What questions should you ask operators who will be managing an investment? Whether you're a syndicator or a passive investor, it's important to know what questions to ask in order to vet them properly. Camilla Jeffs shares her knowledge, she is a Principal at Steady Stream Investments with over 20 years of experience in multi family and assisted living.
Tell us a little bit about you.
I've been investing in real estate for about 20 years. I decided early on that I was going to figure out investing, I became a student of money, trying to understand it, figure out how it works and now teach it to other people. Along that journey I did a lot of investing in single family for about 15 years. I then pivoted into commercial, multifamily and assisted living. I love being a commercial investor now, it's much better than single family.
I then launched Studies Through Investments to teach people how to become investors passively and join group investments to increase their level of wealth. I also recently launched my own podcast called The Quiet Wealth Podcast which I'm excited about, where I will be teaching wealth principles to families.
As a syndicator, how do you find good operators for your deals?
It is crucial to find a good operator, and by operator we simply mean someone who knows what they are doing and can run the project well. When I pivoted into large multifamily, it became more of a business rather than the single family. The single family was very simple and easy to understand, but now you jump into large multifamily and assisted living, and these are businesses that have to be run like a full on business. It can't just be ran like a mom and pop business, it has to be professional, you have people on your team who know what they are doing, who know how to read financial statements, who know how to get bids, just basically manage the asset that you have purchased. There are many good ones out there, but there are bad ones out there too.
One of the keys is finding someone who is experienced. You want someone that has at least four or five years of experience. And by experience, I don't mean how long they have been in business, but what kind of experience have they had? Think about the quality of experience, for example, a woman I know started her syndication journey as an operator in the last two years. She has already been through a fire in her apartment, squatters, all sorts of things. She is one of the best operators I have ever seen because she's there at the property, getting into the details, she's really working hard to make sure that asset is running well. Whereas other people that might be more "experienced", they may have moved away from actually managing the asset and hired a team. Sometimes the team doesn't quite do it as well, so you get into problems. The more removed you get from the asset can make it problematic.
I like those who are working hard in their business, so finding them is tricky. The way you find them is by networking and asking around, it's not like you can pull up a Google review. But joining investment groups, looking up the person's details, listening to the person's four or five different podcast episodes, and you can really get a feel for their approach to how they run their projects.
How do you go about vetting them for the first time that you're working with them?
I have a specific list of questions that I ask. For example, I ask about their track record and their experience, and almost all of them will tell you the highs, the great things that they have done, which is good, you need to know that they can achieve greatness. If they can't achieve greatness, you don't want to invest with them. Then I ask, "tell me about a failure that you had, or a big challenge that you experienced in real estate". If they say, "Oh, I haven't really had any big failures", you have to run the other way because there is a big failure coming. It happens every time in real estate, real estate can be unpredictable, like I said, my friend went through a fire at her apartment units, you don't know when things like that will happen. What is important is not whether they have faced challenges, but how they approached those challenges. Have they tackled them head on? Or did they just hide their head in the sand? And are they honest about it? Are they honest that they actually lost money and that taught them they need to do X, Y, and Z differently? And now we do XYZ different to really hedge against losing any money in the future. That's what I want to know. I want to know that you've experienced some hard knocks, and that you've learned from them, so that now my money is safer with you than it was before.
What are some of the biggest complaints you hear the most from passive investors?
The number one thing is lack of communication. As a syndicator, if you tell your investors that you will be sending out a monthly report, send out the monthly report. Don’t resist it, don’t be late on it, send out your report. If myself, as a passive investor, don’t get those reports I’m scratching my head wondering if something wrong happened. The brain jumps to conclusions, and now I might think my money is at risk, and I start panicking. You will then get calls and emails asking what is going on, so send out the updates.
Number two, make sure that the updates are accurate. Make sure that all the links are working or and that you don’t have any misspellings. If there are any of these, it’s not very professional. I’ve also heard from passive investors that they get frustrated with the operator not following through with what they have said they would do. One of those is communication, but the other might be distribution. For example, the operator may get into a deal and they say “We’re going to start distributions in February”. Well, February comes and goes, and there is nothing in bank account. Again, I’m jumping to conclusions, what’s wrong? I haven’t heard anything from the operator about why it’s not in my bank account. Then in March, they say “Oh, sorry, it looks like we can’t do a distribution because of X, Y and Z”. Well, now I’m mad, because you didn’t tell me beforehand. As a passive investor, we can handle bad news, it just has to come beforehand. We just need a heads up and we can handle it if, say, there was a fire. If the fire was in January, and you could alert your investors right away in January that there is a risk we won’t be able to do distributions, then we can handle it. But if you are just going hide it and not tell us, that’s not good.
What are the pros and cons of investing in the assisted living asset class?
Assisted living is an asset class that’s within the senior housing realm. There are three different levels of senior housing, starting with the 55 plus communities where there maybe a clubhouse, people around to help if needed, there also might be special services and amenities for seniors who are living in those communities, but they don’t necessarily need extra care.
The next level is assisted living which is the in between level where they need care, medication management, and they might need help with bathing and clothing, feeding or making meals themselves. There are different levels of what assistance they need.
Finally, there’s the skilled nursing facilities. Skilled nursing facilities are where people go at the very end of their life, where they need very extensive medical care, 24/7. We like the middle one, the assisted living, and our team has decided that we are going to build boutique assisted living communities. By boutique we mean that we don’t like the big, huge hospital concept where you build a giant building that has 100 rooms in it, we prefer to have bigger homes.
If you think about your Grandma’s place, Grandma doesn’t want to leave her house, she loves her home, she loves being at home, and she has many memories there. It is a really hard transition to leave your home and go into a facility. If you are going from your home to another home that is just bigger and has more people in it, it's a much easier transition than going into a giant medical facility. That is in very high demand right now.
If you think about the baby boomers they are in their mid 50s and mid 70s now. They represent 21% of the population, a huge portion of the population. Seven out of ten of them are going to require assisted living care at some point. In the next 10 to 20 years, that number of people over 85 will grow 111%. The average age that people go into assisted living is 80, and there is a forecast that we will need 1 million more units by 2040. In the next 18 years, a million more units need to be built to care for all these baby boomers who are going to need this help. That's why I'm super excited about assisted living, especially right now. If we get in right now and build them right now, we are going to be ready to sell at the prime demand base.
Are you picking primary markets? What other things do you look at?
We do lots of research into the market. There are a couple of things to take into account in primary markets. You need to know how many people of that age are in the market, there needs to be a healthy population of elderly people that are in their 80's, or will be turning 80, 85. The other thing to keep in mind is the families that are placing them will want to be close by, they don't want grandma or their mom to be a plane ride away. We like to build these facilities in major metropolitan areas so that it's not so hard for people to visit their mother or father at the assisted living facility. Something we really take into account is where do the families that will be coming to visit live.
I like to be transparent and open about the cons too, and one of the cons is, it will be a little bit more risky because it's not just a real estate investment, you are investing into both the real estate, and a healthcare business. You have to have both those components, you can't simply go build the real estate, and it will suddenly be worth a bunch of money without the health care component. That is something important to keep in mind, you need to evaluate both the real estate and whoever is running the healthcare business, and make sure that with the healthcare business they know what they are doing, which makes it a little bit more risky.
One of the things that we do is, more risk equals more reward. We will give better returns in our assisted living to passive investors than we do for multifamily or something that's more stable or conservative, just to reward them. Another con is new construction. As a passive investor, if you are looking for cash flow, this is not the right place for you to invest. You need to invest in something existing if you want cash flow right away.
But if you are okay waiting for the cash and letting your money grow, then you can invest into a new construction type project, which is what these are because you have no cash flow for the first two or three years, depending on how long it takes to lease up. But then cash flow comes in year four or five, selling in year five and you will make two to three times your money.