Market cycles are just that – cyclical. The current market cycle is making it hard to find deals. Prices are high; cap rates are low; interest rates are on the rise; and the good deals seem to be drying up. If you have chosen the path of a real estate syndicator, what can you do?
1. Do nothing and wait for the market to come back, go back to your previous profession and give up in defeat, never to try again.
While this may sound like the wrong thing to do, it’s probably what most people in this position will do! When life becomes difficult, we often think it’s fate, “too bad, we tried” and give up. How many times did your parents tell you, “Don’t be a quitter!” How many times have you heard the cliché, “When times get tough, the tough get going!
Markets are tough right now. Finding commercial properties that make economic sense is like searching for a needle in a haystack. Not to mention the plethora of real estate gurus out there teaching thousands of competitors how to buy the same properties you’re looking for. What’s a real estate entrepreneur to do?
I heard Ron LeGrande, one of the original group of commercial real estate gurus, say that at any real estate investment association meeting, “There are 7% of the people who are doing something, 7% who are about to do something, and the rest are there for entertainment value.” (I would replace entertainment value with “wishful thinking.”) It’s my belief that this statistic (although anecdotal) is probably true in any real estate guru training.
So, the next time you find yourself in one of those rooms, look at the people around you. Into which group do you fall? If you’re not already doing something, you’d better start, because you are either on the verge of it and need to do something to prove it, or you are with the other 86% of the people in the room engaged in wishful thinking who will never do anything!
But what can you do now?
2. Send more LOIs
Lets’ face it, how many of you are sending the number of Letters of Intent (LOIs) your guru told you to send? I think I was taught to send 100 per month. Are you even close to that number? If not, maybe that guy who sat next to you in the guru event who has now done three deals (while you haven’t done any) actually did it? Why not call and ask him what he did? How about dusting off that original notebook from the first guru event you went to and start talking to brokers and writing LOIs like they told you to do? Better yet, get a coach if you don’t already have one, so someone can hold you accountable.
3. Change markets
Did you pick a dud market? Are you so stuck in your ways you can’t move on? I don’t mean that you should chase every shiny new penny, but if you haven’t had luck within two hours of where you live or the unrealistic market you picked, perhaps it’s time to broaden your horizons. Don’t know what markets to pick? Just do a Google search for “current emerging markets” and if you need more than that, search for “emerging markets books” on Amazon. My personal favorite is Emerging Real Estate Markets by David Lindahl – and that’s because I know him, and he gives solid investing advice.
4. Change asset classes
Multifamily isn’t giving you the cap rates and returns you need? Get some training in new asset classes. While multifamily is suffering, you might be passing up killer deals in self-storage, hotels, real estate development, recreational properties, industrial, etc. You get the idea. Don’t be a one-trick pony. You need more than one tool in your toolbox to build a solid business, right?
5. Learn a new skill-set
Go get some training – don’t think you know everything about another asset class simply because you did a weekend boot camp on one asset class. Don’t take chances with other people’s money. Get some solid education and coaching and try approaching investing from a different angle, or explore different types of properties or investment opportunities. Think like a prospector – if your current mining claim isn’t producing nuggets, it’s time to move downstream or dig another hole.
6. Develop vacant land
Last time I checked, there was still plenty of vacant land out there. It just might be a good time to build in your area. If you don’t know what you’re doing, don’t go it alone – leverage off someone else’s experience. Find a local developer and see if they could use some money for their projects. Put together a group of investors to help fund their deals in exchange for a place in management and some OJT (on-the-job training, for those who don’t know the term).
7. Use your network of investors to fund other people’s deals
Have investors, but no deals? How about using your network of investors to fund other people’s deals? You can create your own “fund of funds” whose purpose is to find other great deals for your group to invest in. Your fund of funds will be its own syndicate, so you still have to follow securities laws, but if you bring money to others’ deals, they will likely give you a seat at the management table (no more kiddie table for you), and a share of the management’s earnings. You can help oversee the asset on behalf of your investors and you may be affording them an opportunity to invest smaller amounts in deals they couldn’t do on their own because the minimum investment amount is too high. Hint: This model also keeps you in control of your own investors without handing them over to another syndicator so they become their investors.
8. Do bigger deals
When times look bleak, think bigger! Be bold. Don’t let the naysayers hold you back. Look at bigger deals; team with other syndicators who can’t find deals either and take bigger deals down together, either as a joint venture or as a pooled syndicate – combine their chocolate and your peanut butter. Don’t fret, we can help you structure these deals and make it a win-win for everyone. To find others to team with, start attending events where you can meet bigger investors (such as Richard Wilson’s Family Office Club) so when the big deals fall in your lap you’ve got some resources to call on and you don’t run behind the couch and cower like a scared dog.
9. Change your parameters
This is probably the most important lesson you need to take away from this article. At a recent RealShare Apartments event sponsored by GlobeStreet, one of the keynote speakers said that this is no longer a 20%+ returns world; current annual average returns for multifamily are projected in the mid to high teens. So how do you get your investors out of the 20%+ mindset? Education, my friend. When times change, it’s time to re-educate your investors and keep them abreast of changing market conditions. But don’t be sad – returns in the mid to high teens still knock the socks off historical stock market trends. Always remember who your competition is for investor dollars – and don’t forget to remind your investors of it on a regular basis.
You might also need to re-think your investor splits. If you are doing bigger deals – 25% of a bigger deal might still be more than you would make on a smaller deal if you kept 40% for your management team. It’s all relative, but it’s also relatively the same amount of work to buy 100 units as it is to buy 300 units. Think bigger and reduce your splits and still earn the same return; hmmm, seems like a no-brainer. You may also be able to cut back on acquisition fees and raise a little less money – but still make a nice payday on closing. When times are lean, pull up your breeches and tighten your belt, but don’t give up as there is still some meat on the bone if you look hard enough.
There is a large real estate training group (whom I shall not name) whose whole model is based on 80/20 splits with a 1% acquisition fee. Do you think their students are still doing deals while you’re sitting on the sidelines? It might be time to re-think your strategies and change your parameters.
10. Work on your marketing materials
While you aren’t chasing deals (because they are so hard to find), it’s a great time to work on your investor marketing materials. Hone that pitch deck, create an investor educational presentation, prepare a website for your investment company, create an investment summary or company brochure, or design an email drip system. Start with an investor marketing plan. Hint: go to our website at www.SyndicationAttorneys.com/Store, and get a free Investor Marketing Plan Template for a limited time. While you’re there, browse our Online Store to see how we can help you showcase your company as a professional investment company. These things take time to set up, so do it now – before you have deals – and start using these investor marketing materials to create a healthy database of investors so when you do have deals you are ready to rock!
Did you know? The prior securities law firms that Kim co-founded grew during the Great Recession – that means people were still doing deals when times were tough, and you can, too!
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