses to determine whether this deal is worth funding or not and what the debt service coverage ratio will be once the rents get where they need to be.
Pictures information on the property more or less, I put it in a nice sexy package, I send it off to five or six banks and I have them battle against each other to give me the best terms. Thankfully we had an amazing broker that did that for us. And just going back to your point, Tony, I think we locked up the bank maybe in May. We closed in August, so we locked it up maybe in May, but that’s why it’s really important to work with banks and organizations you trust, right, because with banks they can change the terms last minute, but this particular bank kept the rate locked in, I believe for 90 days when we got our term sheet, and they honored that, right?
So by August, to your point, I think rates were in the six or the sevens and it would’ve absolutely killed the deal, but the bank honored the term sheet that they provided 90 days before, which allowed such great great terms.

Ashley:
Andrew, you had talked about in the beginning how when you divvied up the equity piece, you talked about someone being a guarantor for the loan. Can you maybe explain a little bit more what that means and why you should get a piece of equity for that responsibility?

Andrew:
Great point. So this was recourse debt, meaning that just like when you get a primary residence, you have to sign your name on that, so if anything happens, the banks can come after you for that money. That’s exactly the case with this larger property. So all of the partners, all of the initial GPs were guarantors on this loan, meaning we’re personally responsible if anything goes bad. It’s recourse debt versus non-recourse debt, which the deal make’s name isn’t on the loan, but the downside to going with non-recourse debt is you get worse terms, right? So I believe in this particular deal we decided to go with recourse debt to make the deal better because we knew it was a great deal to begin with.

Tony:
One last thing I want to hit on before we move off of the kind of negotiation and money raising stuff is what were you actually saying to investors when you presented the deal? Were you kind of having one off conversations with every single person? Did you just host a big webinar? What was the information you were presenting? What kind of objections did you get? Just walk through what the actual conversations looked like.

Andrew:
It’s really, like I said, really good to have a mentor because you already had a template in place on kind of what he did that was successful on what I should do. So we did host a lot. We did host a live webinar going over the deal, the slide deck, answering investor questions, recording it, sending it out to investors. So we absolutely did do that. When I did my initial capital raise, I reached out to people and I just asked, “Are you interested in real estate?” I just had an initial question. If they are, I’m like, “I have this deal. Happy to jump on a call if you want to chat,” no pressure, but to your point, sometimes when you ask people for money, they take a negative connotation with that. So it did turn some people off to me asking to be part of this deal.
I mean, in my opinion, I’m presenting a great opportunity which not many people have the ability to be a part of if you’re not investing in real estate, but some people looked at it as me asking for money. So I did lose some friends and family seeking capital for this particular opportunity, but I also built a lot of connections as well where other people I didn’t expect to show interest were extremely interested in this particular opportunity. So it’s a give and take, but like I said, I think it goes all back to credibility. I’ve been posting content for three years, I’ve been buying properties for three years. I’m doing this on a daily basis. So I think that credibility added to the fact that I felt reassured asking for capital, but Tony, I’m not going to lie, it was awkward. It was super awkward. All my other deals I did with my own money, very awkward, but the more you do it, the better it gets.

Ashley:
Yeah, I am definitely someone who does not like confrontation and Brandon Turner had given me this advice once before, and I’m pretty sure I’ve shared it probably on the podcast 20 times, but it’s like when you’re asking somebody for something to partner or for money, instead of asking, do you want to invest in this deal with me? Do you know anyone who would like to invest in this deal or something along that lines where you’re not actually putting them on the spot to answer you directly, but plants the seed that you’re looking for investors in your deal or whatever that may be, but I thought that was interesting.

Andrew:
And to your point, I did learn that lesson. I think I asked people directly and I was like, oh, then I think I heard exactly what you said and I had a lot more success using that strategy for sure. Absolutely.

Ashley:
Yeah. Yeah. Okay. So let’s kind of move on to wrapping up the deal. So what kind of structure did you actually set up for these investors and for yourself? You said you and your partner kind of went back and forth, you had to bring on additional partners, kind of talk about how that all came together into your final syndication product.

Andrew:
So I think we were probably three or four weeks before close, and the projections for the capital raise were not lining up. We were absolutely not going to raise the capital base on how much money we raised in the past. So at that point we raised about $1.1 million and we need about $800,000 left to close the deal. So at that point, I think we talked among the group that we’d be cool with giving up equity if somebody else brought the remaining capital and did some asset management component of it. And I ended up just calling my mentor. He’s done seven or eight of these types of deals before, so he knew it well, walked the property, very interested in it, thought it was a fantastic deal, and I think within four calls he raised the remaining $800,000. So from there it was pretty easy but yeah, like I said, it’s all about who and who you connect with because without that, without him coming in at the last minute, the deal would’ve fell apart and we would’ve lost, I believe $60,000 in EMD money or deposit money.

Tony:
So one clarifying question there, so the structure you had in the actual syndication was that all of your investors, all of your passive investors, they owned 70% of the deal and then you and your folks that kind of put the deal together, which we call the general partners, you guys owned 30% of that deal. Of that 30%, how did you guys structure it between you, the guy that found the deal, your mentor, that kind of finished everything off, and if there were any other folks involved in the general partnership?

Andrew:
So just want to clarify, it’s 30% of the upside. So if the deal makes no money, the GPs, they make no money.

Tony:
Exactly,

Andrew:
Yes. So the way we structured it, I believe we gave I think 40% of the equity to the capital raise prior to bringing in my mentor. And we split the rest between being a guarantor, between the due diligence, between the deal finding, between asset management who was going to take a larger component of responsibility once the project closed and that’s kind of how we divvied it up. So it ended up pretty even across the board, to be honest with you. I think most partners got around 15% of the deal. So it did end up pretty even across the board after everything was said and done, I mean a lot of people did carry their weight. It was a really great team dynamic for sure.

Ashley:
So as a lot of us know that have done even one deal is once you close on the property, the work is not done. There is a lot to do, whether it’s getting new tenants in place, whether it’s signing a new lease agreement or it’s getting repairs done. What was your operation plan? So raising money of a syndication deal is just one aspect of the acquisition, and then once you close on the property, there is the asset management, there is the property management, there is the whole operational piece to make sure that it’s running as efficiently and as effectively as possible to get the investors more money.

Andrew:
Yeah, I mean to your point, depending on the business plan, this deal could have played out 20 different ways. We could have closed on it. We walked into a million dollars of equity, because of an estate sale. I think they valued it about a million dollars higher. So we could have just sold the whole thing off and scoop up that mill or we could go throughout the whole portfolio. I think average ran across the board was $700 where market now is around $1,200. So we could have got all the units to market and then held the thing for 10 years. That’s another strategy we could have taken. However, we decided to take a hybrid approach. We decided to do a half flip, half buy and hold.
So more or less we decided to sell the smaller properties off to retail investors because when they’re smaller, you can get a better price per unit, get the investors their capital back and then keep the larger stuff to stabilize, refinance, and potentially sell down the road. So it was kind of a hybrid between a fix and flip and a buy and hold. And the great thing about the larger properties is a lot of times they have a better cash on cash return, because there’s a lot less systems involved in the property than some of these smaller multis.

Tony:
Yeah, I love that strategy of doing the hybrid because here’s the thing, and this is for our rookies more so, but it’s like when you’re doing a syndication, the sooner you can return capital back to your investors, the better their return is on paper. So by selling off some of those single family homes, you’re able to kind of beef up the returns in a way that would’ve been harder had you held those properties long term. So have you actually sold off any of those smaller properties, Andrew, or are you guys still in the rehab phase? Where are you with the partial disposition?

Andrew:
We are definitely in the rehab phase. We do have one under contract right now to sell. We have an offer on another one as well, and I think we’re about to list the third one. So we are in the process of selling it, but we are renovating, I believe, six or seven units right now, and we are dealing with a couple evictions. So we’re still in the process of cleaning up the properties to get them ready to sell because as you know, when you sell properties, you put them in the MLS, you want to get rid of the problems first before you sell, so you get the max price per unit. If I put a property in the MLS with an eviction, I’m obviously going to take a hit on the price. So I’d rather just deal with that pain initially.

Tony:
Andrew, were there any restrictions given that you bought this as a portfolio on whether or not you could sell those properties immediately or was it just like as soon as you owned them it was free range for you?

Andrew:
So that was a big landmine that I avoided because I asked the right question to the right people. I knew somebody else, my mentor has done this type of deal multiple times before and I asked him about that and he told me to negotiate a partial release clause in the loan. So when we were actually talking with the bank, we negotiated a partial release clause, meaning we have the ability to sell the properties off one by one while keeping the loan and paying back principle. Most commercial loans are all or nothing. You pay the whole thing off or you pay nothing off. So it would’ve been extremely challenging to sell the property while keeping the same income we needed, or they call it the debt service coverage ratio to keep the loan. So you bring up a really good point, and that was a huge landmine that we avoided.

Tony:
Andrew, so this is something new for me. I haven’t heard of this before. So yeah, so just to kind of zoom out a little bit. So the two options when you I guess have a portfolio loan are either A, you keep the whole thing or B, you sell the whole thing, but what you’re saying is that the bank gave you the option to sell off individual properties within that portfolio, but as you sold those properties, would it be applied to the overall loans, like your loan balance would be reduced by that amount or was it like-

Andrew:
Correct.

Tony:
Okay. Okay, gotcha.

Andrew:
Based off the appraised value when we did the appraisal. That’s exactly correct. Yep.

Tony:
So if you sold it for more than the appraised value, did you get to keep the difference? Say the property appraised for $300,000 and you sold it for 400, 300 would go back to the bank and then you would keep that extra $100,000?

Andrew:
Yep, and that’s going to go back to our investors to give them back their initial capital to enhance the returns early on, because I think as you mentioned, the quicker you pay back your investors, the sexier the return return is, and that’s exactly what we’re aiming for.

Tony:
I’ve never done anything like that before. I mean, Ashley, I know you’ve used some portfolio loans in the past before too. Have you used this whole partial release thing?

Ashley:
Yeah, actually my first and second property I ever purchased, we bought the first one in cash, and the second one, my partner took a home equity loan and we used that money. And then after we had closed on both, we went and got a portfolio loan on them and we ended up selling one of the properties. We still have the other one, but all we had to do was go to the bank, they appraised the property that was left ended appraised for more than what was due on the balance of the loan. So we didn’t have to pay anything, any more principal off of the loan. We just had to make sure there was enough equity in that property to cover the other one that we were selling and there was.
So Andrew, let’s go on to the outcome. So what did you end up getting out of this? I don’t know a ton about syndication deals, but I know that sometimes you said you had your 15%, but also there’s acquisition fees, management fees. Are you involved in any of that?

Andrew:
Yeah, I mean you bring up a great point and because this was our first syndication, I think we wanted to give very attractive returns. So we did have a very small acquisition fee and a very small management fee. Normally when you get a portfolio of this size, the people that bring down the deal get 2 to 3% of the purchase price as a fee. We only asked for a 1% acquisition fee and we dedicated hundreds of hours to this project. So I mean, I believe our investors got a deal and we also did a 1% asset management fee.

Ashley:
What does that typically go for, the asset management portion? What do other investors charge?

Andrew:
Usually it’s like two to three, usually it’s like two to three. So more or less as GPs, all of our upside is tied with our investors. I don’t get paid until my investors get paid and we get into that 30% upside, as Tony alluded to earlier. Yeah, and that was purposeful because this was our first in syndication, so we wanted to give really good returns and we wanted our upside to be tied to the actual asset.

Ashley:
Okay. So to kind of wrap things up here, what are some of the things that you learned from this deal from start to finish that maybe you didn’t expect or kind of curve balls thrown at you? What were some lessons?

Andrew:
So in the smaller multis, I feel like it’s more of a team sport. Everybody’s looking out to help each other. Everybody has each other’s back in these larger deals, it was a lot more cutthroat than I anticipated. When you’re dealing with more dollars, you’re obviously dealing with larger personalities, and that’s exactly what happened. When it came to this deal, I learned that it’s better to operate in silence with people you trust because I didn’t do that while during the due diligence phase I was openly talking about this deal, openly bringing it to people, and as a result, I brought it to somebody who ended up trying to take the deal from us and we ended up having to negotiate a hundred thousand dollars more on the purchase price as a result of them coming in as a second buyer.
Additionally, a third buyer came in, called the broker, said we couldn’t close, because we were actually capital raising and go with us. So we had two parties attempt to take the deal from us because I didn’t operate with people in silence with people I trusted. So that’s kind of something more or less I learned in the deal. So it was very surprising to me for sure. I take more of a collaborative approach with kind of the smaller multis.

Ashley:
Okay. And then last, what are the first steps someone should take if they’re starting their own syndication for the first time?

Andrew:
I think they should buy some smaller deals and show they have what it takes to take a bigger deal on. So I think they should do. At the end of the day, you’re dealing with other people’s money. That’s very precious to me. I’d rather lose my money before I lose somebody else. As Tony alluded too, this is a 506B, these are all friends and family. These are all people you want to make money, you don’t want to lose like your mother, your brother, your dad so be cautious. If you’re going to take people’s money, ensure you can actually perform or use your money first. Build that credibility, build that knowledge base before you think you have the confidence to take other people’s money in my humble opinion.

Tony:
Andrew, I guess just last question from me, given what’s happened, do you plan to continue syndicating or do you have PTSD from people trying to steal your deal and the money raised? Where do you stand on syndicating in the future?

Andrew:
So I am raising for a 32 unit right now. We’re doing that as a JV. So my idea when it comes to syndications is it’s a tool, right? If there’s a large deal that you don’t have the ability to take down yourself and you want to participate in the upside, it’s a fantastic tool to be able to do that, but what I will say is a lot of the wealth in real estate is actually built in the smaller deals. If I have more equity and they’re easier to perform. It’s much easier to buy an undervalued six unit, get the rents up, get it to perform, and do a cash out refi way less hours, way less work than making a large property perform of that caliber.
Additionally, when it comes to such a larger deal, a lot of times it’s split five ways out of 10 and there’s really not much equity to kind of go around. I think syndications are a fantastic way to learn. I think they’re a fantastic way to build credibility, and I think it’s a great tool if you run across an amazing deal that you don’t have the money to take down. However, I do believe the easier path to building wealth is, at least for multifamily, is some of these kinds of smaller multis in my opinion.

Ashley:
So that being said, why did you decide to do your second syndication deal?

Andrew:
It was a fantastic deal that was too large to take down myself.

Ashley:
Good answer.

Andrew:
We did structure that one as a JV this go around.

Ashley:
Can you explain real quick what a JV is?

Andrew:
Absolutely. So a joint venture is when everybody in the deal is actively participating in the deal, right? As opposed to a syndication when you have passive investors and once suddenly some investor becomes passive, meaning they do nothing besides sit back and collect a paycheck, that becomes a security and that has the SEC all over it, and that becomes a huge liability risk, right? So be careful when you’re going in deals to take money from other people and have them in a passive role. Try to incorporate some sort of active ability for them if you’re trying to take their money for some sort of deal, in my opinion.

Ashley:
Yeah, the last thing you want is to not follow the rules when it comes to syndications. A great resource is mine and Tony’s friend, Bethany LeFlem, she actually hosts a free webinar every Wednesday. She’s an SEC attorney and you can go and ask her all sorts of questions on this free webinar she does on Wednesdays. You can go to bethanyleflem.com and there’ll be more information on there about that. So Andrew, thank you so much for coming on today to share your first syndication deal and your second. We really appreciate you coming on here and sharing that with us. Can you let everyone know where they can reach out to you and find out some more information about you?

Andrew:
Absolutely. So you can find me on Instagram at InvestorFreed, and you can find me on Facebook and LinkedIn at Andrew Freed Multifamily Investor in the Worcester area. So if you’re ever looking for multis, definitely give me a shout.

Ashley:
Okay, awesome. Thank you so much. And if you want to provide value to our listeners, just like Andrew, you can apply at biggerpockets.com/guest to be on an episode of Real Estate Rookie. I’m Ashley at Wealth Farm Rentals and he’s Tony at Tony J. Robinson and we will be back with another episode of Real Estate Rookie. See you then.