Why Good Underwriting is So Important in Syndicated Deals

Join us as our host, Attorney Kim Lisa Taylor interviews Hitomi Yasuda and Hans Christian Seelinger about why competent underwriting is so important when evaluating potential deals for real estate syndication purposes. Kim and her guests delve deep into real estate underwriting, explaining the common mistakes real estate investors make and how you can avoid them.

Episode at a glance:

• Hans' self-taught real estate journey from Venezuela.
• Hitomi's transition from the clothing industry to real estate.
• Key underwriting principles and risk assessment.
• Challenges of managing tenants, vendors, and staff.
• Best practices for conservative underwriting and market cycles.

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Transcript

Krisha Young:

Hello everyone and welcome to the Raise Capital Legally podcast and YouTube channel where we talk about topics of interest to real estate syndicators and fund managers with an opportunity for live questions and answers before we sign off. I am Krisha Young, co-host and business development director for the firm, and this is attorney Kim Lisa Taylor, the founder of syndicationattorneys.com. Before we get started, please note that audio and video from this event will be posted on our podcast platform, YouTube channel, website, and social media, and so will be made available to the public. You can ask questions at the end of the broadcast by raising your hand or typing it in the Q&A. The information discussed during this event is of a general, educational nature and should not be construed as legal advice.

Today’s topic is “Why Good Underwriting is So Important in Syndicated Deals.” Please join us as we interview Hitomi Yasuda and Hans Christian Seelinger about why competent underwriting is so important when evaluating potential deals for real estate syndication purposes. Kim and her guests will delve deep into real estate underwriting, explaining the common mistakes real estate investors make and how you can avoid them. Hitomi and Hans are experienced underwriters and real estate coaches. At the end of this session, you'll have a much better understanding of how good underwriting can make or break a deal. Hello, everyone, welcome.

Kim Lisa Taylor:

Hi Hans. Hi Hitomi.

Hitomi Yasuda:

Hello.

Hans Christian Seelinger:

Hi Kim. Hi Krisha. Thank you so much for having us. It's a pleasure to be here.

Kim Lisa Taylor:

Yeah, we're super excited that you're here. So tell us a little bit about yourselves, how you guys got started, how you came to know each other and started working together. Just tell us what's going on with you.

Hans Christian Seelinger:

Go ahead, Hitomi, you start.

Hitomi Yasuda:

So, hi, my name is Hitomi and my background is that I've come from 25 years of international marketing in the textile and apparel industries. I followed in the footsteps of my father, which was about getting good grades, going to school. So I did the whole graduate school route and pretty much grinded away for quite a few years in the corporate world and really struggled to find work/life balance, but more importantly, time and financial freedom.

When I saw my father pass away prematurely at the age of 58, having worked so hard, I really realized that I needed to do something different with my life and more importantly, how I was going to actually create security for myself, my future, because over the course of my professional career, layoffs happened, in which I lost my job in the past. I hit glass ceilings in terms of how much I could earn, and I was always trading time for money in terms of the quality of my life.

So I knew that I needed to find something a little bit different. I started looking and exploring different avenues. I then came across real estate investing and it really opened my eyes to, wow, the power of teamwork, the power of leveraging debt and how it's really important and it gives you the ability to actually create legacy wealth. So I got educated, really learned how to do this thing, and that journey began probably about six years ago. And then, just really juggling my full-time job and this, it took me about three years to be able to transition over to be able to do this full-time, and I'm very grateful for that opportunity.

Kim Lisa Taylor:

Wow. That's a pretty amazing journey, and it sounds like you have a passion for this because of just your own personal experience. That's why a lot of us do the things that we do.

Hitomi Yasuda:

Yeah, I absolutely love this industry.

Kim Lisa Taylor:

Yeah. And we look into our future and say, "Wait a minute, we want to do something slightly different. What can we do different? How can we change what future we can foresee for ourselves right now?" That's how a lot of people find real estate. We were just at an event teaching people how to raise capital, and I always ask the room, "Why are you here? Are you trying to augment your retirement? Are you trying to leave your job, taking care of kids that you know aren't going to have the same opportunities we had?" And we get some mixed answers, but almost everybody says, "Better retirement."

And I also ask one other question, and a lot of people don't answer this. They don't know enough to answer it the way I want them to answer it until after the event and then they know. And I say, "How many of you are here to help yourself along with your family and friends?" And only a few people raise their hands until they finally realize that this is really what it's all about. It's not just you. It's all about including other people in these opportunities and offering them these opportunities that they wouldn't otherwise understand, know about, even realize existed.

So your job as a syndicator becomes so easy because all you're doing is educating them. You don't have to sell anything, you just have to teach other opportunities to invest in real estate. Here's how we make sure it's going to work, which is where you guys come in and explain to them how that process works and what you're doing to safeguard their investment. And then they always want that. Most people want that. They want that diversity. So great. Hans, let's hear about you.

Hans Christian Seelinger:

I was actually born and raised in South America, in Venezuela. My father's from Germany, that's why I have the German name. I went to German school over there. Graduated in business administration from college, started working in a company, a sports brand. I started in the warehouse, ended up being the general manager after 17 years. But I made one big, big mistake and it was that I put all my eggs in one basket. It was the equivalent to a W-2 job. And then the economy of Venezuela basically collapsed drastically. And even though I had 300 people under my supervision, and it was a big company, basically the government made it almost illegal to make business.

So after some pretty traumatic events in that country, I decided to move here to the U.S. And here I was. I didn't know anybody. I had no business experience in this country. And I said, "What do I do?" And then, because I had a couple of condos here that I bought in foreclosure and short sale back in 2009, I was getting that passive income, and I said, "How do I get more of that? That's the right type of income I want." So I started my journey buying first properties for myself, and then I ran out of my own money, and I said, "How can I leverage this?" Because I saw people having thousands of units and not coming from rich families, and I said, "They must know something that I don't know. So how do I get that information?"

So I enrolled in various education programs to learn how to raise money and how to understand SEC regulations and then how to actually underwrite multifamily properties. And that's when it clicked. I said, "Oh, we do this by using other people's money, using investors." So in that journey, I had the privilege to meet Hitomi and we have been doing several deals together, and now we are here in front of you. That's how we are here.

Kim Lisa Taylor:

Cool. That is a really compelling story, and I'm sure there's some people that are going to be listening to this podcast, if not now, then later, that are really going to resonate with your story. I always love the immigrant story because immigrants are fearless. They believe that America's the land of opportunity, so they just come here and they just forge ahead. They can have very little resources, but it's the land of opportunity. They know they can succeed here better than maybe where they were, and they go forward. And all of us, I see so many of us that are educated in the U.S., we're always fearful. "I could get in trouble. This could happen, that could happen." And, "Oh, I don't want to take these risks." And we hold ourselves back.

And so I always say, whenever I have a chance to talk to somebody who came here from another country who saw the opportunities in the United States, I always try to just impart on the audience that you really have to think about that immigrant spirit. So some of you should be saying to yourself, "What would Hans do?” Hans went out and started figuring it out. Hans did whatever it took. He went to events. He learned. Once he had the education, he just started doing and he started underwriting, making offers. Now, Hans is living the life that some of you are aspiring to. And I've seen that again and again.

So always think about the immigrant spirit when you're fearful, when you're hesitating. Wait a minute;  what would Hans do? Right?

Hans Christian Seelinger:

Thank you.

Kim Lisa Taylor:

I like that a lot. Okay, so how did you guys ... Hitomi, you said you just kind of got into it. Do you have an accounting background or bookkeeping background? How did you learn about the underwriting process? Because it's really a lot of numbers, and for some people that's kind of daunting, right?

Hitomi Yasuda:

Exactly, yep. And real estate really is a vast ocean of lots of different things that one can do. You hear about wholesaling, flipping, buying a single-family home, things like that. I had some exposure to the rental, townhome, duplex, that sort of thing. But when I started researching a little bit more and learning about economies of scale, that's when I learned about multifamily, large apartment complexes and syndications. But I really realized like, "Wow, this is really different than just buying a house. What we're ultimately doing is buying a business." And at the time I didn't really understand that, what's the difference between a house versus an apartment business? Income, expenses, right? But when I kind of took a step back and realized that I actually come from a business background in the clothing industry. And for my career in the clothing industry, I was basically forecasting and analyzing jeans and sweaters.

Kim Lisa Taylor:

Oh, interesting.

Hitomi Yasuda:

And how we're going to take these American brands and launch the stores in a foreign country. So I had to analyze jeans and sweaters and things like that and production, and then asset-manage those items back in the States. So when I took a step back and said, "Look, how could I apply this to apartments?" I really realized the connection. It's very similar. So instead of jeans and sweaters, now I'm actually analyzing studios, one-bedrooms, two-bedrooms. And if my product — my jeans and sweaters — didn't sell, what do we do? We put them on sale at the end of the season. What do we do in apartments? We have concessions, we have promos, we have different things. At the end of the day, what are you trying to maintain? You're trying to maintain income coming in, if not increase it, and you're trying to reduce your expenses just like in a manufacturing business.

So once I started to see that connection, I was able to take that previous financial planning background and apply it to this business. Of course, I had to learn about asset management, had to learn about what it means to manage apartment buildings. And there's a really famous saying that a mentor told me, "Hitomi, managing apartments is actually quite easy. Managing people is not." With people, what they were referring to are your residents, your staff, your vendors, your contractors, and your teammates. So the concept of multifamily apartments, storage units, or all of these different asset classes, the concept is rather simple to understand: What are we trying to do: income coming in. But it's the juggling the logistics of the various people that are involved to make the business successful, that is the real big challenge.

So once I understood that concept, I really then also educated myself on what asset management actually really means, because that all ties back to being a really good underwriter because the numbers tie back to how are you going to run the operations. So education was everything. It's really, really learning all of this stuff was key. And surrounding myself with really, really smart people who had the experience so I could learn from them when things went sideways and how to embrace all of that, to visualize everything.

Kim Lisa Taylor:

How about you, Hans?

Hans Christian Seelinger:

Yeah, my background, I went to college. I studied business administration. But nowadays, I believe that you don't need to have some sort of degree or finance background in order to understand about underwriting. Because the way I see this is underwriting is just analyzing some numbers. And I always make the same analogy about the doctor. We're looking for properties that — and basically I consider ourselves as property doctors — we're looking for properties and we want to see what's the pain they have. So when you go to a doctor, he's going to ask you, "What's the story? What happened? What pain do you have?" And according to that, they will do an X-ray, blood work. That's the same thing we do. You analyze the T12, the rent roll, and that's for me the X-ray and the blood work. And out of that you decide what's the treatment for this property.

And that's basically what you do when you do the underwriting is analyzing some numbers, seeing certain trends, and then basically coming up with a business plan to see if you can make money or not. And just like when the doctor sees you and he can't have a solution for you, he says, "I'm going to refer you to someone else," same thing we do in underwriting. If we don't find the solution, that's not the property for us, next, and we find the next one.

Kim Lisa Taylor:

Yeah, I like that analogy a lot. These analogies help put it in perspective for people, especially because there are probably some doctors that are going to be listening to this program … like, "Okay, light bulb!" What I love about what we've been talking about so far is that we all take these experiences from our past and we apply them to what we're doing now. And sometimes we don't think that it's related, just like you and Hitomi could have said, "That was the clothing industry. That's completely different. That has nothing to do with this. I have to start from scratch." You really don't.

And that came home to me one time when I was being interviewed on a podcast and the host asked me, "How has your previous experience prepared you for what you're doing now?" And I never had I ever even thought about that before. But I was a licensed professional geologist in California. I was a project manager on some large contracts with the military, and we used to have to figure out — I was doing the environmental space, so we were collecting soil and groundwater samples — but I had to manage vendors, I had to manage drillers and labs and put it all together into these reports. I had to organize staff to go out and collect the samples. Sometimes it was me, sometimes it was other people.

And then you had to figure out, “Where are we taking these samples? How are we going to map this contamination plume?” And we're going to start here and we're going to keep marching out. All those project management skills have helped me learn how to manage my staff and our clients and keep their stuff moving forward and making sure that they … And I was a professional editor for our company back then, and I was editing all these reports, trying to put them in plain English, taking out all the jargon, and I did that to our legal documents.

So every one of you that's listening to this, think about what from your past — and it doesn't have to be anything professional, it could be just managing your kids and all their sports events and activities, and wrangling your family and being the household manager — those are important skills that can all be applied here. It doesn't matter what your background, you've learned something that can be applied here and can help you be unique and better in this field, I believe. So think about that. Don't discard your past experience. And actually think about, “How can I apply all these skills I've had in the past? What am I good at? What do I like doing?” As you're applying to be in one of these management positions in a syndicate, which of those jobs are you going to fill? Which ones do you want to fill? And which ones are you not good at that you have to bring in somebody else?

Krisha Young:

Yeah.

Kim Lisa Taylor:

And in an underwriting program, a lot of it is really about gathering data, right? You got to have the data to plug in the numbers, correct?

Hitomi Yasuda:

Yeah, it's about assessing risk. Underwriting is all about assessing risk. So sometimes just by analyzing some numbers, assessing the risk, we're just like, "Let's not even go there with this one." It just dies before we even spend too much time on it because the risk is just too great.

Kim Lisa Taylor:

So what do you mean by that? What kind of risks are you looking for that would cause you to walk away from the property?

Hitomi Yasuda:

It's about looking at how much something's going to cost, the time it's going to take to try to implement whatever strategy. Because your whole goal is when we evaluate a property, is really having a clear vision of what it is that you're trying to buy. So you have a certain criteria. It could be vintage, it could be what type of asset class — is it a hotel, is it apartments, is it a nursing facility? Is it a storage unit? — There's all these different asset classes. So first of all, it's just having a very clear vision. We call it a “buy box.” What it is that you're trying to buy, the vintage and all the different risks that's associated with how old something is versus how young something is, the structural condition of the property, but then also the location, the market, the economy, population growth, all those kinds of things. Looking at all that.

And then understanding what it is that you're going to be inheriting from the current owner. Is it like a partnership breakup? Is it a cash flow issue? Is it a management issue? What are the different issues? And then once you understand that, and then we decide, "Based on that, this is what we think we want to do." Because your whole goal is to just do it better than the current owner is doing it. But how much money is it going to take? How long is it going to take? And what kind of return on an investment are we going to make on this? And then stress-testing it. If things were to go sideways, what could happen? There's a lot of things that we can't control. Things like interest rates, insurance, all those kinds of things.

So looking at the whole picture and understanding, is the risk worth it in terms of our vision of being able to hit these particular numbers versus the purchase price? Can we find that balance between what the seller is looking for and what we think it's worth and what we think we can actually accomplish in a reasonable amount of time? So is that going to give us the highest probability of success being able to achieve these numbers? And if that answer is not a definitive “Heck, yes!” and it's like “maybe,” that's what underwriting is all about, to evaluate what is the probability of our being able to achieve this deal relatively easily without losing sleep.

Kim Lisa Taylor:

Right. Losing sleep and second-guessing yourself, "Oh gosh, what have I done?" right? Yeah, we've all done that. I get that.

Hans Christian Seelinger:

I believe also the very part of the assessing risk. At the end of the day, we're looking for an opportunity to make money. That's what we are looking for. We're looking, and the vehicle we're using is real estate, which is one of the safest vehicles throughout history. But of course, one of the things is we need to understand we're not selling a condo on the beach to our investors where we're selling them a nice view and look at the pictures and how nice my presentation is done. At the end of the day, investors are looking to understand “How much money am I going to make? What are the returns going to be? How long is my money going to be in this investment? And what are you going to do to not lose my money?”

So when you are in the process of talking to investors, what we have realized is basically what you're talking about, is the underwriting. You need to explain the underwriting to your investors. If the investors feel that you don't understand the numbers well, then a confused mind or a mind in doubt will always say no. So you need to really understand your numbers. I say in multifamily, there's no way around underwriting because you needed to find the property, you need it to explain it to your investors when you are inviting them to be part of your project. But then when you actually buy the asset, you need the underwriting as your roadmap. It's what you're going to use to manage the asset. Now you've got to execute that plan.

So that's why I believe underwriting is such a valuable skill because at the end of the day, anyone who wants to get into this business, regardless if you're going to be an investor or if you want to be the one who wants to put these deals together as a general partner, you need to... I like to quote Jim Rohn, what he says, "You don't get paid for your time. You get paid for the value you bring to the marketplace." So I believe when you learn a new skill that's pretty valuable to the marketplace, like, "Hey, I found an opportunity to make money." And when you said about it's not about you but serving others, what you're doing is you're bringing an opportunity that you're going to share with other people. It's like, "Yes, we're going to make money alongside with you. It's not like I'm going to make money and you're not going to make, we're both going to make money. And what we do with that, we can go a long way with that."

Kim Lisa Taylor:

Yeah, and that is a key component. A lot of beginning syndicators just have this sense, it's dread of talking to potential investors because it feels awful to ask somebody for money, ask somebody for a favor, ask somebody for a loan. That's not what you're doing. You have to flip that switch in your head and realize that you're offering investment opportunities that your investors are interested in if you can educate them about it or may be interested in if you can educate them. So if you put on your teacher hat and say, "Look, I'm just going to teach you what I do. If it's for you, that's fantastic, love to have you along. If you can see how that's going to be of value to you, then let's do it. But if it doesn't seem like a good fit or you feel like it's too risky, that's okay. We respect that. We understand it.” But we all have our own risk tolerance.

And diversity is key. How many times have we seen the stock market fluctuate up and down and people can lose a substantial amount of their investments overnight, and then it takes a very long time for that to come back. Whereas here, even if the real estate value drops, we still have an asset that has value, but part of the risk, I think there's probably some people out there that are saying right now, "How could underwriting have prevented some of the people that seem to be getting in trouble right now?" What do you think about that?

Hitomi Yasuda:

What I would say to that is when Hans and I, whenever we look at deals, it's always constant. The fundamental thing is about evaluating risk, but we always have a fiduciary responsibility to the investors for any deal that we consider. We always talk about this, "What do you think though? What about our investors?" And it doesn't just stop with submitting the LOI and getting it under contract and actually winning the deal. It becomes even more important at the asset management stage because now we are running this apartment, storage unit, nursing facility or whatever, this asset, always with the investors in mind, always. We know that they're the ones that we have to answer to. So at the end of every month, we've got to get our monthly P&Ls all cleaned up and get ready to present to our investors what's happening, the good, the bad, the ugly. Share the wins, but also be very transparent with the challenges. Same thing with quarterly updates and things like that. And it's always with the investor in mind, always.

So as underwriters, for me, that's the guiding light that I always follow, is the decisions that we make, how is that going to ultimately impact the investors? Because everything about the deal, decisions that we make, maybe midway through we might refinance, or when the decision comes time to sell, things like that, all of these things are going to have a direct impact onto our investors. So it just circles backs to all of that

Kim Lisa Taylor:

You used a word that maybe some of our audiences are familiar with, and that's fiduciary responsibility. And what that really means is that you have a greater obligation to protect your investors' money than you would your own. So you always have to put their needs ahead of yours. Even if you are suffering, you are not making money, you're working for free, but they're making money, they're doing okay, or you're foregoing your income in order to make sure that they're getting what you offered them, what you promised them. That's a real thing. That does happen. You don't want to set yourself up for that situation, though. That's always a mistake, is to set yourself up in a situation where, "Oh, we're not going to take a dime until the investors get all their money back and all the returns that we promised them" because you could be doing this deal for five or seven years and spending 10 or 15 hours a week on it, and you don't have any income coming in.

So at some point, you're going to have to have income unless you're independently wealthy, then you're going to have to have income, and you're going to have to turn your attention to other deals, go back to your old job, get a new profession, something that's going to turn your attention away from managing their investment, which misaligns the interests of the investors and the syndicators. So you want to make sure your interests are always aligned. We set up the syndicates in a way that you will be able to get paid from operations, from both fees and from share of the profits. But sometimes, ideally, you don't want to go longer than a couple of years before you're able to start getting some of that profit-share income.

If you don't see that just because the property doesn't underwrite correctly and you see that that's five years out, not two years out, then that might be one of those red flags where you need to say, "This isn't going to work for us unless we can get it at a much lower price" or something that will make it work. Okay, Hans, what would you like to add to that?

Hans Christian Seelinger:

I believe what you do in underwriting is to assess those risks and to try to go on a scenario that is good enough to have the returns, but conservative enough. You have to be careful to not overestimate how much you can increase your rents. You have to be careful and not overestimate how fast the market is growing. So you also have to be conservative with your vacancy. Hitomi and I always say, you can't beat market vacancy. So if the market vacancy is 5%, you can't underwrite at 3% because you think you have a nice property. You always have to be conservative. If the market vacancy is 5%, underwrite it when you stabilize at a 6 of vacancy, so have some extra cushion. Or a 7.

Remember, when you are executing your plan, the first couple of years it’s going to be a little bit tumultuous to name it somehow. And things always take a little bit longer and cost a little bit more than normally we foresee when you have to do something with construction. So you have to have enough cushion in your underwriting. If your underwriting is so slim that if just a little piece of the plan does not work out and you go south, then consider not buying that property. So you need to have a certain cushion everywhere so if something goes wrong, at least you have some level of cushion to catch it. And I always like to say... It's better to under-promise and over-deliver it than do it the other way around. No investor's going to be sad because you gave them more money, but if you can't deliver what you promise, your investors are not going to be that happy with you.

Kim Lisa Taylor:

And always, always, always make sure they get their money back because that is the number one thing that investors want is their money back. And so when you're explaining syndication to them, it's critically important that you tell them how that's going to happen. Because that's the first question, they may not ask it, but that is their first, fundamental concern is “How do I get my money back?” And then, “How are you going to generate a return on that money and how do I get to participate in the cash flow and the equity on sale? How is that going to happen with the organization, the structure that you're proposing for me?” So again, we're back to education.

But I just want to summarize a couple of things that I've seen people doing. The people that got in trouble, this was … some of what we're seeing right now is an exact repeat of what happened in 2008, 2010, slightly different causes for why it's happening, but the end result is the same. And the way to ride it out, first of all, you have to understand that there are market cycles that the real estate market goes up and it comes down and then it goes up again, and it always goes higher, but it takes a while to climb back out, and then it comes down again, and then it goes up and it climbs higher.

So if you look at a 100-year cycle, which we have comparing real estate trends to stock market trends, you'll see that 100 years ago, property was worth a lot less than it is now. But in the meantime, there were a lot of dips and rises and it just kept going up. So it's like climbing a mountain. You're going to go down a little valley and you're going to go up a bigger hill and just keep getting to the top of the mountain. So realize that and realize that when the market dips, you don't want to be caught in a downturn with a high loan-to-value ratio so that if the market drops and the prices of everything drop 35% and you have an 80% loan (a loan of 80% loan-to-value) you're in trouble because if you come to the end of your loan maturity date — which a lot of people did short maturity dates and bridge loans, 1-year, 2-year, 3-year maturities — meaning that you have to pay off that balloon at the end of that time period. And there's only two ways to do it: sell or refinance, or recapitalize by bringing in more money. And that's what people are facing right now. It's like, "Okay, we want to refinance our property, but the loan-to-value ratios are lower than when we started and the interest rates are higher, which means our property values are depressed more than we thought they were going to be." So what they're seeing is that lenders saying, "I'll refinance, but you need to bring in another $1 million, $2 million."

And then we've also seen the situation where COVID slowed everything down, eviction moratoriums were in place. All these things that just like you said, caused everything to take longer and cost more. The supplies got more expensive. Staff or construction personnel were just not available, or even staff to man your project weren't available. The way to ride these out, low loan value ratios, long maturity dates, five to seven years, pay more for fixed-interest rates. It's always better. And back to Hitomi's point of sleeping at night, you want to sleep at night, don't be worrying about your mortgage resetting and all of a sudden becoming a payment that you can't pay and expect everything is going to take longer and cost more.

Because what happens is you don't get those repairs done in the time that you predicted because everything takes longer, it costs more, or you run out of money and all of a sudden you're stuck with a property that's only partially renovated. You haven't been able to raise the rents. Now you're just in a perfect storm. And we're seeing a lot of that. There's a lot of articles, I was reading some even this week coming out about what's happening with the commercial mortgage industry and how many... There's something like $3 trillion worth of deals that they're predicting are slightly in trouble, some of which can be fixed, some of which won't.

The people that kept the low loan-to-value ratios, you can ride it out. You can suspend your distributions to your investors while you're fixing all these problems, and you can explain to them what's happening and why you need to do that. But you need to make sure from the beginning that they understood that this could happen. And that's where we come in is helping explain those risks. I think everything you guys are saying is so right on.

Hitomi Yasuda:

I think one metric too that's a dangerous metric that can accidentally or on purpose manipulate the deal is the reversion cap rate.

Kim Lisa Taylor:

Tell us about that.

Hitomi Yasuda:

So cap rate tends to be an indication of market sentiment about the valuation of a property, and it rises and falls like sort of where interest rates are going, too. And so what we try to do is we really try to be conservative on the exit or reversion cap rate versus the cap rate, what we see when we're going into a deal. We tend to add 10 basis points, sometimes even 15 basis points to be really conservative for every year that we're holding it. So we're assuming that the cap rate that we're starting off at, and we do take a look at, what's the purchase cap rate versus what's going on the market. Because again, it's a function of NOI and price that impacts the cap rate.

But I've seen some aggressive underwriting where the going-in cap rate and then the reversion or exit cap rate, the reversion cap rate is actually lower than the going-in cap rate. So it makes the back-end valuation of the property really high, and therefore it makes the average annual return look fabulous. But in reality, you're going to have a really hard time trying to hit that number. So on paper, everything looks really good, but it'll be very, very scary, very challenging to try to hit that. So the way we do it is we will add 10 basis points at least for every year that we're holding it, and the deal has to work. And if it doesn't…

Kim Lisa Taylor:

In case somebody doesn't understand basis, that's like a 0.1. So if you're going in at a 5 cap, then you're assuming after year one it's 5.1, after year two, it's 5.2. Is that how that works?

Hitomi Yasuda:

Exactly, yeah.

Kim Lisa Taylor:

Maybe if you hold it long enough, you're now at 7, which means your property, your IRV formula is going to be skewed from when you bought it, and that's going to affect the sale price.

Hitomi Yasuda:

Yeah. And your intention is that throughout your hold, you're constantly increasing your NOI. NOI should be going up if you're following your business plan. But we don't want to assume or hope or predict, because again, we're very much data-driven. We don't make decisions based on emotion. It's all data-driven, but we do not want to bank on that the NOI is growing and that we hope that the valuation therefore is going to be like double or something crazy at the back end. So instead we have that cap rate go up to be safe.

Also, knowing that during that hold period, the property is also getting older every year that we're holding it too. So the property in itself is getting older and older despite the money that we invest in it to make it better, clean up deferred maintenance, and make improvements and updates and stuff like that. The building is getting older, pipes, everything. So things like that, that's how we also build in conservatism into our underwriting and not set ourselves up for failure by giving such an aggressive exit. We may not be able to hit that.

Kim Lisa Taylor:

What we're looking for when somebody brings a deal to us, we want to review the property package. After we've had an interview with our client to determine what they're doing, what we're going to write in the documents, we want to review their property information package that they're going to share with their investors so that we... First of all, we make sure it's consistent with what we agreed to write in the legal docs, but also we want to make sure that the complete information is there. And what we're always looking for, which is a direct derivative of your underwriting, is what is the sources and uses of funds? Where are you getting the money and how is it going to be spent to acquire the property? And how much of that is going to go to the management team?

You're entitled to an acquisition fee. You're entitled to be reimbursed for your expenses, including our legal fees, all your pre-closing expenses, all that stuff that the management team is required to put up to get the deal to the closing table. And you can get reimbursed for that if you've raised enough money. So that should be built into your uses of funds. The SEC actually wants that. They want that number, those numbers in your private placement memorandum. So we're looking for you to have it in your property package, and we're going to duplicate it in the private placement memorandum to comply with the SEC requirements.

Then second thing is you've got to be able to figure out year after year, what are we going to do? How many units are we going to be able to rehab? How many rents are we going to be able to increase? How much are we going to be able to increase it by? And are there opportunities to decrease the expenses along the way? Maybe consolidate things. So we're always looking for that year-by-year for at least five to seven years, however long you plan to hold that property. 

And then the third thing, and a lot of people miss this, is that proposed exit strategy. What is it? And this is where you've got to make those assumptions about those cap rates. We can't predict the future, but what can we realistically assume might be happening with the cap rate for this property at the time we go to sell? And then we can calculate, "Okay, so based on that, here's our proposed net operating income from our five-year projections, and here's our proposed cap rate, and then this is going to give us a proposed sale price."

So when you do that and you're making assumptions, you have to write down all the assumptions that you've made, and you need to share that with your investors and say, "Look, we can't predict the future, but we're using our best estimates of what might happen based on our past experience and our education in the real estate industry of where we might be with those numbers." So once you've got all that in place, now you can figure out sale price, proposed sale price. What is our loan balance going to be at that time? What are we going to have for cost of sale and how much is then left to be able to return capital to investors? And then also, how much is left then to share between the management team and the investors? Get them whole on any preferred returns that they might've been short on in any prior years, giving yourself a catch-up hopefully. We love to have manager catch-ups. Make sure that you catch up so you're whole as well and then having something left over to split.

That's really from our perspective, what we need to see. You're going to do a whole lot of number crunching and a whole lot of other data and information and putting that all together. We're just going to see those things as the end result in that property information package. But that's what we're looking for. And that's what your investors are looking for. The legal documents don't sell anything. You have to have a great solid property information package with that information condensed within it. That's where your investors make their buying decision. That's where they understand what you're doing, how it's going to work for them, and why they should do that. 

Krisha, would you like to add anything to this discussion? Krisha's got a really unique perspective on a lot of things, and we always love to get her input.

Krisha Young:

Yeah, so I'm coming at it from my coaching background and hearing, summarizing all of these things. What I'm hearing here is what makes a successful syndicator isn't just the underwriting. This is a massive part of it and a really, really, really important part of it, but there's a few other things in here that I'm hearing over and over again in this conversation and others is putting those investors first, being of service. We're doing this as a service to not just ourselves and our friends and families, but these investors and hopefully running successful businesses in terms of good-quality retirement homes and good-quality apartment buildings and things like that, too. We're putting that goodness out there.

Transparency and clear communication: This is a big thing that I hear over and over and over again. And this can be a stumbling block from people, too, because you don't want to get in trouble or admit when something's not gone well. But that is what really gets you in trouble, is when you don't talk about things. And you can really put out some fires and you need even get help from your investors if you are transparent and have that clear communication developed from the beginning. So getting over any of those blocks that you might have for that.

And I love that conversation about transferable skills. Yeah, dig into your toolbox. I'm really awesome at sales because I'm really awesome at coaching. So it's like the two don't seem to really match, but they do. And so what can you bring in from your past and even your personal life? And I loved that conversation around the immigrant spirit. It's just like that enthusiasm. That's also an entrepreneurial spirit, too. I think you've got to be a little entrepreneurial — or a lot entrepreneurial — in order to dive into these kinds of projects. That's what I'm hearing over and over and over and again. And the importance of having the good marketing and a great law firm.

Kim Lisa Taylor:

We have quite a few questions, and I know we want to get to those, but let's tell people about how they can get a copy of one of our books and then let's tell them how they can get hold of Hans and Hitomi and then we'll go to the Q&A.

Krisha Young:

Yeah. All right, everyone. So in case you aren't aware, we have two books on raising capital legally that Kim wrote. One is for beginners and one is for more advanced capital raisers. If you want us to mail you one for free, text the word SYNDICATE to our phone number: 844-796-3428. So that's the word syndicate, S-Y-N-D-I-C-A-T-E, to 844-796-3428. You can also check us out on our website syndicationattorneys.com. We've got tons of resources and can send you the book from there or schedule a call with anybody on our team if you've got some questions. 

And Hans, Hitomi, how can people reach out to you?

Hans Christian Seelinger:

So they can reach us via email. I think this is one way of getting to us, it's through the underwrite to win. Let me unblur my screen here so you can take a copy of that, of our email — info@uw2win — either Hitomi or Hans, right? That's one of the easiest way to get ahold of us.

Krisha Young:

Right. I put that in the chat. Hopefully everybody can see it and we'll have it in the show notes too.

Kim Lisa Taylor:

Yes, absolutely. All right, let's hop into some questions because I see there's a few and I think these are great questions. Thank you guys so much for participating because that's one of the things we love about this podcast is that we actually open it up to live Q&A from the audience, and we think that that helps round out what we're talking about because we may miss something that's really obvious that everybody needs to know and one of our audience members is going to point that out to us. So we love that.

Krisha Young:

Okay, so one of the questions here is, “How do underwriters get paid?” I guess if you're underwriting your own deal, it's in the deal.

Hitomi Yasuda:

That's what I was going to say. So generally, if you're an underwriter, you're obviously doing it, analyzing deals, because you want to get into your own deal. So from that perspective, you'll be part of the founding members GP team, general partnership team. And from that, we have something called an acquisition fee that the managers will allocate and get. Because it's a lot of work, not just underwriting the deal, but putting it all together. The financial, physical due diligence. Loan documents, earnest money deposit, there's a lot of different steps involved to actually getting over the finish line. So that's one way an underwriter can participate. It's about the value that you're bringing to the deal, what kind of skin in the game? It could be sweat equity.

But also the underwriter on the GP team, you could also participate by joining on the limited partner side too. Hans and I, we're both GP and LP on the same deal because we believe... This is the other indication of conservative underwriting and being a good deal: We like to eat our own cooking. If we're underwriting deals and we believe in the deal so much, why wouldn't we also invest alongside the limited partners, the LPs? Because we believe in the deal, so we have great skin in the game. 

Hans Christian Seelinger:

I wanted to add real quick to that, Hitomi, I think underwriting is one of the most profitable skillsets you can ever learn because by your ability to identify a property and by creating a business plan, you're going to be part owner of a multimillion-dollar business. So you'll be part owner just by putting in your sweat equity, even if you don't have the resources, because you could just do this. And that's so valuable to a team to have found a property, create a business plan, and present it so that it can be presented to investors and you can do it as well. That's very, very valuable. And just imagine that, by just doing that, you're going to get a percentage of a multimillion-dollar deal where you're going to get part of the cash flow, you're going to participate in the acquisition fee, you're going to be part of the asset management team, and you could also get a percentage of that asset management fee, and you are going to be creating equity on the exit when you sell.

Part of that is going to be for you as well because as probably you know, when you have a deal, you have a split — depends on how the teams put it together, but normally it's between 70% for the investors, 30% for the GP team, the team that's going to manage it. As an underwriter, you are part of that GP, so you get a piece of that 30%. And believe me, it's not small numbers. It could be pretty good numbers.

Kim Lisa Taylor:

Yes, absolutely. There's a lot of jobs involved in a syndicate, and I want to be able to share this slide because everybody just loves this slide when I show it. There's two slides, actually. One, what are the job descriptions for somebody in the management of a syndicate? You've got to raise capital, you've got to find the deal, you've got to do the underwriting. That's the analysis part. You've got to conduct the due diligence, which is partly the underwriting, but also the physical due diligence. You have to oversee the property manager, oversee the CPA. Someone has to be the liaison with us and oversee the legal documents that we're creating. You have to create investor presentations. There's all kinds of things.

Here's a little bit more detailed. This is a good slide to screenshot because when you co-GP on a deal, you are bringing skills ... Just like Hitomi said in the beginning, you're creating a new company. The people who have found the deal and are looking for the investment group to help fund it, they are putting together a company and they have these jobs that all have to be filled. And so this is where you look back into your past and figure out, “What skillsets do I have that could be valuable in conducting any of these particular jobs?” Because if you don't have any jobs to offer, then the company's not going to hire you. So you have to be able to do some of these things.

And in order to participate in some of the management earnings and fees, everyone in management has to have the job of raising money, and nobody gets separately compensated for that job. So they have to have some of these other jobs in order to be able to legally defend that they weren't just a capital raiser, which technically is illegal. If all you're doing is raising capital and you're getting a portion of the fees and you’re ever questioned by a regulator, there's a good chance that you're going to be in trouble because you don't have the right securities license to do that.

If you have these other jobs in management and no one is getting paid for the amount of money they're bringing to a deal, you're all getting paid for these other jobs, there's never a question that you were actively involved in making this deal profitable and you have a defensible position. “Yes, I got a share of the management earnings for doing those jobs.” That's critically important. I like those slides. Everybody loves it when I show those slides because it really does help you understand what you can do and what skillsets you need to be able to offer in order to be of value, not just raising capital.

Anything you guys would like to add to that? All of a sudden, everybody's muted…

Hitomi Yasuda:

Lost you, Hans.

Kim Lisa Taylor:

Yeah, Hans…

Hans Christian Seelinger:

My microphone was off.

Krisha Young:

There you go.

Kim Lisa Taylor:

You're back.

Hans Christian Seelinger:

Self-inflicted technical issue.

Krisha Young:

You're good. We can hear you now.

Hans Christian Seelinger:

Right. Yeah, no, it's perfectly said. There's many roles in this business, and the way I see this always is you have to see this business as a rowing-boat race where everybody's in the boat and everybody's holding a row. Sometimes I see people setting up teams like a relay race where I'm going to have this row that's going to start, one person is running and everybody else is waiting until they pass the baton. And I believe in this business, it's about team sports and the collaboration. Everybody will hold the row in the boat so the boat moves forward instead of just having one doing one activity and everybody else is waiting. You have to be good at a little bit of everything.

Kim Lisa Taylor:

Yeah, absolutely. And I just want to quick share one other slide, and then we've got to get to the rest of these questions. So we've got some really great ones, but I think this is also a great one to share.

Krisha Young:

I love these analogies. They're so good.

Kim Lisa Taylor:

Okay, there we go. So this slide is our really quick and dirty rule-of-thumb, how to split manager earnings. The people that find the deal, do the underwriting, conduct the due diligence, coordinate the loan, those people are entitled to 25%. They're usually the same people that are going to be overseeing the asset for the duration of the time you own it, for the five to seven years you're holding it, overseeing the property manager, contractors, all of that, working with the CPAs. And then you need people that are going to act as loan guarantors. So even on non-recourse loans, you need to have loan guarantors that will collectively have net worth equal or greater than the loan amount. And then we have to have people that are doing the investor relations and the capital raisers, but nobody should be in just one of these boxes, and especially not this lower right box.

So anybody that's in this lower right box should also have a piece of each of these other slices of this pie. So you could have a piece from each of these slices depending on your role in the syndicate. And the more you have, the more defensible your position is that you're not illegally raising capital as a third party, and that you actually truly are an actively involved member of the management team entitled to a share of the profits and the share of the fees. So I just like to share those things. But let's get back to our questions.

Krisha Young:

I don't think we need this, but one of the questions is, “Do we need a certificate or license to be able to underwrite?”

Kim Lisa Taylor:

Not to be able to underwrite, but if you're raising capital and you're not part of that GP team or part of that syndicate, then yes, you would have to have a securities license. But as far as underwriting, no, you just need to learn how to do it.

Krisha Young:

Right. So it's a skillset to develop and learn.

Kim Lisa Taylor:

Yeah.

Krisha Young:

Do you guys have a coaching program for this as well?

Kim Lisa Taylor:

Tell us about that.

Krisha Young:

Yeah.

Hitomi Yasuda:

So this was... It's our baby. This is something where I really am passionate about giving back and adding value. And it's something where around maybe for three years, before we launched this program, so many people were coming to me with their struggles. Because underwriting, when you're first learning is... I associated it with learning how to snowboard. It's very difficult to try to learn something just from videos or watching someone on stage doing something. Because it's like trying to learn how to snowboard or even drive a car. You can watch all these videos and everything, but very, very difficult to really figure it out. And so when you get help from someone and it's very hands-on and direct, then it all starts to make sense. And then you're actually driving the car, you're actually driving the snowboard, or in our case, you're driving your underwriting tool.

So I was approached about three years ago by many, many people, and I was doing it one-on-one Sunday afternoons, Thursday mornings, Monday evenings, because of all the different time zones and everything. And it just became really out of control and just really took a toll on my time. Hans and I. .. He also then started getting the same amount of requests and everything. So that's when we decided to band forces together, put our heads together, put our skillsets together so that we can actually add value and help way more people at the same time. And so it's really been a passion project for us to really, really add value, quality and really help the next generation because we really believe in collaboration. The more people that we can help to really get good at this, then there's more of us that together we can create partnerships and take deals down together. It's a skillset that really weaves all of us together because at the end of the day, we're all buying businesses and we all have that same vision of entrepreneurship. So that's how it came for us. It's a passion project. We really love it.

Kim Lisa Taylor:

That's amazing.

Hans Christian Seelinger:

And basically we focus in four pillars on our business, and I say the first one is how to find the right type of deals. Because that's very important. It's not good that you have 100 deals on your inbox. You need to be able to analyze them. You need to have quality deals. So first, we would focus on getting the right type of deals. Helping you select the market and analyzing all that. The second piece is, as I say, the X-ray and the blood work. It's analyzing numbers. We want to really go into the process of analyzing, but not just theoretically as we were saying, but we will put you to it. We want to do it with you so you can learn by doing.

Then the third pillar would be creating that business plan, which I believe is, at the end of the day, the heart of the whole business. It's seeing from, what I saw from the opportunity what is going to be my treatment. I always like to say it's like when you go to the doctor, I always like to make those analogies, some people look at this as a cookie-cutter method. So you can't go to the doctor and the doctor asks you nothing and say, "Put a cast on his left arm and give him a couple of Tylenols." I said, "But I have a pain on my leg." "Yep. It doesn't matter. It's going to work." It's not like that. You have to be able to analyze the numbers and come up with a treatment plan. That's the third pillar.

And I say one of the most important pillars as well is how do we present our deals to our sponsors, to the brokers and to the investors? Because you may have an amazing deal, but if you're not able to communicate that to the investors correctly, nobody's going to invest in your deal. You may have an amazing deal if you are not able to communicate it in a way that a sponsor understands your vision clearly — because you have to be able to explain it clearly — then the sponsor's going to lose you. He's not going to be interested. And the same thing with the broker. You have to let the broker know that you are a qualified buyer because it's not always the highest price.

Hitomi and I, we've been in this many times, I've been in both sides. I just exited and did full circle on one of my properties, and I did not select the highest bidder. In fact, I actually made the mistake of selecting the highest bidder, and that cost me three months of them trying to close and not being able to close. So it's not always the highest price. You need to come across as someone who has the assurity of closing because at the end of the day, the broker wants to make his commission and the seller, when he's selling, he wants to get rid of that property as fast as possible. So for them, it's more valuable to know you are able to close than you have the highest price. Does that make sense? That's in a nutshell what we teach.

Kim Lisa Taylor:

Yeah, that's amazing. I just want to … because people are maybe listening, some people are listening, they're not watching us on YouTube … so let's put out your email again. So for people to reach out to Hans and Hitomi, it's info@uw2win.com. So it's underwriting2win —  U-W, the number 2, Win, W-I-N, .com. So email them for sure if you want to learn more about their coaching and how they can guide you through this process. We're running a little bit over. Are you guys okay with going on a little bit or do you need to move on? 

Hans Christian Seelinger:

Okay.

Krisha Young:

I actually have a sales call right now. They're waiting for me.

Kim Lisa Taylor:

You go ahead, Krisha. We'll miss you, but thank you so much.

I do also want to mention to everybody that's on, if you're not already a client of our firm, we have a low cost pre-syndication agreement that you can get started with us. We include some strategy sessions, coaching with Krisha. If you have any mental impediments to getting to investors, she's a magician at getting you past those. Our legal team will help you strategize where you're at, what you should be doing next, what marketing materials you should be creating so that you can start presenting these things to investors.

We do also include some other perks along with that, an Investor Marketing Plan Template, Investor Relations Blueprint, and a discount equal to or greater than the amount that you spend off your first syndication. So reach out to Krisha if you want to know more about that program. You can contact her or Charlene, our other sales associate, at our website syndicationattorneys.com, you'll see a tab to schedule a call and just schedule a call with one of our staff. If you do have a legal question, you want to schedule a call with me, you can schedule a paid consult right there also.

So we'd love to have you. Our biggest benefit for our pre-syndication clients though and all of our clients is our weekly clients-only masterminds. We love, love, love them. We get anywhere from 15 to 30 people on the call. We're creating right now a whole community where our clients are going to be able to interact with each other about what their needs are and what they're looking for in team members for some of their GP team, and we're really excited to be able to create this. We should be rolling that out within a few weeks, but for right now, we're still doing the weekly masterminds. We're going to continue doing those, and then we'll have a place to house all those recordings so you can listen to other ones later on. Super-excited that you guys are here, but let's keep going through these questions.

So somebody, one of our anonymous attendees asks, “Does the value of the property automatically increase every year?” I think we're seeing some evidence that it does not, right now in the marketplace. You guys want to about that?

Hitomi Yasuda:

Yeah, I would say that question and the second one are combined. So remember at the end of the day, the property is actually a business. It's a business. So the valuation is based on the performance of the apartment. So you could have an apartment where all of a sudden the vacancy goes out of control and half the tenants just suddenly move out. So the revenue drastically drops or somehow something happens and the expenses go out of control, like you have an unexpected rate hike in your insurance and your insurance goes up by 50% and things like that. All these different factors at the end of the day, right? Things happen. To answer your question, no, it doesn't just automatically increase. It's tied to the performance of the property, the NOI performance. And then the second was, “How would I calculate its future value?”

Kim Lisa Taylor:

I want to add to that. It's not only that, it's also the market conditions, the interest rates and the availability of buyers. If it's hard for buyers to get qualified because people aren't lending like happened in the last recession, or the interest rates are higher, and that's depressing the property values because people have to look at, all right, of all this income that this property is going to generate, I have to be able to pay a mortgage. A few years ago, they were paying 2%, 3%, 4% mortgages. Now they're paying 8%, 9% mortgages. That's going to have a big impact on what they're able to pay for that property, and so it depresses the property value.

I have some clients that have been doing this for a very long time very successfully, and they just assume the property is worth exactly what they paid for it until they sell it, because they don't know what the market's going to be at the time they sell. And it could be depressed, it could be the same, it could be higher. We all hope to have it higher, but you've got to time your exit in the market cycle as well.

Hitomi Yasuda:

Which is why we're conservative on the exit cap rate as well.

Kim Lisa Taylor:

Exactly right. Exactly right. Okay. That's amazing. So how do you calculate the future value while you make those assumptions? The cap rate is going to be this. You make those conservative assumptions we talked about earlier. You might factor in that interest rates could still be high later on. And then how fast are you going to be able to increase the NOI? And back to Hans' point, everything's going to take longer and cost more than you expected. So don't assume that you're going to get everything done in six months and you're going to be at full value and you can sell the property right away because it doesn't happen that way.

You usually do your repairs when the first year and then you have two years of stabilized occupancy before you can even think about refi or get the maximum sale. And you may be able to sell sooner for less than maximum value, but then you've also got to look at what's going on in the market at that time. Is this the right time to sell? Do we need to hold longer? Should we... And if you're stuck in a bridge loan that's resetting or has a maturity date in that three-year time period, you are stuck. You just have to deal with what you have, which is why a lot of people are in trouble right now.

Okay, good. Good questions. Really great questions. 

“How do you split the ownership after refinance?” Mike asks, “Do you invert ownership and use that control?” I think what you're asking, Mike, is... what we suggest you do is a cap.... whether it's a refi or a sale, once the investors have gotten all their money back plus a specified — and I don't care if you call it IRR or AAR, pick your number, pick your metric — and at that point that they've hit a target return plus all their money back, then you can change the split. So you can cap it and then say, "Okay, once you get to 15 — investors get to 15 —  then we're going to change the split. It's no longer 70/30 now we're going to go to 50/50." Or if you make your target a little higher, maybe once they get to 18, it goes to 30/70.

So the split changes, the investor stay in. It's not ever a good idea to pay off your investors, keep the property, get the windfall, because what happens is you do ride out the market cycle. They hear that you sold the property for twice what it was worth when they got out, and then they don't like you anymore. They feel like you used their money to get some advantage over them and get a big windfall and they got cut out of it. So it's better to keep them in for a lower ratio. Just change that split. Flip the split if you need to. And just let them keep getting mailbox money. They'll be excited for your next deal, they'll be telling their friends. If you kick them out, then they're going to be sour about it. They don't like that.

Let's see. “How critical is market research,” Domingo asks, “when underwriting a multifamily property? What do you look for?”

Hans Christian Seelinger:

I believe market research is very critical because exactly what we were just talking about, you want to be in a market that from the beginning has good metrics. For example, job growth, population growth. You want to have enough tenants to pull from. You want to make sure how much product is going to be available in that market, whether they're building a lot of product that is going to be available during your hold time. That is of course, it's just the basic economics of offer and demand. So if there's a lot of offer and the demand is not growing, your price is going to drop on your rents. So yes, market analysis is very, very important. You need to know where you're buying. Because you can change a property, but you cannot change a neighborhood. You can make your property look better, but you cannot change a bad neighborhood because you just changed your property. So you need to really understand your market.

Hitomi Yasuda:

Because a lot of this also goes into your assumptions about market rent growth, like what's happening with the rents in that area, what's happening with the vacancy in that area, but that's market level. But also what we like to teach as well is to go a little bit deeper and also doing your asset research. A really important skill for an underwriter is to be able to move quickly, make decisions quickly so that you're not bogged down with 20 deals and spending three months, and then you just never get an offer submitted because you're spending too much time on something.

So also part of the market research and stuff like that is looking at your asset, Googling it, “crime, shooting, this, that.” You'd be amazed at how much stuff comes up about the asset, which would immediately help you decide like, "Hey, we don't want to pursue this thing because we just found that there were two shootings two months ago," or a stabbing, or some violent crime kind of stuff. Because like Hans was saying, you can put a lot of money into a property and make the property nice, but you cannot make that crime culture of the area go away overnight. There's just no way. So Yelp reviews, Google, things like that about the actual asset, too, which will give you an indication of the area, the immediate area.

Kim Lisa Taylor:

Just a couple more questions out of the chat. Gary asks, “What do you think of using third parties for underwriting who get paid a fee and have access to data that I don't.” What do you think about that?

Hitomi Yasuda:

I have really strong opinions about this.

Kim Lisa Taylor:

Okay.

Hitomi Yasuda:

So here's the thing. At the end of the day, everybody on the GP team, we are operators of the property and we have a fiduciary responsibility back to the investors. A lot of people try to cut corners and want to pay somebody to do all this stuff, but then at the end of the day, how are you going to understand and be able to critique if the underwriting that somebody else did is even accurate? And any of the teams that I've been involved in, every single member of the GP team has a strong understanding of the vision, the business plan, and why is that important.

Because as you get into asset management, when things start going sideways — and things always do start going sideways — as a collective team we could have very, very robust conversations with each other, challenge each other, make suggestions and say why this wouldn't work or why this might work or whatnot. But we can actually bounce ideas off of each other critically for the sake of the business because everybody understands the numbers, the ramifications of the decisions that we're making. We can pivot quickly.

If you're paying someone to think for you, you're going to be lost during those critical meetings, and you're not going to have any value to contribute as to what's going on, what solutions we should come up with because you've made someone else do the thinking for you. Now, on the other side to that, we definitely have paid a third-party consultant, as we like to call it, but only to basically verify what we've done. Is there anything that we've missed? Is there an area where we're being way too aggressive? So on and so forth. So we definitely did that on a very complex deal that we're actually working on right now because it's a monster deal. Many complexities. It's extraordinary. It's very, very different. So for us, for our own safekeeping and to protect our investors, we definitely invested in a third-party consultant. But again, not to think for us, but to just double-check that our assumptions were on target.

Kim Lisa Taylor:

I like that a lot because they're going to maybe be able to provide that market research that you don't have access to. You've run your numbers and you say, "Hey, but what can you tell me about the market and will that change what I've written or the assumptions that I've made?" They can definitely provide that input. We do have a trusted vendor on our website. So many of you may not know that. At syndicationattorneys.com, we have a whole entire free resources tab with so much stuff there. You can sign up for our books, you can read our FAQs, you can read over 80 different articles. You can access all of our previous podcasts, and you can also go see who we have interviewed in the past that we count as trusted vendors on our website. So Despard Analytics is a company that has built their business around underwriting, so if you want to hire them to maybe give you that second look, then they can help you with that.

But I do think Hitomi is right. You've got to understand the numbers yourself and where they came from and where every one of them was derived. Because if somebody asks you a question and you don't know the answer to that, they're not going to invest with you. But I would say the same thing for the legal documents. There are attorneys out there that will just give you the documents or maybe you can find some boilerplate documents or whatever you want, but you're not going to understand what you have. We force our clients, "You have to read the documents and you have to give us back comments. If you don't, we know you didn't read it, you don't understand it, how are you going to ever explain it to investors?"

So we want to make sure that you understand it and we're available. So we give our clients continuing access to us after their documents are done. So if an investor asks you a question and you say, "I don't know exactly where that is in the documents, but let me get back to you on that. I'm going to do some research into the documents and find the answer for you," you can call us and we'll point you to that answer and we'll show you where you can see it. And not only so you can read it, you can tell them, but you can point them to it, "Oh, the answer to your question is here in the operating agreement in this section; please read that section."

And then you don't ever want to give legal advice. You don't ever want to give accounting advice, and we'll tell you what the questions that they're asking are things that they need to ask of their own advisors, especially accounting. You can say, "Here's the accounting provisions in our documents that you should discuss with your CPA to make sure that this works for you." But you are not going to be giving them advice about whether this is a good investment for them or whether or not it's going to work for them tax-wise. They need to investigate that on their own.

So same thing. You've got to understand it so that you can explain it. So the danger in having a third party do it all for you is that you never get that understanding. So if you are working with a third party, make sure that you are walking through those documents with them to make sure you have a very deep understanding so you can explain it to your investors.

Hitomi Yasuda:

But also, they're gone post-takeover.

Kim Lisa Taylor:

Sure.

Hitomi Yasuda:

You own the business plan. You now need to be able to operate to it and be able to understand critical decisions that you're making as you're pivoting, going through rough waters and stuff. That's why on any team that I'm a part of, every member of the GP team is really on board with what is our vision as a team, as a united front. And so we can have these robust conversations with each other if we have to pivot to keep going straight in the direction we need to go, right?

Kim Lisa Taylor:

Right. Yeah, absolutely. All right, so we have one more question and I just want to tell everybody the reason that we don't usually go long, we usually stop right at the top of the hour, but we had a really great audience today and we had a lot of people. And so a lot of people are very interested in what you guys are talking about, so I wanted to give them all a chance to ask their questions. And so we understand if some of you had to leave, but you can always listen to this later or the end of it later on our podcast channel or on YouTube. So Shirley asks, "You're showing 25% for capital raisers and investor relations, but said no one gets paid separately for that. Please dive deeper."

So what I was saying is that this is what we allocate for percentages that are divvied up between the people that provide these services, but nobody should be in that bottom right quadrant, and that's the only place they are. They should have other jobs. So that's why I showed you the list of the other jobs. So look at your background, look at your experience, what other jobs can you provide? Can you participate in the underwriting? Can you go out to the site and help walk the units? Can you be the person that's talking to brokers? Can you be the person that is talking to investors and trying to help them process their investment into your deal?

Maybe you're the person that's helping to manage the investor management platform, because a lot of these do-it-yourself investor management platforms like Cash Flow Portal, InvestNext … we have clients that love them. There's some other ones out there as well: AppFolio, Juniper Square. We have clients using all of these different programs, but someone has to put the data in. So every time you create some information that you want to share with your investors, you have to post it. So someone has to be responsible for maintaining that, keeping up to date. If investors are asking questions, who's responding to them. Someone has to answer the phone. Someone has to be available to take investor calls.

Again, this is a company that has to have a receptionist, that has to have somebody who's in charge. It has to have people who are doing the work. You've got to divvy up all these different jobs, and you're going to hire people with different skillsets to fill all these different jobs. That is a well-rounded management team. But I would caution you, when you're doing that, this is no more than a five-person job because those jobs that we showed you, or that I showed you on those slides, if you have more than five people, there are not enough jobs to go around to divvy up. People walking all over each other trying to do the same job, and everybody's dissatisfied because the money is spread too thin. And what ultimately happens is two or three people end up doing 90% of the work, and the other people are along for the ride, and they didn't really participate.

So one of the things we suggest, have an operating agreement that spells out and attaches the job description for each member of the management team, delegating those responsibilities. That way, if they don't do it, you have a way to ask them not to be a participant, to move on without them. Because if they can't produce, they didn't raise any capital, they're not available to do those other jobs or they're just not doing them, then you don't have to keep sharing all this management fees with them if you've identified that as their job and they're not doing it. But if you haven't identified it and you're just granting interest based on what you think somebody's going to do, and then they don't do it and you don't have it in writing, it's harder to get rid of them. So I think we need to wrap up for the day. Any last words that you all would like to share with the group?

Hitomi Yasuda:

We just love this industry because it's really a team sport. It's just made some amazing relationships and some... Wow, it's been life-changing. It really has. You grow as a person, that's the great thing about this. It's the journey that we've all been on, it's the person that we're becoming. And also too, we're not slumlords. So we're really proud about the different projects that we're involved in that we're providing safe and affordable housing for our residents too. So it's a win-win situation. We're actually a social impact back to the communities in which our assets have a presence.

Kim Lisa Taylor:

That's phenomenal. Thank you so much, Hans, Hitomi, this has been amazing. I think our audience has gotten a lot out of it. I think you guys will get some people reaching out to you. So keep looking for those. If you want to reach out to Krisha directly, you can, her email is krisha, K-R-I-S-H-A @syndicationattorneys.com, and she's happy to talk to you about our pre-syndication agreement. Or if you have a deal and you need us to give you a cost estimate or quote or a fee agreement, or if you want to know more about our masterminds, please do reach out to Krisha and she's going to be able to help you with that. So thanks so much for coming and staying long today, everybody. We really appreciate it.

Hans Christian Seelinger:

Thank you.

Kim Lisa Taylor:

And we love your participation, so keep coming back. All right.

Hans Christian Seelinger:

Thank you, Kim. Thank you for everything.

Hitomi Yasuda:

Thank you. 

Kim Lisa Taylor:

Bye-bye.