All Forum Posts by: Evan Polaski

@Jack Pasmore, there is so much to discuss here.  But at the end of the day, 506(b) or 506(c) is relationship driven.  The conversion rate of lead to investor in 506(b) is likely higher.  The sheer volume of leads available in 506(c), with effective marketing and large marketing budget, is vastly bigger, but your conversion rate is significantly lower.

I have seen groups throw massive amounts of money at 506(c) marketing to raise less than when they were a 506(b) operator.

The savvy groups play in the grey area where they know that marketing a DEAL is not that valuable.  So they stay 506(b), not because of the non-accredited investors, but for simple ease of onboarding a client, and still heavily market the company.  A very conservative compliance attorney may not like this.

But at the end of the day, regardless of structure, it is everything you do.  Your reputation, your track record, your perceived momentum, your ability to answer the phone and emails quickly, the ease of executing docs and accepting funds, your ability to talk to investors where they are, your willingness to give straight answers and not *****foot around complex or less flattering issues, your honesty.  None of this really has anything do with whether you are a Reg D, Reg A, or a fully registered offering.

@Stuart Udis, I think there is starting to be a bit of a shift here.  Some of the family-business real estate companies are starting to move from the (typically) patriarch who started the company in the 90s into the kids who are in their early 40's +/-.  

While this won't stop the Gen Y and Z crowd, I think it will make it harder for people to raise money, when a company with 30 yr track records are marketing right along side the guy with 2 yrs (for a similar type of deal).

@Jamie Parker, for what it is worth, I tend to agree that you can't take the 70% rule for much of anything.  

To me the only thing that is working now is partnering with people who have their own salaried teams.  My current flip was bought from a wholesaler in a partnership with a builder friend of ours who has his own salaried framers, roofers, plumbers and electricians.  He will do work at cost, I am paying for everything, and we split the profits.  

Granted, I am a part-time flipper, but most houses I see the pricing does not make sense for what I have to pay for labor.  The house I currently own, I am saving over $100k (estimated) on the rehab cost by partnering with this builder (and it takes me out simply finance the deal and, hopefully, make a very good profit).

But to your point, flipping is not what it used to be.  There are far more people trying to buy all houses.  More demand means prices go up.  And, at least for me, there always seems to be either someone that is willing to make pennies on a flip or someone like my builder partner, who can always do the work for so much less than I could, that he can pay more for a property and still turn a healthy profit.

@Travis Gutting, the fact of the matter is: $100k in today's market is by and large going to land you in a "rough part of town", a MAJOR renovation, or into rural areas.

Granted, I don't know every market, but Cincinnati (my market) and Louisville are not too dissimilar.  While each person has their own perceptions of a rough part of town, in my experiences, I do avoid them.  The tenant base, on average, tends to be rougher on the properties, moves more frequently, and cannot absorb any rent increases.  All of this equates to lower returns with turnover costs, being the primary one.  Additionally, when underwriting deals, you need to account for the general idea that repairs and maintenance will be a larger percentage of your rent, the lower your rental is.  I.e. say your plumber has a fixed $150 service call fee.  That does not change if your rent is $600/mo or $1500/mo.  But as a percentage of monthly rent, you have to account for 25% vs 10%.  Same with a refrigerator replacement, HVAC system repairs, etc.

So, I am back to echoing Jaycee: first, don't be discouraged because someone else says to avoid a part of town.  Their perception is not yours or your tenant's.  
Second, if you want a nice house in a nice part of town, you will have to pay for it, so will likely need to raise your purchase price.

Third, if you want to go off-market, just know you are trading a lot of time for the possibility of maybe finding a deal.  The "typical" off market seller is someone who thinks their house is in too rough of condition to sell on-market, but doesn't have the money to fix it themselves.  So I would expect a pretty heavy rehab for off-market.  And from there, you will be knocking doors, sending fliers, cold calling, networking with wholesalers, scouring Craigslist and FB marketplace, all the MAYBE find a deal.  So it comes down to how much you currently value your time.

@Jaren Taylor, not sure if this is why you talk about raising all cash, but given most deals are trading in the 5% cap rate range, and agency debt is 6.5% while balance sheet debt is closer to 7%, I whole heartedly agree that all cash is the ideal capital structure for many properties today, if your goal is to maximize overall returns for your investors.  (Granted, I am not factoring in various fees that may be saved by financing at acquisition). And while I agree that debt is often the cheapest form of capital, if you are looking at a project that involves some form of value-add business plan, you can always refi either when rates come down or you have increased the yield on the asset to exceed your interest rate.

But like Stuart noted, for many groups, even the most seasoned syndicators, raising call cash for their deals is effectively impossible.  

So, what is my most preferred to least preferred, it all comes down to cost of capital.  I am looking at this from the LP perspective, because to the GP, equity is the MOST expensive form of capital. That being said, your typical cost of capital is as follows:

Equity
Agency debt
Balance Sheet local lender
Debt Fund
Private Debt
Pref Equity
Hard Money Debt
Bookie/Loan Shark

Other things that will impact capital sources: are you wanting to finance the improvements, or will you pay for those from equity/cash flow?  Recourse or non-recourse?  Floating rate or fixed?  If floating, buy the rate cap or now? 3+1+1, 5 yr, 7 yr, 10 yr, etc term?  IO or amortizing?

Again, I would say there is no one size fits all, as each have their own risks, i.e. floating rate has interest rate exposure (a rate cap is just a prepayment of that exposure and is temporary), but fixed rate has prepayment penalties.  Non-recourse has less personal exposure, but you need a very strong balance sheet to secure this without bringing in a KP.

This gave me a good chuckle.  

The less you "do" the more you have time to educate others.  And I agree that it can work in gaining leads. I have seen it done time and time again.  

But I do see many groups just now learning the true nature of social media.  If I am going to be consuming it, it means I am present on it.  If a syndicator finds a lead through social media and then does not perform as expected, then I am more apt to use said social media to air my grievances...  And given how the algorithms tend to work, someone complaining will get a lot more air time to a wider audience.

@Grant Shipman, I will say, I have not explicitly seen anyone violate these rules (that I know of), but more commonly there are a lot of people who have comfort operating at the margins.

I.e. compliance officers/attorneys that stop at the letter of the law may say: "investment manager X, you can advertise your company all you want.  You can advertise historic performance.  You can run ads directing people to your blogs or white papers, etc. As long as you don't explicitly talk about your current offering, you are in the clear."  A more conservative attorney would say: "investment manager X, you can NOT advertise your company in any meaningful way.  The intent of your advertisements is to build awareness to garner investor interest for your upcoming deal."  

Or, as Greg noted, the co-GP who raises money to be a part of the deal.  Of course, the smart ones will have agreements stating they are involved in due diligence, marketing, asset management, etc.  But, more commonly, they bring in the capital, maybe do a site visit before closing, and ultimately just forward an investor email to the main operator, then forward the response to the investor.  

As for question 2: no. But, only because I have seen LLC agreements in lieu of PPMs, with the same general items discussed.

3. Let's just say compliance officers have a hard enough time educating their employers about compliance, so educating investors who don't already know about it, nearly impossible.  I think this really comes down to many investors not even knowing this is important until they learn the hard way. Many investors in syndications ask such basic questions: what's your track record, when do distributions start, and how frequently do you pay distributions.  If that is the benchmark of an investors diligence, educating them on compliance is a lost cause.

@John Lasher, admittedly I tend to align a bit more with Stuart, but try to give some valid advice.

Some questions I would ask any guru I was considering investing in:

Will you invest my deals by being a client of yours?  If so, how much are you investing in my first deal?

Will you introduce me to LPs in your network and help vouch for me to raise the equity I need?

Will you act as KP in my deals, offering your balance sheet and liquidity to help me secure a deal?

How many deals have you done in Jacksonville?  What relationships do you have in this market with Brokers and PMs to help me see more deals and assist on underwriting assumptions?

How many clients do you have at any given time?  Do I get access to you or will I be farmed out to "your team"?

How many deals have your clients done?  How many are you co-GP on?  

What are you going to try to "upsell" me once I sign up? (For a lot of gurus, the education is just a top of funnel entry point for them to then have you find deals for them, invest in their deals, etc)

If they are active in real estate themselves, I would ask how much they are making from their RE versus their courses?  If they are syndicating deals, how much of their OPM equity came from their students?

And then, there is the true catch-22 with gurus, which is: the people that I would want to teach me are very likely too busy and too successful in real estate to be spending time educating competitors.  So, my standard thought is they are either not as successful as they put out in the world (and need $20-30k), or they are charging you to sell you something more.

@Ken M. I guess I will answer your question with another:

What impact does it have?  

To answer your question: yes, large studies released by the bigger brokerages have shown Phoenix and other sunbelt markets showing overall rent declines. But, these broad market studies are so large, they are almost meaningless, in the real world.

Between glut of new supply in many "hot" markets coming online, a continually softening economic outlook, inflation over last couple years making day to day items feel cost prohibitive, many average renters are strapped and seeking lower cost housing.  As there is a general flight to affordability, the new developments don't fill as quickly, and rely on concessions and/or lower asking rents to fill up.  When a Class A apartment can be had for the same price as a Class B/C renovated unit, the B/C operator drops prices, and so on.

But, in terms of making an investment decision, I think it is short sighted to rely purely on full market average data.  There are still properties that can increase their rents, and may make for a good investment.  Whether it be a submarket that is still growing or a property that needs some love and investment.

@Anthony Klemm, cost is just one component.  To echo Dominic, typically if you need to raise under $1mm of equity, the formation costs become overly prohibitive.  I.e. a security attorney drafting full set of Subscription docs will on average be $7500+.  Some of the "package rate" groups start at $15k, but include the compliance reviews of marketing assets, too.  But either way, $7500 of $1mm is 0.75%.  $7500 of $500k is 1.5%.  Given this is a front loaded fee that needs to be overcome in asset performance, it is a lot harder to absorb on "smaller" deals.  

As noted, if your options are Reg D, private offering vs fully registered public offering, even if you are talking Pink Sheet (OTC) stocks, you have public filing costs, annual audit requirements, and likely more on-going expenses that have to be covered by the property(s) owned by the offering.  

Then you get to the overall scrutiny.  Many real estate operators talk about lack of volatility relative to the stock market.  Granted, I think this is overblown, but many operators don't want to be publicly traded.  It creates far more visibility into the company's operations, their investment decisions, etc.

And lastly, you get to the overall ability of the sponsors.  While this is indirect, a less experienced sponsor is not going to be able to attract capital like a seasoned sponsor, regardless of securities being exempt or not.  So it gets back to the "minimize costs" for the newer/smaller sponsors.