075: Is Apartment Syndication Dangerous?

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What would it feel like to make a hundred thousand dollar mistake? 🤔 If you’re a real estate investor, it’s all in the name— investing. 

It’s a part of the game and there are people who are winning and losing big every day. It begs the question, is apartment syndication dangerous? Hey, you’re a rational person, and putting your hard-earned money into investments does require a leap of faith. 

And one that’s well worth it, but we won’t dismiss how one might feel when they enter the apartment investing world, there is a lot to consider before deals are closed and checks are cashed. 

You see, apartment investing is dangerous when you don’t learn how to implement a risk mitigation strategy. We recently came across an article that had us giving each other a pat on the back for knowing how to invest in the right deal because yikes this one was a doozy.  🙏

We’ll read you a couple of excerpts to describe what we’re talking about. “Apartment complex residents complain of overflowing trash, rats, and roaches. The vacant apartment units need to be boarded up because of homeless people breaking in and living inside the empty units.” Can you even imagine!?!

I honestly never want to. Picture this, “the mayor pays a visit to your property, but it’s not to give you an award for excellence, instead, he’s there because residents came down to City Hall demanding action for their ‘inhumane living conditions.’” 

I mean, can you blame them?

A total nightmare! 😨 Investing in apartment syndication doesn’t have to be that scary, but real risks are involved. Being a well-informed investor, you need an investment strategy in place to mitigate the risk involved. 

Don’t worry, we are not about buying properties that would make a great setting for the next true crime series! Instead, these are straight from the headlines stories that could be happening in a multifamily apartment property you might invest in if you don’t do your due diligence beforehand! 😘😘

Luck or Skilled?

Since 2015 we have seen nothing but growth in apartments in locations we love investing in. Honestly, people were making massive profits 💰 even when they paid little to no attention to the asset management aspect. The market was making everyone look like geniuses. 

It really was a golden era, huh?

Long gone are those days, today the market will no longer protect the weak and negligent General Partner teams. The 2020s have ushered in a new decade of operations! 

Kinda like your friend who only hits you up for a brunch hang when they need a favor from you, we know plenty of general partners who are similar. They are deal chasers and are always on the lookout for what they can gain. This results in careless property management that can’t hit their passive investor return targets. 😞

To be clear this is not how we operate at The Kitti Sisters. This is 100% against our philosophy. We always put our investor’s best interests first which means aiming to hit or exceed the projections we present in the investment opportunity webinar. 🙏🙏

For the first time since 2015 👉 General Partners and Apartment Syndicators can’t get away with the “set it and forget it” model on their properties. This is because properties will come with more challenges and issues that require an experienced team to manage them. In other words, we need real asset managers who track their property’s performance like a hawk! 

Okay, so let’s go back to those articles we referenced earlier. Headlines like those are rare, but nonetheless impactful and straight-up harmful to those who invested in those deals. These stories do hit a little too close to home though since we personally know people who have invested in deals similar to those nightmares and ended up losing 75% of their initial investment. 

Which is UNHEARD OF even when the rest of the multifamily apartment industry was thriving. 

The C.A.R.E Strategy 

We’re giving you some pretty extreme examples, but it’s to illustrate a point. Hearing such a story, the key thing that savvy investors should really pay attention to is how to avoid such a mistake. Not hitting the projected returns in investment is one thing, but for us, losing your money is a huge no-no! 

So what can you do? We’ve come up with a simple and effective strategy that gives you total confidence in all your money and investing decisions. All you have to do is c.a.r.e. 👀

That’s right! C A R E is an acronym we have been using lately that has really given us perspective. As a disclaimer, Cashflow Multipliers team, any investment comes with some level of risk, so be sure to consult your professionals, if anyone tells you differently that’s your sign to run. 😘😘

Compass 

C stands for “Compass”. 🧭️ In order to achieve any goals, you must have predefined criteria on how to measure the result of your actions– a compass to guide you. For example, take legendary NBA basketball star, Lebron James. Lebron is on a quest to be the NBA’s all-time scorer, surpassing Kareem Abdul Jabar. Do you think Lebron goes into the NBA season without knowing how many points behind Kareem he is? No way, right? 

Lebron knows that he’s scored a total of 37,062 points, while Kareem scored 38,387 points in his career.  He only trails Kareem by 1,325 points if he averages what he did last season, which was 29.8 points per game, and if he averages anywhere around that amount he will surpass Kareem sometime in the 2022/ 2023 season.

And this is a huge deal considering Kareem retired 32 years ago! So, pivoting it back to you. Imagine having the same mindset as Lebron James when it comes to your investment goals. What criterion do you have to establish ahead of time to reach your goal? Let that criteria be the compass to guide you.

You’ll also need a Freedom Metric, which helps you determine how much passive income you’ll need to generate monthly so that with or without you trading more time for money, you’ll be able to thrive in your current lifestyle. If you want to learn more about how to calculate your Freedom Metric, check out episode 4 Say no to the Rat Race Cardio. 🙌🙌

Awareness 

The “A” in C.A.R.E stands for “Awareness.” Did you know we’re native Californians? This means we’ve had great weather, best-in-the-country tacos, and several Disneyland trips. 😌😌

We are pros at navigating the lines, where the best food is, and we definitely don’t need a map anymore. For example, we are not huge fans of Frontierland, so we zoom right by and head straight to Tomorrowland and hit Space Mountain immediately. From there, we’ll usually head over to the Avengers campus and then hop over to New Orleans Square and ride Pirates of the Caribbean. 

Then, we’ll end the night by heading back to Main Street 🛣️ and doing a little souvenir shopping. As you can tell, we definitely have a strong routine going and know our likes and skips. This is not to say we don’t want to enjoy the entire Disney experience, but by knowing exactly what will make us happy at the happiest place on earth! 

It’s what Walt would have wanted, right? To maximize our time there and not get overwhelmed but to simply enjoy ourselves. Well, the same can be said for multifamily apartment investing. ✨

You need to have the same level of awareness– if not more– than knowing the location of your favorite ride at the theme park. This requires you to understand the property location, and demographic, including median household income, major employers in the area, rent growth projections, and more. 

Review 

Up next is “R” which stands for “review” or doing your due diligence. When it comes to apartment syndication, you’re going to hear a lot of numbers being thrown at you, but a simple yet effective business plan speaks for itself.  🧐🧐

This is not the place you want to jump through a million hoops to get to. While Rocket Racoon in Guardians of the Galaxy did like 50 jumps to rescue Star-Lord, a good business plan will not put you through the same stress. A good rule of thumb here is the business plan should be simple and straightforward to implement and easy to understand. 

You’ll also need to review the proforma. Are the returns projected in line with what’s happening in the market?  Some GPs may fancy themselves the outlier, and boast they are able to produce outsized returns, however, to be safe, you should make sure that projected returns are consistent with the market expectation as well as their past performance.  If everyone else is projected a 100% return in 5 years but you come across a GP that is promoting 200% in the same market, you may need to further investigate.

We’re not saying it’s impossible but we are saying, review the process and do your due diligence. 

Plus, don’t forget the very crucial role of getting to know your sponsorship team and reviewing their track record. Have they ever had a capital call? 

A reminder that a “Capital Call” is when they have to go back to their investors and ask for more money to support the property. 

These are crucial questions you answered before jumping the gun and committing to a working relationship with them. You wouldn’t hire someone without interviewing them first, right? The same rules apply here. 

You have to learn more about who you’re choosing to invest with.  And yes a cheese board and wine are highly suggested pieces to this process. 🤓🤓

Execute 

Compass. Awareness. Review. And finally, execute. 🙌

We can dot all our ‘i’s’ and cross our ‘t’s’ until we are blue in the face, but all this means nothing if we keep it theoretical. We must execute!  If the deal checks off our internal investment criterion, make sure you don’t succumb to analysis paralysis.  

Tony Robbins said, “The path to success is to take massive, determined action.” 

The Kitti Sisters’ says “The path to success is determined by the speed of implementation.”

Tony Robbins. The Kitti Sisters. Basically the same thing! 

Fortunately, for passive investors, a good general partner would have already done the research on the front end to validate the property prior to getting it under contract. This means that you can leverage their efforts to get the top line info without having to spend hours digging and doing your own research from scratch.  

And while the C.A.R.E. strategy sounds like it requires a lot of work at the front end, keep in mind you tend to have to do more work when you start working with a new general partners team.  Once you’ve established a working relationship with a GP team, you get into this rhythm where a lot of the reviews can be reduced or eliminated. 🙂🙂

Here’s an awesome thing, by implementing the C.A.R.E. strategy, the situation with rats, rodents, and tenants coming at you with pitchforks will most likely not happen. 🤩🤩

As you grow in your investment journey and implement the C.A.R.E strategy you will “know how the sausage is made” sort of speak. 

In that, you know the proper ingredients that will make a good sausage which will help you avoid any hundred thousand dollar mistake– or more!

 

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