All Forum Posts by: Sam Silverman

Hi everyone!

I have been a limited partner in 65+ deals over the last 5 years.

I wanted to gauge potential interest for other potential limited partners in building a free community (Skool or Slack) that focuses around education for the limited partner. 

The goal here would to help educate and avoid potential pitfalls before wiring $50,000, $100,000 or even more.

We would have educational modules, regular meetings and ZERO solicitation. 

Thoughts?

One of the most common struggles for aspiring fund managers -- current cash flow.


Many fund managers are struggling in the short term to produce cash flow for their business.

In a typical structure, fund managers (specifically referring to folks who leverage SPVs to invest into specific deals or funds) -- may earn 1-2% upfront as an acquisition fee and earn the rest of their compensation in a profit sharing split once the preferred return to investors is achieved.

Most real estate projects today are either not achieving their preferred return in cash flow or may not achieve this bench mark for the first three, four or even five years -- at this point, there may also be accrued preferred return that would have to be caught up.

As a fund manager, what other asset classes are you evaluating to help increase cash flow for both your investors AND yourself?

Personally, we are diving deep into buying and operating businesses that potential to conservatively achieve 20%+ cash on cash returns.

@Aaron Bard the syndication route would likely be the best route to go for you.

You will likely structure in either a 506(b) or 506(c) syndication, each having different pros/cons.

To raise capital from those outside of friends in family, you will need systems and process to be able to target/attract investor that want to partner with you on your projects. 

@Stefano Muscatelli this is a great idea.

When looking at raising capital, I would break this down into five main steps:

1. Identifying your dream investor avatar

2. Building the common connection/story that allows for you to relate to and build trust with your dream investor avatar

3. Figure out the best medium in which you meet these folks (in person, LinkedIn, networking groups etc)

4. Leverage a system and process to book meetings/engage with your dream investor avatar

5. Build a framework for your prospective investor calls to provide a quality experience for each person 

The driver of this capital call is due to the floating rate debt that is on the properties that, over the last couple of years, gone up dramatically. 

In turn, this drastically decreases cash flow as the debt service becomes far more expensive.

The intention of the capital call here is to allow for the market conditions to improve to exit properties to be able to recover significant investor capital and in the best case, provide some level of a return.

In most cases, if the investors do not participate in a capital call, they would become diluted in their investment. In the case that not enough capital is raised, the project can entirely fail and all capital would be lost as the deals would be sold at a total loss of all LP equity. 

Personally, I don't have an exit strategy -- I genuinely love doing it.

In terms of longer term approach, the bigger the track record you have, the more capital you can then raise with the least restrictions. I have partnered with excellent operators rather than operating deals myself, longer term, I should be able to continue to get better returns for my investors by bringing larger checks to the table. 

Also, becoming more of a family office is extremely appealing -- the ability to help newer real estate groups guarantee loans, source capital etc. 

One of the most appealing parts of this business in "moving up" with larger checks is the people you now get to interact with on a daily basis -- think education by association. 

Q1: In any project we look to raise rents to the current market rent in which our improvements will support, % does not factor into that as much as the current fair market value does

Q2: We don't allow for month to month renewals at market rate rent. If we have a lease up window in which we need to give an incentive, it is always a one time move-in incentive that gets the tenant to true market rent, rather than a discount across their lease. This shows far better in a t-3 when looking at NOI.

@Bruce Lynn

In the best case scenario, I prefer the mid-size operators that act as if they are already big time operators. I mean this in the sense of that their reporting is on or close to institutional level, they have their systems and process down, multiple exits and ultimately less risk. When investing here, you are likely to get better terms of investment structure vs true institutional operators, with very similar risk profiles.

I love seeing vertically integrated, especially if that business is not designed to be a massive profit center -- to me, great operators can build a PM business that will help fuel their syndication business. 

Fees should typically go up in each level operators as they have mouths to feed in regards to full time salaried employees on payroll. Additionally, if they are at this level and investing in $40m+ or larger type assets, they likely have $1m or more in hard EMD day one to have a shot at winning deals.

I will still invest in a few of the early stage operators deals each year in partnerships in hopes we can grow together. The true mom and pop deals (also under 100 units) is where you can typically find an incredible basis that gives you a great chance of doing a refi and pulling out the bulk, if not all of investor capital. 

In terms of my personal allocation, this only makes up 10% or so of how I allocate my capital. I view these are long term cash flow and tax benefit investments, where the larger operators I invest with for velocity of money. 

For funds, I see the future being the top operators will only raise capital from and leverage funds. Once operators or fund managers have enough of a track record, the blind pool fund is the ultimate tool for flexibility and velocity when targeting projects. This allows the fund managers/GPs to move quickly, make offers more confidently and leverage their discretion. Earning a track record that allows you to raise capital in a fund like this the trickier part. I have investors who invest in every single deal that we put in front of them, but they still want the chance to review the OM prior to locking in their commitment. This is earned over a period of time and can be a win/win scenario when done the right way. 

Also funds can be used to get preferential terms from top operators for the investors within the fund -- higher preferred return, better equity split, less hurdles etc.

@William Costello for example, the Phoenix MSA operates at a collective 95%+ occupancy in apartments. The bulk of new product in areas such as this are extremely high end class A, we don't compete in that market. Our focus is on value add, workforce/attainable housing that is discounted vs the replacement cost value. 

I prefer lower cap markets than the ones above -- if you add $1 of NOI on a 4.5 cap property, that is worth far more than adding value on a 6.5 cap property.

@Zachary Inman we are moving away from Class C assets as a core focus and moving to Class B and better. Additionally, we are evaluating partners in the self storage and mobile home park space.

We are also focusing on more primary markets within a given metro that has infrastructure and proximity to employment.

I think it's also extremely important to educate investors that cash flow is going to do down as cap rates continue to compress to ensure their expectations are realistic.