Are funds more beneficial than syndications for the investors? Are they better for the sponsors? How to approach investors when you have a deal? How to find a great partner in the industry? Brian Spear, Principal at Sunrise Capital shares his experience.
Why do you recommend people creating a fund instead of syndications to be begin with?
I wouldn’t say that, with absolute assurance, everyone should always create a fund, but I do believe that funds are better structure for both parties involved. I’ll walk through why that’s the case. Selfishly from the general partner side, it ‘s more flexibility of capital, it affords you the opportunity to be able to move at a moment’s notice. If every time that we stumbled upon a given transaction that we wanted to acquire, we had to roll out a brand new syndication. Then we would miss some deals, some opportunities in a hot market such as this, when you have to compete against other people. The brokers want to know where your equity derives. If you don’t have the ability to say, “I’ve eight figures sitting in the bank right now and I can close on this next week if we really need it to”, then you’re going to be at a little bit of a disadvantage, especially in this crazy environment where there’s so much capital chasing deals. The fund affords you to have that capital ready when those opportunities arise so that you can act and move faster, that expediency helps tremendously.
I would also convey that funds will afford you to provide outsized IRRs as well. Depending upon the scale of your respective fund, you may be able to garner some lines of credit, which would afford you to be selective about when you bring capital in and leveraging that provides your investors with a higher internal rate of return. These are some of the things that you can do at a higher scale inside of the fund structure. In addition, you get diversification across the various different assets, as opposed to your investment return be a function of one individual property. The old adage goes, one data point does not a trend line make. And if I did 10 deals, I can guarantee you that over the course of 100 deals, I would revert closer to the mean than if I did 10 deals or if I just did one deal on that one transaction. It’s true that one investor might hit a grand slam, it might be an outsized, unbelievably phenomenal rate of return. But on the flip side, for every time that occurs, there’s also that one that does not meet or exceed the expectations, it’s the one that swings, maybe it’s a pop out. It’s very difficult to know in advance, which one of those is going to be the one that does not ultimately hit expectations.
For that reason, implementing the funds structure ensures that you’re reverting closer to the mean of the investor projections and what we feel will occur for that investor over the term of the holding period. I would also say from the limited partners perspective, you just get more stability and assurance of outcome. Also, one of the most overlooked aspects of this, for those investors out there who seem to prefer the individual deal specific syndications, when you decide to move forward in a fund structure, you’re also forcing the general partner to diversify their promote over the course of the entirety of the fund, as opposed to the individual deal specific syndication. Let’s say we did 10 deals inside of the fund, but we had chosen to do the 10 individual deals specific syndication, nine of them go very well, they’re all grasslands, then one of the deals is a complete and utter failure. We barely get the money back, or we lose some. Along the way, there’s a capital call, some of those investors have done exceptionally well, but some of them have done poorly, they’ve underperformed.
On the other hand the sponsor is making an exorbitant amount of money on one to nine, and on the 10th deal, where maybe he loses all of that money, he will still make out exceptionally well. However, with a fund structure, you are forcing the sponsor to diversify their earnings, their rate of return over the entirety of the business. If nine of those deals did well, and then on the 10th deal, they ran it into the ground and lost all the money, the sponsor doesn’t make any money, because the benefit of the other nine properties is making up for the deficit of the 10th asset. And in that manner, you are getting more assurance that the sponsor is working on your behalf through every step of the journey, that’s far overlooked and it’s not discussed enough. I would say that people are often overlooking that, because they think that they have the ability to select the best deal that is coming through the pipe. While that’s the case, you’ll able to select the most appropriate cap rates, IRR, leverage micro markets, etc. But the truth is, you don’t know when the tornado is going to hit that property, nobody does. It’s impossible to know that in advance of acquiring those deals. Those are some of the benefits and drawbacks associated with it, the fund structure is superior for both parties involved.
I’m assuming that you recommend people doing a syndication first, because it’s probably very hard to raise for a fund first?
Yes, you want to use your own capital to go out and prove the business model. To have a simple, scalable, and repeatable one prior to rolling out a fund. It would be imprudent to just launch a fund from scratch, you need to go out and prove yourself first. There’s nothing wrong with that. But I do think that ultimately, the fund structure provides more benefits for everybody involved. I would pose to you that’s why the likes of Blackstone, Carlyle Group, Apollo, all the guys on Wall Street, don’t run out and do individual deals specific syndications. They do fund structures without fail for all those reasons.
How do you approach an investor when you have a deal?
The question of how you approach investors when you have a deal begins well in advance of when you have a deal. You’re never going to reach out to somebody, and hard sell them on wiring you $100,000 one day after you have a deal, come under contract, and all of a sudden need to scramble to get that capital. What you need to do is develop that relationship with the prospect or the potential investor many days, weeks, months or years in advance of that opportunity arising. If you intend to scale actively in this business, you’re going to need to build a substantive Rolodex. And you’re going to need to begin providing that Rolodex with valuable content that provides them with insight and knowledge that you are an authority in your industry and are worthy of their time, energy, effort, and ultimately capital, to partner with you on deals as you progress.
That’s why we host “The Mobile Home Park Investing” podcast, it provides people free content to understand who we are and what we do, we literally take our business model inside out and explain to individuals how we go out to find off market transactions, turn them around and go full cycle on the deals, ultimately generating great returns, etc. This provides people with business plan that transparency, and knowledge that if they want to go down the rabbit hole, they can literally listen to hundreds of hours of content that we’ve put out there. By the time they reach out to me and want to have those respective conversations after I send that email, they’ve already listened to 10s of hours of content that we’ve already put out and understand exactly what we’re going to do in advance. And now it’s rinsing and repeating the business model, as opposed to me trying to explain from a high level, what a mobile home park is and how we’re ultimately going to try to implement that model. So when we approach investors, it begins further upstream than when we have that deal under contract and we ultimately need that capital. Begin that process now, if you have not done so well in advance of that opportunity arising.
What steps do you take to find the right partner for all of these deals that you’re doing?
Find somebody who has complementary skill sets, in order to make a partnership successful. They need to bring skill sets to the table that are complementary, that make the two parties more valuable than the individuals themselves. When you’re looking for right partners, you must spend some time first thinking about yourself, what do you bring to the table, what do you do better than anybody else in the marketplace. I always say that there are three things that are necessary to make any deal happen, you need to find the money, the deal, and you need to operate it. If you try to approach somebody and you’re seeking a partner, you need to first determine where you want to spend your time, energy and effort. What do you like doing, what are you good at, if you’re very good at attracting capital, the investor relations side of the business, then you will need somebody to either go help you acquire those respective assets, and/or manage them over time. From my perspective, I’m going to select which of those skill sets I’m going to become proficient in. And then I’m going to locate a partner that can help me in the other areas. And that’s ultimately what I chose to do years prior.
Kevin, my business partner, has been an active real estate as investor his entire adult life, I always like to joke that that guy has never had a real job. He has been doing this since he was 19 years old, going off market, direct to owner, he was originally buying single family homes by doing cold calls, direct mail, that sort of stuff, he had a great business model finding deals off market, and managing those respective assets. I had some skills throughout my 20s that I garnered in helping small businesses scale. I knew that the business model that he was implementing was exceptional, but it was only being done in a very small scale. And I knew that we had the ability to pour some gasoline on that by coming in and helping them scale, offloading a good chunk of the investor relations side, and regulatory compliance, that is what I handle over here, which allows him to focus on what he loves and knows better than anything else. He loves having those conversations with mom and pop operators, traveling throughout the country and getting those deals under contract. That dispersion of accountabilities in the organization helps you scale quicker and can create a mutually beneficial relationship that lasts for decades.
Where did you meet him, and how did this conversation start?
The same way that everybody meets everybody today, you reach out and you find somebody online that’s doing something that you want to do, they are a little bit further along than what you are, and you add significant amounts of value. I reached out to Kevin, I made him an offer he couldn’t refuse, I told him I’m going to come down to Florida and work for 60 to 80 hours a week. I offered to help him grow his business, and over time, we’ll be able to build something that’s pretty special. He was intrigued because the cost benefit analysis was in his favor. I shared my resume with him and explained all the things that I’ve been able to accomplish over time. And after putting your head down and working exceptionally hard, you look back years later, and you add more value along the way. People like to coin themselves as value add investors, but you can add value in a litany more ways than just going in, buying a property and trying to increase the NOI. I would consider relationships a great way to add value, to bring significant value in any way that you can to that relationship, so that you can build rapport. And by doing so you can garner more experience, accelerate your learning curve, and scale quicker than you would otherwise be able to.
We put together a free report for everybody called “The Past to the Investors Guide to Parking lot profits”, so people can learn the ins and outs of the business the highs and lows and why we feel it’s such a compelling asset class