How should you fundraise? What are the best practices? Ben Kogut, partner at HJH Investments will share his extensive experience with fundraising for syndications. Ben focuses on Investor Relations and fundraising, and has been in commercial real estate for over 15 years.
Tell us a little bit about you.
I have been in commercial real estate since 2005, I started as a real estate broker and then transitioned into investing and developing. Now I am primarily focused on raising capital for commercial real estate syndications, with a firm that I’m a partner in called HJH investments, I am the Director of Investor Relations and all the capital raising responsibilities fall on my shoulders.
Why don’t you walk us through your first syndication raise. Can you tell us what did you do? How long did it take for you to raise the funds? What were the results? Lessons learned?
I’d say first, it starts with the deal, making sure that the deal itself is solid. And for me, a good deal looks like predictable cash flow. And generally speaking, that means that we have a high credit tenant with a long term lease, or multiple long term leases, something to that extent. And so making sure that all the numbers, the debt, that we structure our deals where we have a high net worth individual sign on the debt, and that the assets are in an area that we think are going to appreciate.
So to answer your question, that process started for me on my first deal with my relationships. At the end of the day, that’s what this business is about, in my opinion. Is people that I’ve known throughout my involvement in real estate for the past 15 plus years, plus people that I know throughout my involvement in the community, I’m pretty involved in the Jewish community, so people that I’ve known through that, I’m involved in the fitness community, I do a lot of sports. I basically just started there by talking to people, Hey, here’s the deal. Here’s what I like about the deal. Here’s what I don’t like about the deal. And here’s what you may expect by potentially investing in a deal like this.
At the beginning, I would say it was way more difficult than I expected. Mostly they would say, Ben, we like you, we’d like to steal but why don’t you go out and get a little bit more track record under your belt. And once you got that going then let me know, chicken in the egg situation for sure. And then at the end of the day, it did take a lot a lot longer than I expected. It’s been some years now. Right now it’s taken me sometimes one week to raise all the money for a deal but usually I budget three to four weeks to get a deal done. Back then it took me months.
But the best advice I could say if anybody’s thinking, Okay, I want to raise money or I’m thinking about one day raising money. Then now is the time to start telling people within your sphere of influence. The people that already know that you’re a smart, capable individual, and that you’re working on a deal, or you have a deal, Hey, would you be somebody that would be interested in investing with me once I get a deal, and I think a deal will look like this, whatever that is. If you’re in triple net properties the way I am, or if you’re in multifamily, or all the other different asset classes, which there are many.
That brings me to my next point, I would highly recommend that, if you’re at the beginning part of your journey, that you focus, that you pick one niche, and learn as much as you can about that niche, learn who the players are, learn where the best areas are, so on and so forth. And just focus in on that. One book that has been a big influence on me and my company is a book called The One Thing by Gary Keller, who started Keller Williams. Long story short, the people that focus are the ones that are going to really win biggest at the end of the day.
That is really good advice. It’s so easy, especially nowadays with the internet and 50 open tabs on your computer, to get distracted by the next shiny object. But focusing is so important.
Yes, I’m not gonna say that I don’t get distracted. But from a business perspective, once I gave up development, for one, and number two, I basically gave up 80% of my brokerage business to focus 20% of brokerage and 80% of raising capital. And, honestly, it’s been the best decision I’ve ever made in my life.
Now that you have quite a bit of experience, and that you’re raising all of your funds in less than a month, what are some of the best practices for fundraising for a syndication?
1. Putting together a clear and concise investment deck, to make sure that people understand what it is that that we’re trying to accomplish.
2. This is a new addition to my practice, I’ve been putting together a short video where I just stand in front of the property, and I talk about it. What are we seeing here. Some people really care about what the property looks like. Some people could care less. They don’t care where it is. They want to know what are the leases, who are the tenants, what are the terms? What kind of debt do we have? If I am going to put this much money in, how much am I going to get out and when. I’m trying to provide that type of data to a broad range of people.
3. We’ve been building up a database of accredited investors, so communicating with them, primarily through email. We just transferred our database over to a software company called HubSpot, it is our CRM and email marketing. We are at the precipice of working with a third party company who specializes in optimizing HubSpot to be able to create new lead magnets and other ways to attract people into our database. Right now we have upwards of 180, or close to 200 existing investors amongst our portfolio, that’s always the best place to start, we give them a heads up. So any new deal that we put out, and we put out a new deal, if it’s not every month, it’s every other month, with COVID things got a little bit delayed. But right now we’re on track to do about a deal month. And so we like to give preferential treatment to our existing investors. Let them have a head start, they will see the email and the data first. That unlocks the first wave of conversations with our investors who are calling me to ask specific questions about that particular deal. And then once we’ve shaken through that list of people, usually we’ll have investors that just jump right in. And we have other investors really like to get into the nitty gritty. And then some people will just be a quick No, which is totally fine.
4. Another piece of advice I could give people, that I struggled with at the beginning, but is really good advice that someone gave to me is to be indifferent. To be indifferent to whether or not somebody invests in that deal or on you. Completely indifferent. I really do not care if you invest in this deal or not. Mentally, it really set me free, it really takes the pressure off. I don’t want anybody feel pressured to come into a deal. I want people to take their time and make the best decision for them, their family, and their lives. And so that requires that I be indifferent. And it’s tough, especially when you get a second deal, to be like, Oh, man, this person is going to drop X number of dollars as an investor into my deal. I’m so excited, this is going to kick it off. But the best way to do it is just be completely indifferent.
I think that’s really good advice. And it’s probably the first time someone says that here. So you mentioned that you have basically one deal every month, is that how often you reach out to your investors? Or do you have a more often cadence to reach out to them?
Historically speaking, our investors would hear from us every 15th of every single month. They will get an email, basically saying, You’re about to get a distribution. We make distributions every month. So that’s an automated way that they hear from us. Number two, they get another email quarterly. So at the end of October on the 25th, is the end of the third quarter, where they will get a brief update on the property, We got a new tenant, we lost a tenant, we had somebody hit a pole in the parking lot, we had a window broken, whatever it is. Our asset manager will draft a summary explaining to them, Hey, this is what’s going on with that property. Most of the time, the email is about a paragraph long. And it’s basically saying that everything’s on track. Everything’s about the same. That’s generally what the communications are. That’s on deals with investors that we already have in a deal.
For new investors we’re trying to educate, which is what I actually think of my job as. I’m not here to raise capital, which is a weird thing to think about. My job is to educate people about the benefits of investing in commercial real estate syndications, about that particular deal that we intend on acquiring, just educating. And then on a side note, just building relationships, just being myself, having fun, taking care of people, and enjoying life. So one of the reasons why we are using HubSpot is that we do want to do more communication. We are intending on sending out a weekly email at this point. And I think in the next three months we’re going to actually have that set up. But so far, we’ve built up a portfolio of $260 million dollars of assets under management without having those weekly emails that I know a lot of our competitors love to blast out, which is good, as long as it’s educating. Our goal is to educate, and coupled with that, I think I want to start my own podcast as well, to be able to share the wisdom that I’ve learned along the way and try to interview people and incorporate that into the weekly or bi weekly newsletter that we are going to start growing our email database with. But right now, the alligator closest to the boat is just constantly raising capital for the deal that’s right in front of me, it’s a balance between working in the business and working on the business.
What kinds of questions do you get from both potential investors before the deal closes? And also investors after the deal has been going on for a while?
The questions are generally first and foremost about the tenants. At least that’s how I would direct them. Who are the tenants? How are they doing during COVID? What is the trend in that business, or industry, or property type? What’s the trend in that area? I think it all starts with that. There’s a motto that a mentor of mine taught me. I don’t know if anyone’s ever mentioned this on your podcast, but it’s our RTFL. It means read the freaking lease. That’s what drives the cashflow on these deals. So that’s what it all starts with, the lease. And once you have a better understanding about that, that’ll trickle down into a spreadsheet and the cash flows and all that good stuff. And then from there, we have a long checklist of due diligence items that we’re going to look at to make sure that everything is what it is, and that we are, in fact, buying a property that we believe will be will be stable.
And that gets into the next conversation, which people want to know, If I put in X number of dollars, how much money am I going to get out, and when. And so that one for us is super simple. We typically historically have structured deals where we pay out an 8% preferred return, and we pay it out every month. Because we’re buying deals at a 10 cap, we leverage it up with normal market rate, it pushes it to 11 to 14% cash on cash return. We receive the rents on the first of the month, we distribute the 8% out on the 15th. And then every quarter, assuming that that additional cash flow hit its pro forma, we’re going to have an additional bonus distribution to the tune of upwards of two to 4% on top of that. So that’s pretty simple, your $100,000 dollar investment is going to get an 8% pref, at $8,000 a year, you divide 12, that’s going to be $667 that we’re going to ACH your account on the 15th of every month.
Very clean and simple. So after the deal has closed for several months, let’s say a year or two, in, what kinds of questions do you get from these investors? If any?
Most people are pretty happy with their monthly returns and quarterly return bonuses on top of that, after that it’s not a whole lot. Unless we hit an unexpected bump in the road, which definitely happens sometimes. For most people, this is a passive investment for them. And they don’t really have to do anything at all, we handle all the leasing, all the management reporting. So the questions I get are, Where is the next deal?
That’s a great question to get.
I’m constantly sharing with people about what we have in our pipeline, what I see come in, and where we think the trends are, and so on, and so forth.
Let’s say we have a beginner syndicator that will do their first deal, how do you recommend them structuring their offer to tie into those months of fundraising, because that’s going to frustrate the seller if you keep dealing the close date.
It really just depends on what kind of terms they’re talking about. I wouldn’t necessarily go to a hard money lender, but maybe a high net worth individual. You go to them and say, Listen, this is a great deal. And you tell them why it’s a great deal. But be indifferent. Remember that. Share with them about what you’re trying to accomplish. And you’re going to go out to your network, and you’re going to share with everybody about this deal.
We have a motto in our company that if you find the deal, the money will find you. So if it really is a deal, you’ll be able to find that money. If it’s not a deal, or if you really can’t find the money, then it’s not a deal, or give me a call, we can talk about it. And I will keep it confidential. And I’ll give you some feedback. I do that regularly. Just because I’m in that role where I’m constantly raising capital. People are bringing deals to me all the time, saying, Hey, can you help me raise money? Or can you just give me a little bit of feedback? That’s something I’d be willing to do for about anybody, with no expectations whatsoever, just to help people out. But, back to the hard money lender topic. If you really like think it’s a great deal, it is possible to close on the deal with some short term, higher interest money if you need it. And then you can close on the deal, you will have title to it, and then continue raising capital after the fact to subscribe people into the deal and basically pay off that short money lender to get them out of the deal.
Is there anything else that you think is important for our listeners to know?
At the end of the day, just start with your relationships, people that you went to middle school, high school, college, or whatever, your friends of friends. Just just share with people about what you’re doing. Be somebody of high integrity, and have some fun along the way.