All Forum Posts by: Justin Moy

Seller finance or mezz debt. But there will be a few obstacles to this

First, the first position bank will want to see you have skin in the game, so they likely won't love you putting 0% into the deal. 

Second, you'd be really heavily leveraged, so much riskier and cash flow restricted

There’s a quote that applies to almost everything but especially real estate investing and it’s this:

When you first start to study a field, it seems like you have to memorize a million things. You don’t. What you need is to identify the 3-5 core principles that govern that field. The million things you thought you had to memorize are simply various combinations of those core principles.

Principle 1: Recovering From Losses Takes Longer Than Stacking Up Small Wins

You’ve likely heard this before but it is much more difficult to recover from a loss than it is to go a few deals in a row with minor gains.

If you invest $100,000 into a deal and that deal loses 20%, you get that cut down to $80,000

Meaning your next deal would have to gain 25% just to break even for the first deal’s loss. And be mindful that the difference between 20 and 25% isn’t 5%, it’s a 25% difference, meaning your next deal has to do 25% better than your projections of the first deal just to break even. Not to mention the time lost going backwards and then going forward.

That’s not to say never invest in real estate. All investment strategies have risk and if you invest in real estate long enough you will have a deal that loses money, but going into a deal your first thought should be capital preservation and asking yourself what is the downside risk of a deal like this.

That’s one strong selling point of syndications is your downside risk is limited to your initial capital contribution. Passive investors don’t sign on the loan, don’t put up risk capital which means paying for things like inspections and bank fees that can cost tens of thousands of dollars.

So when looking at a deal, your first thought should be: what is the total downside risk for you as an investor?

Because it will take longer to recover from loss than it will to just hit singles on your deals.

Principle 2: Risk & Returns Are Directly Correlated

As you see projected returns increasing your risk in that deal is increasing as well. Turnkey investors who buy something 100% ready to go and already leased out will take significantly lower returns than someone buying a fixer upper, and they should, the fixer upper or house flipping investor should get more upside because the risk is so much greater.

Whenever you take on a renovation project you never truly know what you’ll uncover until you get in and start doing the work. You can do inspections and have lots of experience on the team, but once floors start coming up and drywall starts coming out you can’t be certain what you find.

The investor who wants higher returns needs to be comfortable with taking on more risk. This will also help you analyze deals quickly, the deal with a 15% IRR should be inherently less risky than the one with 35% projection.

Principle 3: Cash Flow & Equity Gain Are Negatively Correlated

When it comes to cash flow and equity gains, when one goes up, the other typically goes down.

It’s why people who want to invest for cash flow can rarely find deals that fit their criteria in California or New York. These places see much higher equity gain so investors are willing to take less and less cash flow until cash flow even becomes negative.

I typically tell investors cash flow is more playing defense with your investment and playing for equity is offense. If you’re looking to grow what you have, look for equity, if you’re looking to preserve what you have, look for cash flow.

You can also balance these 2 however you’d like, and even in our deals we look for balance with equity and cash flow but we also know if we leaned 100% on equity gains we’d likely make more money but, just like principle 2 says, we’re taking on more risk by doing so.

That’s not to say high cash flow properties present no risk either. If a property has higher cash flow that typically means it’s going to be a bit further out from major cities or the most desirable areas in that city.

You’ll find the highest cash flow deals in tertiary markets/small towns or higher crime areas. The trade off in risk is usually those areas aren’t seeing big growth, and they may lack strong property managers or contracted labor.

Then, when you go to sell the property, your pool of buyers will also be smaller. These properties come with their own unique set of risks.

These 3 principles can help you break down the entire industry of real estate investing in either commercial or residential: Recovering from losses takes longer than stacking up small wins, risk & returns are positively correlated, cash flow & equity are negatively correlated.

It depends on your strategy. Do you have enough cash to invest right now where your passive income from stabilized apartments is significant to your life? If not, you may want to hit heavier equity multiple plays (like value add) until that portfolio size is considerable enough to make a big impact on your life. 

How many years of cash flow would it take to match the returns of the value add opportunity? Probably 10+. 

Returns are a factor of risk though. If you're not familiar with executing on value add strategies or construction or construction management, then maybe stick with turnkey cash flow until you or someone on your team is comfortable and can mitigate the risk of value add

I was a broker in the past and something that's really strong is to be prequalified with a strong and well known lender with a strong reputation. These types of lenders can give your offer a bit of an edge from the listing broker who is primarily looking for certainty of close

If you hire you'll save yourself some time. The question becomes what is the highest and best use for that time that you'll be saving, that you can't take on now because you're too busy. 

Is your primary role going to be looking for the next 130 units? Do you like to stay in the construction management side? 

I'd make a list of all the tasks you're looking to outsource, estimate how much time that'll save you after you hire and train them, and figure what that time will go towards. What you're 'paying' right now is opportunity cost.

I've heard you can 'combine' them with another VA loan and get into more unit properties. There's even some tactics to have 1 of the units non residential I've heard people do. Never done it myself but heard it at a conference once so don't quote me

Yes you can, but will have to make up for it in other areas like liquidity or net worth requirements. Also to make up for not having owned real estate investments in the past. 

You could look to partner with someone who can help sign the loan for you and possibly help with operations of the property as well, or if you have significant net worth and liquidity they may overlook the lack of experience and no regular income coming in. 

Overall the lender will look to dilute it's risk. Another factor could be a smoking hot deal you're getting. If they feel the deal is very good or priced very well and in a great market, that will also help. 

Having no W2 income or real estate investing experience are factors of risk, so they'll look for other things to help balance out that risk.

So you’ve done your research, you’ve found an operator you like and trust and now they have a deal that you like as well.

You’ve done your due diligence and now you’re ready to make that investment. Here are some of the steps to completing your very first passive investment:

*Every deal and operator is different but in the industry these are the steps that I’d expect are followed to a certain degree*

1 - You’ll submit a soft commitment form. This form is commonly a google form or some might have an investor platform you may use instead but you’ll follow the prompts to submit your soft commitment.

You'll fill out your name, mailing address, contact information, investment amount, how you're investing (either as an individual or as an LLC or other entity like a retirement account), then verify if you're an accredited investor or not.

Of course if the deal requires you to be accredited there is some form of verification of that which we’ll get to in a bit but if you’re not accredited and the deal does require you to be accredited this is essentially where you’d stop and start looking for deals that don’t require accredited status.

This soft commitment is NOT legally binding.

2 - Once you fill out that form or submit your soft interest in the investment portal, the sponsors team should reach out with a private placement memorandum (PPM). This is a heavy legal doc and depending on the investment can be up to a few hundred pages.

For most people, this is the toughest part because you want to either review those yourself or if you have an attorney you’d like to review that you can do that as well. But these docs will lay out and confirm, legally, the details of the deal highlighted in the marketing packages.

Including return projections, equity splits, any return hurdles, liquidation events, sponsors fees, early liquidation if that’s possible and the process for that if you need to get your cash out before the investment is sold/completed, and of course lots of disclaimers.

You’ll want to review these docs to the level that you’re comfortable with the terms then sign them.

If there’s something in the docs you’re not comfortable with, bring it up to the sponsor for clarification. Sponsors typically aren’t going to make exceptions for retail investors with their legal docs but it never hurts to ask.

All sponsors should send these to you in an e-signature platform like hellosign or docusign so signing should be very simple.

3 - Once you sign the documents the sponsors team will be notified and they’ll reach out with funding instructions or an accredited verification step.

If the deal requires you to be accredited they may either request proof by having you send your W2 or proof of net worth requirements, or more commonly they’ll send you to a third party verification platform like parallel markets or verify investor.

These 2 platforms operate almost exactly the same and typically get you a verification letter the same day or next day if you submit it later in the evening. They also offer a rushed verification service for an additional fee, I haven’t ever gotten a letter later than 1 day at the most, typically within a few hours so I haven’t seen a need for that fee before.

Once you have that verification letter you can send that to the sponsor team or if you’re in an investor platform you can upload it there.

4 - Once that’s done you can fund the account. You should have funding instructions that tell you the bank name, account and routing number that you’ll be transferring or wiring money into.

If it’s the same institution as you use for your banking you may be able to do this in your app but many prefer to go to the bank in person. I’d be sure to use your full name and the investment opportunity in the memo of the wire transfer so the sponsors can easily track your investment.

When you’re going to wire the investment, let the sponsor know when you’re going so they can start checking the bank account for your investment. A great sponsor will work to verify your funds as soon as possible once they receive them.

Different institutions may take different times to complete the transfer so no worries if it’s not instant. It could take a few business days for institutions to transfer this cash.

*interesting fact*

If you have a very common name, your wire could be delayed. What happens in the background when cash is wired especially in larger amounts is there are checks to see who is sending and who is receiving the money.

People with common names tend to share a name with others who may have criminal backgrounds and depending on those crimes it could take the financial institutions longer to verify that you’re not that person and dig into what exactly this money is going to.

Just something to keep in mind as I’ve had that happen to colleagues of mine

5 - Once the sponsor confirms your investment, if you haven’t been in a portal already, you’ll receive information to set up your portal and create a password so you can view your dashboard and track the investment.

The nerve wracking part is over! Now your only job is to receive and review regular updates from the sponsors and reach out with questions if any but now your job as a passive investor starts to kick in and you’ve made your first of hopefully many passive investments.

When I got into the realtor game 11 years ago it was the most failed business in the country, although many people go into it part time or not really looking to make a real business out of it. 

It's a simple business, but not easy. 

You're an independent contractor, so if you're making $49k you're much better off getting a regular job because you still have to pay your taxes and your own benefits, insurance, realtor fees, and possibly for staff. Also any retirement options you want to contribute into. 

Every market is different, I was in the bay area and my average sale price was $2.2M, it definitely took more than 12 hours of cold calling to break through. But if you're selling $100k homes I could see it going much quicker. 

If you've been communicating with a large property manager they will likely help you pull this report and give it to you. It cost them nothing extra and will help them secure business. 

Lenders may also help you with this as well but I wouldn't make it their job to keep giving you costar reports. Maybe ask them once you've really narrowed it down to just a few properties. I wouldn't make this part of your regular underwriting process for every deal that interests you!