SS113: What Happens After I Invest into a Real Estate Syndication?

SS113 What Happens After I Invest into a Real Estate Syndication

There are many resources available online about how to invest into a real estate syndication; but what happens after you invest? In this episode, Charles discusses what an investor can expect after they invest into a real estate syndication.

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Talking Points:

  • Recently, you passively invested in a real estate syndication and you just received an email from the operators saying that the property has finally closed; what happens next?
  • First off, as a passive investor, your responsibilities are basically over. The only active responsibility you have is to yourself and that is receiving the K-1 tax form from the investment operators and sending it off to your accountant every year.
  • For this example, let’s suggest that you passively invested in a 150-unit apartment complex. I call the first 6 months of owning a large apartment complex; the initial stabilization period. It is when the new owners get an accurate handle on the property and by the end of that 6 months; the property is starting to make forward progress.
  • On day 1, the operators with their team along with the new property management company are going to be onsite. They are mainly in the office, reviewing the rent roll and contacting tenants about the change in ownership. This letter typically includes information on paying rent and how to make service requests. It might also list additional changes like; new office hours or new parking lot gate FOBs. It is also very common for this letter to request updated contact information.
  • Next is changing vendors. Most vendors are able to change with a 30–60-day notice. Some vendors, like coin laundry vendors, will have their contracts continue over to the new owners until the contract is up. Buyers cannot rely on sellers to discontinue their contracts with vendors. We purchased a property a couple of years back and the trash removal vendor who was charging almost twice what are new vendor was going to charge; required a 90-day cancellation notice. This is only a problem if the operators are not aware of these vendor contract timeframes.
  • Over the next couple of months, the operators will work with the new property management company to begin the repositioning. This will include; changing staff, beginning CAPEX projects, and addressing major deferred maintenance issues. Most of these CAPEX projects will be exterior projects; like roofs, porches, stairs, or sidewalks. These projects are able to be completed without accessing apartments and deferred maintenance in these areas needs to be rectified immediately since; roofs, porches, stairs, and sidewalks are detrimental to the asset if left in disrepair along with the fact that it is unsafe to residents and guests. The insurance company will most likely want to see these changes made in the first few months as well.
  • Once major deferred maintenance projects are in motion; the property management company, along with the onsite staff, will start figuring out the actual rent roll and the actual accounts receivable. Depending on the quality of the previous owner and their management team; rent rolls can vary on their level of accuracy. Rent rolls might show tenants living in units who have vacated and still owe balances, tenants that should be evicted and are still living in apartments without paying rent, many pets in units that are unknown to management and not paying any pet fees along with tenants who signed the initial lease, who have since moved out completely and another family member or friend is now living there. This process will take months. Management calls, texts, emails, and knocks on doors trying in order to verify or correct the rent roll. The goal is to have current paying tenants update their contact information and work information while addressing non-paying tenants and unresponsive tenants.
    • One last part of working with current tenants is determining rent increases, lease renewals, and unit renovations. Operators usually want to stagger lease renewals in order to minimize short 30–60-day periods every year when most leases end. This is done by staggering leases. The operators and the managers need to determine how renewals will be handled. How many units do we want to renovate per month? What tenants do want to keep? Which tenants would we like to not renew? The trick is; to keep good tenants, not renewing certain tenants and evicting problems tenants while also, keeping X number of open apartments available for renovations.
    • For example; say everyone in an apartment complex is paying $1,000 per month and the market rent is $1,100 while an updated unit will rent for $1,300. Maybe good tenants are renewed at $1,050, less-than-ideal tenants are not renewed and problem tenants are evicted. Once some units are renovated; good tenants are offered renovated units for $1,300 per month or on their second renewal maybe their rent goes to $1,100 for their non-updated unit. Ok, tenants maybe are not renewed at all; they just are kept on, paying rent month-to-month if there are many leases expiring when theirs is set to expire. When the time comes; they might be offered a rent increase on their current unit-to-market rate or they have 60 days to move out.
    • The goal is to stagger leases so there is no period throughout the year when a disproportional number of leases is expiring while also continuing to increase the net operating income on the property as a whole.
  • It is typical for apartment building sellers to not begin evictions with non-paying tenants. This makes it much easier for the new property owner to start and complete the eviction themselves. Evictions from previous owners that were not completed; must now be taken over by the new owner’s attorney which can be a difficult process. It is easier to close on the property as the new owner and then begin the evictions. The property managers need to work quickly in order to start evictions as soon as it is discovered that a tenant has no intention of paying back rent.
  • This initial stabilization period typically lasts 3-6 months; all depending on the previous owner and property manager. If the property is really in disarray, it may take a year to get the property moving in the right direction. Either way, as problem tenants are evicted, deferred maintenance is addressed, expenses are reviewed and expensive vendors are replaced; the asset will begin to start moving forward progressively.
  • In regards to the passive investor; in most syndications, passive investors will start receiving a distribution 3-6 months after the property is purchased. This initial stabilization period is where major changes are made that will pave the way for a successful investment in the future. Changes are not quickly apparent with large apartment complexes. Changes made today might not show up for 6-12 months down the road.
  • One last important note to take into consideration is that every commercial property is a business. There are good months and there are less-than ideal-months. The business plan will outline what the challenges at the property seem to be and during the 3–7-year hold period; those problems (and others) will be ironed out. There might be periods when distributions are reduced or temporarily paused but, as the property’s issues get resolved; it paves the way for better tenants to move in. This greatly improves; the collections, the net operating income, and the asset itself.

Warren Buffett always puts it best, “We prefer a lumpy 15% return to a smooth 12% return.”  Investors who’d rather have the reverse – who find a smooth 12% preferable to a lumpy 15% – should ask themselves whether their aversion to volatility is mostly financial or mostly emotional and I couldn’t agree more.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what happens after I invest into a real estate syndication.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
So recently you’ve passively invested into a real estate syndication and you’ve just received an email from the operators saying that the property is finally closed. So what happens next? Well, first off, as a passive investor, your responsibilities are basically over. The only active responsibility you have is to yourself, and that is receiving the K one tax form from the investment operators and sending it off to your accountant every year. In this episode, I want to give you a little bit behind the curtain of what happens with the operators and the property managers after a property is purchased. In this specifically, let’s suggest that you pass the invest it into 150 unit apartment complex, and I call the first six months of owning a large apartment complex. The initial stabilization period, it is when new owners get an accurate handle on the property and by the end of that six months, the property is starting to make forward progress. So day one, the operators with their team, along with the new property management company, are going to be onsite.

Charles:
They’re mainly in the office reviewing the rent roll and contacting tenants about the change in ownership. This letter typically includes information on paying rent and how to make new service requests. It might also list additional changes like new office hours, new parking lot fobs updated contact information. Next is changing vendors. So most vendors are able to be changed every with a 30 to 60 day notice. Some vendors like Coin Laundry vendors, will have their contracts continue over to the new owners until the contract is up. Now, buyers cannot rely on sellers to discontinue their con their contracts with vendors. So we purchased a property a couple years back and the trash removal vendor who was charging almost twice what our new vendor was gonna be charging required a 90 day cancellation period. Now, this is only a problem if the operators, the new operators, are not aware of these vendor contract timeframes because their numbers will be off.

Charles:
So over the next couple months, the operators will work with the new property management company to begin the repositioning. This will include changing staff beginning capital expenditure, CapEx projects in addressing major deferred maintenance issues. Most of these CapEx projects will be exterior projects like roofs, porches, stairs, or sidewalks. These projects are able to be completed without accessing apartments, and deferred maintenance in these areas needs to be rectified immediately. Since roofs, porches, stairs and sidewalks are detrimental to the asset, and if less in disrepair, along with the fact that it’s unsafe to residents and guests. Now, your insurance company is probably going to cite these as well, that they have to be fixed usually within some sort of timeframe after you’ve purchased the property. Now, once major deferred maintenance projects are in motion, the property management company, along with the onsite staff will start figuring out the actual rent roll and the actual accounts receivable depending on the quality of the previous owner and their management team.

Charles:
Rent rules can vary on their level of accuracy. Rent rules might show tenants living in units who have vacated and still owe balances tenants that should be evicted and are still living in apartments without paying rent. Many pets and units that are unknown to management and not paying any pet fees, along with tenants who signed the initial lease, who may have since moved out completely and another family member or friend is now living there. Now this process will take months management calls, text emails, knocks on doors trying to verify and correct the rent wall. Now the goal is to have current paying tenants update their contact information and work information while addressing non-paying tenants and un unresponsive tenants. One last part of working with current tenants is determining rent increases, lease renewals and unit renovations. Now, operators usually want to stagger lease renewals in order to minimize short 30 to 60 day periods every year.

Charles:
When most leases end, and this is done by staggering leases, the operators and the managers need to determine how renewals will be handled. How many units do we want renovate per month? What tenants do we want to keep? What tenants do we not wanna renew? The trick is keeping good tenants not returning or not renewing certain tenants and evicting problem tenants, while also keeping x number of open apartments available for renovations. For example, let’s say everyone in an apartment complex is paying $1,000 per month and the market rent is $1,100 for the unit just as is. While an updated unit will rent for $1,300. Now maybe good tenants are renewed at 1,050 and less. Ideal tenants are not renewed and prop tenants are evicted. Once some units are renovated, good tenants are offered renovated units for 1300 per month or on their second renewal. Maybe the rent just goes to $1,100 for their non update unit.

Charles:
Now, ok, tenants may be not renewed at all. They just may be kept on on paying month to month. If there are many leases expiring when there is a set to expire you know, the time comes, you might want to offer them just a month to month and just let it ride out. And this way that you’re staggering the leases, you know, the goal being to stagger leases so there’s not a period throughout the year when a disproportional number of leases is expiring while also continuing to increase the net operating income on the property as a whole. So in our example, 150 unit property, I mean, you don’t want to have have certain months where 25 leases are going to expire. If you have that happening after you purchase it you’d go through that process and maybe half those are left on month to month and the other half are renewed or vacated evicted, whatever it might be.

Charles:
It just depends so that you can have it, get it to as even as possible. So when renovations are coming through and you’re doing renovating, you know, 3, 4, 5 units a month you now don’t have one month where you know, one third or one quarter or one fifth of the building is going to leave. It is typical for apartment building sellers to not begin evictions with non-paying tenants. And this is really tricky during a, if you’re in a contract to buy an apartment complex and one of their tenants stops paying, right? That previous manager would probably start evictions, but it it, it makes it much easier for the new property owner to start and complete the eviction themselves. Evictions from previous owners that were not completed must now be taken over by the new owner’s attorney, which can be a difficult process.

Charles:
It’s easier to close on the property as a new owner and then begin the evictions. Just work into your numbers that this person’s not gonna pay for say, three months and we’re gonna have to shell out a few hundred dollars or a thousand dollars, whatever it might be. For these eviction fees. The property managers need to work quickly in order to start evictions as soon as it is discovered that a tenant has no intention of paying back rent. Now, the initial stabilization period typically lasts three to six months, all depending on the previous owner and the property manager. If the property is in, in real disarray, it may take a year to get the property moving in the right direction. Either way, as problem tenants are evicted, deferred maintenance is addressed, expenses are reviewed, and expensive vendors are replaced, the asset will begin to start moving forward in progression.

Charles:
Now in regards to the past investor and most indications, past investors will start receiving a distribution three to six months after the property is purchased. This initial stabilization period, it’s where major changes are made that will pave the way for successful investment into the future. Now, changes are not quickly apparent with large apartment complexes. Changes made today might not show up for six to 12 months down the road. Usually when we are doing a deal, we will give a timeframe, an exact or a window a quarter when we’re gonna start paying the, the regular distribution, which is typically quarterly. Sometimes that’ll happen sooner or sometimes it’ll happen later. We’ve had it done on a, a more recent deal when it was supposed to happen two quarters down the road and it actually is happening one quarter after purchasing the property. Because the property was in better shape, we had less evictions and it was just managed a lot better than we had thought when, when we were purchasing it.

Charles:
Now one last important note to take into consideration is that every commercial property is a business. There are good months and then there are less than ideal months. The business plan will outline what the challenges at, at the property seem to be, and during the three to seven year hold period, those problems and others will be ironed out. There might be periods when distributions are reduced or temporarily paused as the properties issues get resolved and it paves the way for better tenants to move in. This greatly improves the collections, then it operating income and the asset itself. Now, Warren Buffet always puts it best. We prefer a lumpy 15% return to a smooth 12% return, and investors who’d rather have the reverse who find a smooth 12% preferable to a lumpy 15 should ask themselves whether this aversion to volatility is mostly financial or mostly emotional. And I couldn’t agree more with Warren Buffet on this, where having the lumpy 15 is a better return than this move 12. So I hope you enjoyed. Please remember, rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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