Speaker 1: Welcome back, best ever listeners. I'm your host, Travis Watts. This is another episode of the Actively Passive Investing Show, an episode you're not going to want to miss. Stay till the end. I promise it's going to be worth your time. What we're talking about is how to analyze, how to basically vet a syndication deal beginning to end in five minutes or less. You may have heard me in conferences I've spoke at or other podcast episodes or webinars cover some of this, but this in particular is going to be the most consolidated way that I personally vet deals in under five minutes as a passive investor. I'm here to make things easy and simple to understand that's always top of mind. Without further ado, here we go. The first step is to start with your goals. This is by far the most important step. You cannot skip over this. I see it all the time where people do. I think it's always a mistake. You've got to know what are you trying to accomplish by investing in this deal or by being an investor in general. I encourage you not to just set a number goal, a 10,000 a month cash flow or $2 million net worth or whatever it is. Forget about the numbers. It's fine if you want to set that as a secondary or just a checkbox goal. I encourage you to look at lifestyle goals. What is the lifestyle you're trying to achieve? Is it retiring early? Is it having a vacation home and a primary residence? Is it about putting your kids through college? Is it about, I don't know, you know you, I don't know you as well as you know you, but set goals that are emotional, set goals that really drive you. Are you really going to give up on your kids if we go through a recession? Likely not. I hope not. But you might give up on a goal that's just simply a number that has no meaning attached to it. Like I wanted a 2 million net worth. Now it's one. I guess I'll just settle there and call it good. It's good enough. I'm not going to jeopardize on a goal that has to do with a child. If my goal was to put them through college, I will put them through college. I'm going to keep moving. Once you've identified your goals, whether they're number or lifestyle or combination of the two, the next step is what kind of investments can get you to those goals? In other words, let's use that college example. Well, there's really two ways you could put a kid through college, I suppose, right? There's save up enough via net worth and just pay for it outright. Or there's the cashflow process. I'm going to invest. I'm going to build up multiple passive income streams and I'm going to pay the bills and the tuition as they pop up using my investment income. So you need to decide, do you want equity-focused deals, cashflow-focused deals, or a combination of the two? And this is hugely important. You'll see why here in just a couple minutes. If my goal was to build up multiple diversified passive income streams, well, I may not consider doing a new development deal that often won't have any cashflow because it's under construction for a period of years. So that's not going to help me get to my goals. And if I did have a net worth goal like that 2 million net worth example, then putting my money in the bank in a CD, a certificate of deposit that pays me 1% annualized isn't going to build my net worth up very quickly. So that's not going to be an investment vehicle that makes sense. Come to think of it, when does a 1% annualized return really make sense for anyone? That's a great question. And I don't have an answer for you. All right, moving on to step number two, it's know your criteria. So we're setting our goals aside now. We kind of have an idea of what kind of investment vehicles might make sense, whether they're equity and growth focused or whether they're cashflow or passive income focused. But now we have to dive in a little bit deeper. What markets are we interested in? Assuming of course that, we're talking about real estate. Do you want to invest in the state in which you live in your own local backyard or community? Cause you see a lot of potential there. You have a lot of connections there. Or do you want to invest like I do in the Sunbelt markets because a lot of people and a lot of jobs are going to those areas. Every city's different. I encourage you not to just generalize and say, well, I like Oklahoma for example, because Ada, Oklahoma or Roth, Oklahoma is certainly not Oklahoma city or Tulsa, Oklahoma. Those are vastly different markets with completely different dynamics, completely different tenant demographic. So you've got to be looking at growth, expansion, job diversification, et cetera. And this is the point in your criteria that you really pin down. Is it multifamily that makes the most sense to you? Is it mobile home parks? Is it self-storage? Is it commercial, retail, hospitality, hotels? This is where I would recommend that you listen to podcasts or you get a mentor or you pick up a book on learning the differences between the different assets that exist in the space so that you can decide what works best for you. I've decided for me that value add, class B multifamily makes a lot of sense. I believe that it still does today. I've been doing it for over seven years, but that's just my criteria and that doesn't make it right for you. That doesn't mean it should be your criteria. And then we have to look at what class of property. An A class property is newly built. It's got the most luxury finishes and great amenities. It's usually centrally located within a major metropolitan area. B class properties might be more in the sub-market regions built in the 80s, 90s, early 2000s. C class may lack some amenities, things like that, have more deferred maintenance. D class properties are usually, in layman's terms, kind of more in the ghetto, so to speak. The only thing below a D class property is really section A government subsidies, mobile home parks, things like that. So that's your tenant demographic and sometimes these can be very old properties or have structural issues or a lot of deferred maintenance. So in general, look at it like higher risk, higher reward. I've seen groups come into the C and D space, completely turn properties around and get very large return on investment. At the same time, these properties are a headache and a hassle, and sometimes there's liability risk that's tied to doing that kind of business plan. On the flip side, to look at an A class properties, these are usually institutional buyers and these are pension funds and insurance companies and publicly traded REITs and sometimes syndication groups as well. But again, higher risk, higher reward. They're not taking a lot of risk, generally speaking, so the cashflow and the overall yield might be a lot lower, but it's a safer bet. So with that in mind, know your risk tolerance. That's another bullet point here under number two. Know what you're comfortable with. Are you an extreme risk taker? Are you a younger individual with not a lot of capital where you're willing to kind of bet the house on a deal? Or are you looking at retiring and living on stabilized cashflow income? You may not want to look at C and D properties. You might want to be in the A and B space in that example. Not financial advice. Always seek licensed financial advice. I'm just throwing out there some food for thought. And the last thing under know your criteria is know what kind of business strategy makes sense for you. There's value add, there's new development and construction. So again, it ties back to your goals. What are you trying to accomplish? I've shared my criteria a lot throughout the episodes. I'm a fan of value add. It makes sense to me to buy something at a slight discount to improve it and make it better and potentially sell it at a higher price. It gives you a little bit of margin of error in case we have a slump or a recession that we have some margin of error. All right, step number three is know the operator and know their track record. You should always know the operator. You should know them via phone call, email, Zoom call, face-to-face meeting. You need to know who the people are that you're investing with. Are they trustworthy? Do you like them? Do you agree with their philosophy? And I look at things like, does the operator specialize in a particular niche? Do they just focus on B-class, value add, multifamily in particular markets, or do they do a little bit of everything? Are they doing some new development and some value add and some self-storage? I tend to do less investing with those groups just under the general philosophy that you cannot be an expert in everything you do. So they're probably gonna be better in one area versus another. It makes it a little harder to know what deals are gonna outperform or do better than others. So I like people who specialize, that's just in a general sense of anything, even outside of investing, I like to work with specialists. Speaking to track record, I'm looking at things like how many times has this group implemented their business strategy and what were the results? I'm not looking for 100% accuracy. I'm not looking for 100% home runs. I just want a snapshot of how many deals they've done that tells me their level of experience, how many were successful, how many underperformed, have they ever lost investor capital? Have they ever had a capital call occur? And if a deal went south, I wanna know what the story was, what the circumstance was, because I'm a realist, things happen, right? Tornadoes, floods, fires, competition being built next door, a lot of things can happen out there in the space, that's why I'm such an advocate for diversification, but I always ask what happened, what was the outcome? So notice, I have already covered all of this content before I've even looked at the deal, because truly these are the steps to me that are most important before I even consider if I'm gonna look at a deal from a particular operator. I am the first to admit that when I started investing as a limited partner in syndications about seven years ago, that I had all of this backwards, I wanted to see the deals, show me your deal, I wanna see the numbers, how much am I gonna make? That was the wrong approach, a lot of lessons learned, I'm skipping over a lot of those stories, and I'm getting right to the point of what I think is most important today and the way that I do my process now. What you've been waiting for, understand the deal, let's talk about analyzing the deal itself, once you've covered all the criteria that we just went over, does the deal meet your goals and your criteria? Is the operator trustworthy and known? Now I look at, is the deal conservatively underwritten? Of course, every operator in the space is gonna say it's conservatively underwritten, but is it conservatively underwritten? I look at things like, they're buying at what cap rate today and what are they projecting the exit cap rate to be upon sale? Simply put, in my opinion, the exit cap rate needs to be higher than what they're buying at today. We don't want that to actually occur in reality, that means the purchase price is likely to be lower in the future, but it's a form of being conservative in the underwriting. If they're making that assumption that we're gonna have a softening market or rising interest rate environment, and I look at the potential returns, already factoring that in, and I'm still good with the deal, that makes a lot of sense to me. If I'm looking at a nice shiny number of say a 20% annualized return, and I find out that they're buying at a four cap and saying, we're gonna sell it at a two cap, that's a huge red flag because we just don't know if that's what's gonna happen. And if interest rates go up like they are, then that's probably not going to happen, which means that 20% return could easily turn into a 10% return. And now I may not be happy with the deal that I chose. I also look heavily at rent bump assumptions. When you're doing value add, again, I should throw that as a caveat, assuming you're looking at a value add deal and that they're gonna buy the property with the intent of raising rents over time, I look at what those assumptions are. How much do they think they can reasonably raise these rates each year? If it's something conservative, like one, two, 3% a year, that's awesome. If they're saying six, seven, eight, nine, 10% a year, I think that's way too aggressive. It's a definite red flag. Nobody can predict things like that. Even though we've seen inflation kick up and rents bump up, that doesn't mean it's going to be sustainable for the next five to 10 years. Quick story on that, I was looking at a deal the other day that somebody sent me, it was a newer operator. And one of their assumptions was they were going to buy a deal today. And in year number two, they were gonna do a refinance and return 100% of the investor capital. Now, is that possible? Sure, anything's really possible. Is that probable or likely? No, it's not in my experience. That's awfully hard to buy a large multifamily property in today's environment and interest rates rising and to assume that you're going to give 100% of all of their capital back in only year number two. I have partnered with different syndicate firms that never anticipate selling. This is more or less their model where they try to buy and hold forever and do refinances when it makes sense and then return investor capital. I have been in some of those deals for five plus years and still have not had 100% of my capital returned, even though that would be their goal and that would be the optimal thing to do. The other thing I wasn't fond of on that deal, as I mentioned, they're using a bridge loan, which is more or less a temporary loan. And what I didn't like about it is it expired in two years. And so if interest rates are 4% today and they're 6% in a couple of years, that's going to really hurt their assumptions on the deal if they were thinking that they're just going to go into a long-term debt play at 4% in the future. The other thing I recommend doing is visiting the property if you can, if that's feasible and reasonable to you. If you can't, ask for any video footage. A lot of these groups will have video footage from their due diligence or some aerial footage or hop on Google and, what is it? Google Maps, Google Street View and do a little drive-by virtually of the property. Just look at the surrounding areas. Just know what you're investing in. Know if there's, for example, a mobile home park right next door to it. Know if you've got four competitors right next to you, multifamily properties. Know if the property is located right next to the city dump. These things matter and I've seen a lot of things get kind of conveniently removed from the overview and the photos to where you really wouldn't know that information unless you really saw the property. Other thing I recommend doing is reading the reviews on the property that exist right now online. But I do want to throw a huge, huge disclaimer out on this, especially when it comes to value-add investing, where you're buying an underperforming property and trying to make it better. The probability that the reviews are going to be bad are quite high. And there's two reasons for that. Obviously, number one, it's been a mismanaged property. So there's probably complaints you're going to find about the property management or people not taking care of maintenance or having deferred maintenance that's not being addressed. The second thing is just kind of the reality check that if you or I walk into a restaurant we've never been to before and we have pretty good service, everything goes as planned, the food was good, the pricing was good, we're probably not going to rush out the door and go leave a five out of five review. But if we walk in a restaurant and it's just a complete nightmare and they mess our order up and they rip us off and then the waiter is requesting a higher tip than what we left them, we're probably going to be very inclined to write a negative review. So what you tend to find on properties, multifamily specifically, is a lot of negative reviews, even when you might have a good property management company. So just keep that in mind. What I do when I look at the reviews is I'm not looking at the star rating, like let's say it's two out of five star. What I'm reading are the actual written reviews. And if I find it's, hey, the management, they never pick up the phone in the office, or I've submitted a request to get this stain on my ceiling looked at over and over and nobody ever responds to it. These are positive in my view because we're buying it and hopefully we come in and we address all those issues and turn these residents around to being fans of the property and not hating the management company. Now a red flag on a review would be a one out of five star where they say, hey, we have structural issues. We have cracks running up and down our wall. I don't feel safe living here. My neighbor just got shot last month. There's always police all around the property. My car has been broken into multiple times. These are red flags. It's about the demographic in the area that you're in and you want to be aware that these are issues that are likely going to come up when you are invested in this property. All right, let's talk about the numbers. All of you engineer-minded folks out there and analytical thinkers, definitely look at the numbers. Definitely look at the T12, that's the trailing 12 months of performance and expenses and income. Look at the T3, that's the trailing three months. Compare, contrast, but listen, here's my disclaimer. Please don't get caught up in the analysis by paralysis. If you are working with an experienced operator, they know what they're doing. They have a track record. My advice is leave it to the experts. They have already read through this. They've already interpreted the data. They already have a business plan in place to address that data. You or I being the passive investor that's not going to be hands-on or making the calls, really should not be stressing over a lot of stuff on those statements. It's kind of like looking at a cashflow statement of a publicly traded company like Coca-Cola and then forming the opinion that the CEO and their team, they don't know what they're doing or talking about. The assumption would be if I'm an investor in that stock, I'm going to leave it to the team to address those issues. I'm going to assume they know what's going on and they know how to address those best. And if I see any major red flags in a statement like that, then hey, I'm not going to invest. That's always a choice of yours. At the end of the day, the important part here is that you're looking for risks. You're asking questions. Please ask your questions before you invest in a deal, not after or not the day before you're wiring funds and you've already signed the commitments. Write down your questions, be organized, book a 15-minute call with the operator, get through your questions. I'll share another quick story with you. Early on, I invested in a deal that I was very excited about. It was a good deal. It was in a good market, it was with a good operator. But it was with a new operator I hadn't partnered with. And I got so excited. I signed the docs, I did my quick due diligence, I asked some basic questions. And I got in the deal and I realized I forgot to ask the distribution frequency, whether it was monthly distributions, quarterly. It ended up being quarterly distributions, which I try my best not to do. That's part of my personal criteria because I live on passive income. And more importantly, the distributions weren't set to even begin for about six months. And I didn't realize that either. So it was really kind of a letdown because these are, generally speaking, these are illiquid investments. So I was in that deal for three, four, five years. I can't remember having that pain point that I had to revisit every single quarter. So please ask your questions up front. At the end of the day, what I wanna leave you with after all of this is just simply trust, but verify. Again, if you're working with a highly reputable firm, they've done this a lot. They're very experienced. I am going to have to put a pretty high level of trust in that operator to feel confident in doing a deal with them. However, when you're looking at overviews and pitch decks, everyone wants to make their deal sound amazing. Everyone wants to have the competitive edge. They wanna show you the best pictures and the best statistics and the best of everything. So my advice here is to trust what you see, but also double check it. Get on apartments.com, look at the competition, read the reviews, as I mentioned, do the Google street drive-bys if you're not able to physically visit the property in person. And you guys, this could be said with any kind of investing, whether you're a stock investor or a real estate investor, you're always having to trust, but verify. It'd be nice to assume that everybody's telling the truth all the time and everything's perfect, but we all know that's not the case. So with that, I'm gonna wrap up. That is how I bet a deal in under five minutes. I hope you found this episode helpful. Please like, subscribe, leave a comment below. Let's connect on social media. LinkedIn seems to be everybody's favorite. Thank you guys so much for the support. I'm always happy to be a resource in the space when it comes to being a passive investor. So if we haven't connected, let's do so, and we'll see you next time on another episode of the Actively Passive Investing Show. Have a best ever week. ♪