How Smart Investors Vet Syndications Before Writing a Check | Ep 131

James
I recently sat in on another syndicators presentation pitch and I really liked it. So I'm stealing it and sharing it tonight with you and everyone else. Listening on the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both property and people Through an amazing pitch convincing you of how awesome this is so that we can do good stuff, which is um build wealth and improve housing. I'm James and this is my wife, Jessi

Jessi
I agree that you can beg, borrow, and steal any good teaching items.

James
Yeah.

Jessi
Oh, that was like a philosophy when I was teaching where it was just like, dude, you find something good, use it. Well, yeah, okay. I mean I get it. So here's what's if don't steal in the sense of like, oh, I'm supposed to be paying for this and I'm just gonna make copies.

James
Yeah. Well, so there's there's an interesting thing in the art world. Uh or the creator world, we'll say that. Yeah, creator. Which is If you take from one person, it's stealing. But if you take from a bunch of people, it's not. What? Okay, give me an example. Um sure. Okay, so like in this case, this guy he gave a presentation. If I just Word for word, like did his pitch, yes, which A wouldn't make any sense, but um, but B what would make sense, but it would just be like, yes, I stole his pitch. But I'm taking his plus my own experience. plus what I've read in other books, and I'm combining them all together. Yeah, you're taking pieces of that. That is new and unique. And so the goal. Which is what's so funny about it, right? Like as long as you cite resources, I suppose. But if you only research one person, now we're in the territory of theft. Sure. Which honestly to boil this up into an even higher level thing is one of the really interesting arguments around all the AI generations because They don't just take from one source, they do combine all the others. But now there's all these questions of, well, is it copyrighted? Is it theft? And how does that all work?

Jessi
Well, especially like the argument that I hear a lot is Because it can collect like all the writings of a particular person, it could write it in that tone.

James
Yeah.

Jessi
And it's like, oh my word. Ha uh How do you distinguish like AI created the content, uh-huh, but also it didn't, it just referenced a bunch of content and put it together in a different way.

James
So also interesting side note. Um we're just like we're headed down space, which is cool. Um one of the new things for coaches isn't just to offer programs anymore, it's to also offer chatbots. that has been trained on all of their content, their writings, their programs, so that it's not just, I don't I don't, you probably don't sign up for this stuff. Well, actually you sign up for one. Well, you know how you sign up for a program and it's like here's all the videos and the worksheets and whatever. So now the new thing that all of these gurus and trainers, teachers, coaches are doing is they're also saying, and we have a new uh AI person that I've trained on all of my stuff that you can ask your specific question and it will give my answer back.

Jessi
That sounds super helpful.

James
So they're like, so they're doing what you're talking about on purpose. Right. And they want it to make who you are.

Jessi
And they're but they're not it's their own thing. Yeah, yeah, yeah.

James
So they're making it an answer for them. Well they're they're embracing that idea of, hey, like here's how I can better serve my Students. Yeah. Clients. Whatever. That makes sense to me. It's it's difficult to tell. It'll be interesting to me to see if uh like high school or college professors ever do that. Like if I were if I were a teacher these days, I would record Every single lesson.

Jessi
Yeah.

James
I've I'm doing every single class when someone asks a question. I've got that. Like I'm gonna record everything And then take that, upload it. And then if you're working on your homework and you have a question, yeah, talk with my little Gen AI guy and he'll help answer the question. Or if you can't remember when something's due or something, whatever, it's all there. Yeah. And you're just you're training it on your actual teaching. I would 100% do that if I were a teacher. I'd also record everything video-wise and make it all available. But that's just me. And that has nothing to do anyway what we're talking about. Which is cool. So as I said, I uh I'm part of a a real estate group. in the area and they had a last minute cancellation so they brought in this guy who is giving a um uh he's hosting a dinner for high net worth individuals. And at this dinner, he's going to be talking about his latest deal and uh pitching them on and explaining here's what syndications are, here's how they work. Yeah. And he asked if he could practice on our group, given his pitch. Super smart. Kind of a warm audience. Let's go for it. So it was super fun to to see it. And he's a guy who I've known for a few years now.

Jessi
Good dude, lives in this area, and he was super successful down in Los Angeles and So he's made these pitches before.

James
Um I don't think so. So he's now off on his own. Okay. And he's he's no longer with the group that he which was his family. Um he's no longer with them, he's now doing his own thing. And so now he's having to do he's rebuilding this network. Yeah. Speaker. And so also kind of interesting is he hired a company that essentially sent out mailers I'm guessing to a bunch of people invited them. We're gonna have about 30 people at this dinner. Oh wow. And he pays per lead and then off the on ultimately pays for dinner. But his whole thing is he's got an active deal and he's like, yeah, I want to get that Fully funded and so here's what he's doing.

Jessi
It's it's almost like I mean It's just another way to think through lead generation. Yeah. Which is another total side topic. Total side topic. It's also like super fascinating because it's like I totally get that. Like instead of having like one-on-one conversations with 30 different people, let's get them all in the same space. Yeah, they hear they all hear the same thing.

James
That's right. And go, which is yeah. Right? Super interesting.

Jessi
Yeah.

James
Yeah.

Jessi
Interesting. So so you're stealing his presentation.

James
Yes.

Jessi
You like it, so you're gonna utilize it.

James
Well I just thought it was good. And I'm like, hey, I the things he talked about were good, and and this is me kind of practicing my pitch in terms of some of his stuff. So Uh I'm not going to pretend I'm pitching, we're gonna say. And then he talked about this and blah, blah, blah. So the first section that he had was talking about why real estate still wins over other investments. Which it was really interesting the comparison he did. He says it starts out on the surface level. You get the SP 500 averages about 9%. Real estate averages 6%. And then he threw in, I think it was gold and silver as well, which I think was also in like that eight uh seven percent range. Mm-hmm. And so He was like, on the surface, dude, invest in a stock market. Game over. 9% is better than 6%. And these are long-term averages. Yeah. And honestly, Welcome to the stock market recently. I'm like, yeah, you know, again, I sometimes get jealous that I'm not participating in that. So so I get it. However This comparison ignores some fundamental advantages that are baked in the real estate. And so there's five levers. That most other assets don't have that real estate does.

Jessi
Okay.

James
You want to I I bet you can guess that they're really big ones. Location? Uh no. These are financial levers.

Jessi
Uh equity?

James
Um kind of, but it's related to that, but it's the o it's like it's the flip of that. when it's leverage. Oh just since I'm making you guess. So leverage, right? Your loans. So so his whole thing was let's say that you have a hundred and fifty thousand dollars. You could put that into the SP and you'll get your nine percent.

Jessi
Mm-hmm.

James
Awesome, cool. He goes, if you pay cash for real estate Yes, six percent is what you'll get from it for your $150,000. Awesome. He goes, but you're never gonna do that. Right. Instead That 150 is going to be a 25% down payment. So you're actually gonna go buy a six hundred thousand dollar property. And so your six percent off of a hundred off of six hundred thousand. It suddenly is not just a I I don't have a calculator, so I can't do the math and I didn't do it ahead of time. So that's fun. Um Let's see here. Oh, uh he actually no, I I he did I did do the math. Um he says that five years later it'll have doubled.

Jessi
Hmm.

James
So your your down payment will have to be.

Jessi
So you'll have three hundred thousand.

James
Correct. It's whatever your Annualized one hundred percent is so twenty percent, I guess. Mm-hmm. It's not, but we'll go with it for now. And so uh that's your average annual return.

Jessi
Uh and that's because you can you can invest in something much bigger. Correct. Because of leverage because of You're people are willing to loan you the money.

James
Now the thing that he admitted in this presentation, which I'll admit to, is this is highly simplified. It is not taking to account the uh there's a whole bunch of other costs related to the property. But he's like just from the pure just from the uh pure value of the asset. At the end of the day, that's what this is. Which again, we get into other stuff. Uh forced appreciation is a huge one. So that 6% is just assuming it goes on with the market. Yeah. Life's good. But that doesn't necessarily have to be the case. You can buy a um uh uh distressed property, which is what we talked about last week, so listen to that podcast. And uh and then you can force appreciation, then there you can like significantly expensive the value. That's what I was thinking when I said equity.

Jessi
Oh.

James
I don't I mean I don't know.

Jessi
You're putting something into it. Got it.

James
You're making it back.

Jessi
Sweat equity.

James
Sweat equity. Sweaty equity. Yeah. Gotcha. Cool. Yeah. 100%. Yes. Then you are totally right.

Jessi
Yes.

James
That is definitely one that that you That's a lever you have control over. Mm-hmm. Yeah. The other one, which I think is awesome and really big deal, is cash flow. But you don't necessarily get necessarily get from the stock market.

Jessi
Yeah, that's true. You kind of have to wait.

James
It depends on the deal that you're doing. But yes. Usually there's syndication it's gonna take well, if it's a bigger property, you're always gonna have someone renting in the unit, but it's gonna be Uh it's uh uh yeah, you so but you're gonna have some sort of cash flow. And once everything's turned, you're really gonna have some cash flow.

Jessi
So if you were just to compare I realize this is simplifying again, but if you're just to compare like real estate to stock market Uh-huh. Um are there any stocks at all that you can invest in that give you like that monthly cash flow?

James
There are. There are actually a bunch of them. They are they're dividend paying stocks. So what's interesting about them, and there's a couple companies that break the rule. But in general, you get you get two choices in the stock market. You either get a stock that pays you dividends, some percentage, and it's usually not a lot. It's like that three to five percent of whatever their yeah, of the value of the stock. But the stock price tends to stay pretty flat or it'll it'll just it'll go up with inflation. So you're still gonna be at that so inflation if it's at three percent, the stock will rise about three percent, but then they'll also pay out say a four percent dividend. So you seven percent return. Mm-hmm. Cool. Which is yeah, which is totally normal. Or what most companies do is they don't pay out a dividend and they say, Yeah, we're reinvesting it because that's more valuable than us giving the money back to the shareholders. And so the value of the stock rises So you get four nine percent.

Jessi
So you have to wait.

James
Yeah, or the way that you get the money is to sell the asset. Yep. Right. And so um there are exceptions. Apple is one of them. They actually are regularly paying out dividends and their stock price is still skyrocketing.

Jessi
Which you can do similar things with real estate as well, where if you're doing like a flip You're waiting, but then they get the payout afterwards. It's not like a monthly cash flow thing. Right.

James
And the cool part about a syndication is it's a bigger building. And so that's one where you actually th they go together. So as you increase the as you improve the property, rents go up, so your cash flow goes up over time, plus just whatever the market is naturally doing. And then because you're improving the building, the building itself is becoming more valuable. So you get that double operation. So what yeah, when you do sell, you also get it. Yeah. Which we'll talk about later. But uh yeah, the uh how many have we done so far? One, two, three, four, uh the fourth one are tax benefits, which you get depreciation. You can do a 1031, which is when you When you sell your property, you don't pay your capital gains right away, said you roll that into the next one, allowing you to get a bigger snowball that eventually you have to Pay or you die and your errors it resets. Yeah. Um whereas anytime you sell a stock, guess what? You gotta pay it. You don't get to 1031 it and um and you can pass those on to your other investors as well, which is cool. And then there's the natural inflation hedge, which is land is scarce and housing is always in need. Yep. Which is not always the case for all stocks.

Jessi
Yeah, that's true. So um people need places to live though. Always.

James
Yeah. So oh yeah, and his in his um I remember this now. He he gave an example of it was gold and crypto and then a Range Rover. Just as an example where he was like because he was looking at it after five years, how much would it be worth? And the Range Rover's value, he's like, if you pay 150 grand, which apparently you can, uh I know, right? He goes, that's worth about half as much five years from now. Don't invest in a Range Rover. I it was cute. Honestly, it was a really fun slide just to kind of to bring that point home. And and you know, part of it when you're talking high net worth investors, right? That's the kind of decisions they're making. So kind of fun. So uh that was section one of his presentation, just talking about why it's still better and the returns are better overall. And I get it. There's nuance and there's numbers and this was highly simplified, but he's just teaching the principles behind it. Yep. So then he went deeper into forced appreciation itself. So um, and we've kind of already talked about this, so I'll go over it real quick. So you have your net operating income. Which is your income minus your operating expenses. So it excludes your financing. So any mortgage payments, stuff like that. It's not a part of it. And in commercial buildings, the value of the building is determined by that net operating income. So The more you raise it, the more the value, the more it's worth. Now the question is, what is that worth? And you have a thing called a cap rate, which is the capitalization rate, which is a way of saying how much does it how much do you need to pay to get that cash flow? And so we talked about this a few weeks ago and it still hurts my head, so we're gonna go for it. A low capitalization rate means that you have to pay a lot, you have to pay more for the same amount of cash flow. Or another way to say it is for the same amount that you're buying, you get less cash flow. So probably that that's directionally incorrect.

Jessi
Yeah.

James
But what's cool about the NO uh the cap rate Is so you take your your net operating income and you mull or no no sorry you take the Yeah, you take your net operating income, you divide it by that cap rate, and then that tells you what the value is. Now he gave some examples where he said in Malibu, it's a one to two percent cap rate. It's crazy low. So you pay a lot. We're not like cash flow and honestly you're probably if you do it just under the standard 25% down and you get a regular loan, you're actually underwater, you're not making any money. A problem, but whatever. And then he gave other examples like Oklahoma. Where it's like that's a 10 to 15% cap rate. So for the same amount of money, you get a ton more cash flow and you actually will be cash flow positive. Now the cap rate usually It it represents risk in the market, in whatever you're doing. So in Malibu, there's a ton of demand, there's a lot of people, so there's not a lot of risk. So you don't get rewarded with the high cap rate. Whereas In rural Oklahoma, there's a lot more risk, so you get paid for it. That's kind of the thinking behind it.

Jessi
Supply and demand affect cap breaks.

James
Yeah, yeah, yeah. Yep. Mm-hmm. And Corvallis sits around five percent. So it's pretty healthy, stable with the university, that kind of stuff.

Jessi
In the middle. Is that kind of in the middle or is that high? Um I would say it's It sounds average but middle low.

James
It's middle low. It's normal. It's average for Oregon. Okay. And the West Coast tends to be lower than the Midwest. in general. I would say like the Midwest hangs out in that eight to ten, maybe even fifteen rates.

Jessi
It's not quite as desirable, so your demand is

James
Correct. Correct. Yeah, that's kind of the way to think about it. So but what's cool about it is you can because of that math, you can derive what your building will be. So if you raise rents by $100 a month. That's let's say just total to make our lives easy. That's twelve hundred dollars a year divided by the cap rate. You can now say here's how much value I've added to the property. Super cool. Yeah. And that's the whole force appreciation. So he gave an example of an eight unit building He said rents going from uh eleven fifty per unit average as an NOI in this example was seventy-five thousand. That would value it at about one and a half million at a five percent cap rate. So values at one point five million. He says, let's say you spend $100,000 in improvements, you raise the rents from $1,150,000 up to $1,500 over those five years. He goes, the NOI goes from $75,000 to $116,000. And so the exit value jumps from 1. 5 to 2. 15. He also is assuming that his cap rate has gone up from a 5% to a 5. 4 because that's a sc again the hot the It's kind of weird when you when you raise the cap rate when you're trying to value your own building, you're essentially saying, Well, I can't sell my property for as much. The cash flow is not as valuable. You're you're saying there's more risk for the future buyer Kind of the way to say it. So you created six hundred and forty thousand dollars worth of value from doing that operational work, which is awesome.

Jessi
Yeah.

James
And so kind of depending on what your down payment was, what you're paying your investors, stuff like that. Sure. It's a good deal.

Jessi
So that's the people legitimately are making improvements and raising rents. Following the market, yes, but also because you've added value theoretically.

James
Yes. Another angle that he looked at was the replacement cost. So if this building burned down and we had to rebuild it, how much would it cost to do it? In Oregon, new construction is, it's a big range, but it's like 75, it's 375 to 500 square feet. It's $375 to $500 per square foot. Per square foot. Sorry. Okay. Yes. Well, yeah. So it's a lot to build. Yeah. But if you're buying existing and renovating, that might only be 200 to 232 dollars per square foot when you're all done.

Jessi
Yeah.

James
So you're actually buying it at a discount versus a new build. The value's not the same as a new build, so it's not 100%. But it's just a way to think about it. That was talking to some people at Baker Tower when they were like, oh my gosh, well, hey, you can't actually rebuild that building. Right. But they were saying if you were to rebuild something of a similar size, they were like, dude, that's the replacement cost is 10x what I was buying it for. So like this is a great deal. Like, yeah, I'll take that. So then his next section goes into what a syndication actually is. Mm-hmm. Okay. Do you know what the Like the layman's, if you had someone who's like, What's a syndication?

Jessi
There's different people putting money in to buy a property and then they get a percentage Of the returns.

James
Yeah, that was great. The only and the only thing I would add is that is a bunch of people to buy a bigger property than normal. Yeah. That's the But but yeah, you were there. So you have two basic people, two groups of people. You have your GP, sometimes that's a general partner, sometimes known as a syndicator, sometimes known as the sponsor, sometimes Known as the operator. Yeah. They go by lots of different names. They're the guys who find the deal, sign the loans, manages everything, assumes all the operational risk.

Jessi
Make these presentations.

James
Make these types of presentations. Yes. And then you have the limited partners. Those are the people who give you the money. They receive the money back and their liability is just limited to what it is that they invest in. And the structure is that they create you create a uh I don't know what you call it. Oh. Yeah, sorry. For each investment. Correct. So each property gets its own LLC. And um Which just protects everybody from all of it and honestly it it makes it easy because you uh the the the investors buy shares of the LLC and it's the LLC that owns the property. Yeah There's nuance here, but as a general rule, that's how that works. You're selling shares to that company. Um he does go through down a regulatory note where you have a 506C and a 506B. So the C is for accredited investors only. So that's the deal that he's doing. It's a C, which is why he's able to give a presentation. Because with a C, and you're only going after accredited investors, you can then You can advertise. Yeah. Which is what he's doing.

Jessi
And they have to accredited means they have to like be at a certain level of investment.

James
Is it based on a number?

Jessi
Oh, okay. So it doesn't matter how much they put in to the deal, but how much They're valued net worth is.

James
And what's interesting is they recently changed the rules where you can no longer self-certify For that you have to have like another accountant come in and do the math for you and say, yep, this person's good. Kind of makes sense. It changed that rule a couple years ago.

Jessi
And um whereas what's the thinking like why why is it associated with accredited investors and like promotion or advertising? Like w I don't understand the correlation between those two things, I guess.

James
Uh the the thinking behind an accredited investor is that they're not going to invest every single penny that they have. They're considered sophisticated investors, which is kind of dumb. Um uh definition. But the idea being you have enough money, you're probably not gonna put everything into this one deal.

Jessi
So you'll be okay.

James
Yeah, so you're okay if you lose money. Therefore, we're okay with you finding some person who randomly advertised to you and you're putting your money into that random person's deal.

Jessi
So they're just trying to protect people's investments? Yes.

James
Yeah. Uh-huh. Protect their money, essentially. That's weird.

Jessi
Why don't they why wouldn't they just vet the sponsors as opposed to the investors?

James
Um you know what I'm saying? Yeah.

Jessi
Why why wouldn't they say That's a great question? Like you anybody can do presentations, but in order to be a legit sponsor, you gotta go through this process. And then and then investors are like, Oh, I know if I invest with this group, it's more stable than I could go with anybody else, but

James
So I don't know the official answer, but if I had to guess, it all comes down to what is harder, what's easier to measure? And it's really easy to measure someone's income and their net worth. It's an easy answer. And for net worth, again, you can get someone in, you can count it all up and go, yeah, we're good Whereas with a sponsor, a couple things can happen. Number one, you can have a guy who's good, but the deal itself isn't good. Oh. And they're doing multiple deals. So here's the other thing. Like potentially there, I mean there's some companies where they're doing They're doing multiple a year, which means now somebody in the government has to come in and assess not only that person and the deal, and they have to certify yes, this is a good, safe deal. Or it's a one time a year thing with this other person where they go, yeah, we'll just value your your net worth. And if you hit that threshold, you're good to go. So it's easier to measure, easier to manage.

Jessi
All right.

James
And And at the end of the day, investments are always risky.

Jessi
Yeah.

James
And and I don't think the government wants to be on the hook for saying, oh, we looked into this investment and it's safe.

Jessi
Yeah. Right.

James
You're still on the hook. Investments are still risky. We're just gonna certify that you have enough money where we're okay with you losing some of it. Huh. Weird. That's my I don't know the official answer to answer. That's what logically makes sense to me.

Jessi
Yeah.

James
Which I'm okay with. Uh so that's the 506C. Then you have the 506B, which is the friends and family one. So you can't do any public solicitation. Can't do that. But and it's now they're because now they're like, it's I I trust you as a person in what you're sending me. That kind of is how that works. What counts as a friend or family makes for interesting discussions.

Jessi
Right, because word of mouth can kind of spread. So like a friend of a friend.

James
So in theory, what I could do is I could put on a dinner that's just a general we're gonna talk about investing in general. I don't have a specific deal. Yeah, it's like education based. Maybe I maybe I go and I say, I'm gonna talk about Baker Tower and it's a case study. We're gonna talk about this and the principles and how you can get involved. I don't have one, but if you would be interested in having one, let's get on the phone and talk. And then I'll put you on my list. And the next one that comes along, I'll let you know about. So that's and so I have moved them from Person I don't know to someone who is a friend. So you can do I have a substantial existing relationship with that.

Jessi
Right, but you can't advertise a specific deal.

James
Now what's weird, and this is where things get gray area. If I know I've got a deal coming, I still can't give that presentation because I'm doing it kind of knowing because I don't actually have one in in the hopper. Yep. I could also do it so I also, like for our flips, we do a lot of private money lending. Totally different, could totally do that. There's no restrictions on that one. Like I could Totally do a presentation and talk about it. It's all about the ownership and selling shares and the SEC get involved. Like that's the thing. Well, and the other thing about a private money lender, right, is They're in theory they have. They're going to have that deed of trust that's gonna be backed by an asset. Yeah, that's why it can still be really hard. There's all that. Sure. So it's like it's not guaranteed. But like those, so he went into that nuance. Uh-da. He talked about the preferred return. Which is the idea of as an owner, sometimes you can do uh you give a preferred return, which is like you're gonna get 8% no matter what. And then Potentially the upside is restricted, tamped down, whatever. And all that preferred return says is yeah, you get paid that no matter what, and you get paid at first. Once you hit that button or that button that once you hit that level, yeah, then we're gonna split it some amount 80-20 70-30 whatever. Yeah. And um yeah, okay. And uh He then went into the waterfall, which is kind of like the next step of this payout piece. And so here's how the order of money flows. Number one. You're gonna pay your closing costs, your broker's fee, your taxes, your whatever. Like all the I would say the operating expenses all go first.

Jessi
The operating expenses for a for a sale or a purchase.

James
Correct. I would even argue for operating the building, like paying utilities and stuff like that.

Jessi
Okay.

James
I think those all go first.

Jessi
Yeah, that's so the highest priority.

James
Yeah, correct. Correct. That makes sense. And then what you do is you pay out whatever the accrued preferred return is. And then um this was I don't know if I agree with this, but that's okay. He says then you do a return on investor capital and then you split the remaining 80-20. Um To whoever, the investors and then the owner. So it's kind of an interesting deal. So and I know why he wants to do it this way is Your preferred return is based off of your principal that you have into the property. So if you invest $100,000, he owes you eight grand every single year.

Jessi
Yeah.

James
And so what he's doing is he goes, well, I'm gonna pay out that first eight grand, but then let's say we actually do ten thousand dollars. He goes, I'm not gonna actually split that 80-20. I'm going, uh I'm trying to make our math a little bit easier here. Let's say that he actually makes $18,000 that first year. So he goes, I pay out that first $8,000. And then he goes, I don't take any money. I pay that, I pay $10,000. the additional to you guys, but I've now reduced that balance from a hundred thousand down to ninety thousand.

Jessi
Oh, because you've paid some back.

James
So next year that preferred return is actually less. It's kind of the same percentage, but on a smaller. Correct. And then ideally it starts to snowball, just like on a regular loan. If it's continue if he's saying, well my NOI is going to go up, so therefore my distributions will go up and I continue to pay it down, eventually I will have paid out that hundred thousand minus or the hundred thousand dollars after that preferred return. Yeah. He goes, and then we'll just split it all 80-20.

Jessi
Yeah, essentially he's paying more up front towards the loan. Yeah, that's a good way to say it.

James
And then and being patient himself. Because you could in theory say, no, we're just gonna do 80-20 split and your balance will stay the same. Sure. Yay. And then it's just constantly. And he gets paid some up front, which is nice, but ultimately it will cost him more in the end. The investors make more the other way. So there's tons of ways to split this cat. Skin the cat. Skin the cat to split the split difference. Split the difference. Whatever. And so there's lots of ways to do it. And that's part of like you have a you have an operating agreement and a private placement at random. Read that. It'll describe how all those flows work. And let's see. Um oh yeah, he did say watch for complicated or or a lot of tiered waterfalls. Some of them are good, some of them not so good. So like for example, his He just goes 80 20 all the way. Some people will add another tier where it's like, okay, we're gonna pay the 8% per return And then we're gonna do 80-20 until we, or in this case, I guess you could pay back your capital. You then we're gonna do 80-20 until we hit like a 15% return. And then we're actually gonna split it 50-50. So I have an incentive to hit it out of the park. And and I'll make more if I do really, really well. And you as an investor, like, no, I'm so happy because I signed up for that first number. Yeah. And I made way more and bum beyond. So You just gotta be gotta read 'em. That's a that's a classic. Like throw that bad boy in the chat GPT and ask the questions about it. What is the waterfall? What's the structure of it? Stuff like that. He talked about refinancing and how the refinance path is a way, and this is what he wants to do with this property, is do all the stuff and then within five years refinance it and return all the capital so that preferred return. gone. Yep. And then he's like, and now we just have an 80-20 split for the rest of time. Or until he decides to sell it. He goes, and you got all your money back. So life's good. And we did ask some questions about if he you know someone wanted out at that time, how would that work? And it's like it's complicated. Yeah. Which I'm like, yeah, it is. So then he went into how to actually vet a sponsor, which I think is really important. And he said most losses don't come from bad markets, they come from bad operators. And so you start with their um start with their uh their track record. Which I thought was like honestly his advice was a little weird. He was like, just ask for the LLC names of the prior deals and look them up and make sure that they're actually there. I was like, I yeah, I guess that's a good

Jessi
First step.

James
And I was like, cool. I would be interested in like, well, tell me more about the property, show me some of the numbers. Yeah. That kind of stuff. But um Yeah, and then uh he said ask about fees. So, okay, this is interesting. So like I said, there's that whole 80-20 split. That's not a hundred percent true. So there's other fees that the sponsor charges up front that technically come out of the operations side of it. So you have your acquisition fee, which could be one to two percent of whatever the purchase price is. Then you can have an asset management fee, which is another one to two percent of rents that they charge for it. You could potentially have a construction management fee. So it's going through doing all these fixes and stuff, and that could be That could be 10% of whatever that cost is for them to manage all of it. There's organizational and operational fees. And like so there's so there's ways that the sponsor is getting paid up front. So he's kind of okay saying, yeah, yeah, yeah, I don't want any distributions until later because I've got other things that come even before those distributions happen.

Jessi
And how does that

James
Which are all gonna be later on.

Jessi
How is it structured with the waterfall? Is it written in there somewhere?

James
Waterfall is waterfalls just distributions.

Jessi
Weird. Not fees and correct.

James
Think of it like a property management fee. Yeah. Where it's just kind of putting it together. That's what that is. That's good to be aware of. Yeah. Uh they also, he said there's a co-invest test, which is like, are they putting any money into this deal? Do they have any skin in the game?

Jessi
Smart.

James
Yep. And um He said the market knowledge test. Do they actually know the market? And so he was like, yeah, there's ways to Ask questions to see if they they actually know it. That's part of the reason why I only invest in Oregon. Right. Because I'm like, I I just know it. I'm here. I know the rules. I'm in it. I just I feel the market. And I was like, it's in my soul. As opposed to Texas or Arizona. Yeah, they might be awesome. But yeah, I don't know. Like I just I'm just not there. Yeah. And let's see here. And then da da da da Oh and then he just said like when are they paying out, I guess. He was like just ask about that preferred return again. Those are his ways of vetting the sponsor. That was probably his weakest section, honestly. It was fine. But if I if I were him giving that presentation, I think I would I would actually go into a lot more of like these are deals that I've done in the past. Like, so I've taught you now about forced appreciation and why real estate wins and how syndication actually works and the waterfalls. Let me now go through previous deals that I've done to like this is actually how this works. And that's the that's the vetting. piece.

Jessi
And there's th I there is like a dinner, I I like For a dinner, that totally makes sense because you're selling yourself, you're pitching yourself. Yeah. However, like some of the tools that you've come up with that's like here's the questions to ask a sponsor.

James
Yeah.

Jessi
I think that Uh you know, if if you're gonna do an unassuming presentation of like, I'm not gonna assume that you want to invest with me.

James
Yeah, yeah. This is just educational, which is what this is.

Jessi
Right. If you want to invest though, here's the way to approach vetting a sponsor and it's like we've done that, we did that with our property management stuff where I create a set of questions, here's what you should ask your property manager, and then you and I recorded an episode where I went through and I answered all of them.

James
Right. That would be my that's probably how I would set that up. Hey, you should ask about this. Here's my answer, by the way. Here's a good answer. Yeah. This one's mine.

Jessi
Yep.

James
And just kind of.

Jessi
Maybe for the dinner thing, you you'd choose your top five or something.

James
Something. I don't know. I don't know

Jessi
It's an interesting thought process.

James
It was which again, he was just warming up on us. Sure. He then went into the tax benefits section. Which you talked about the K1 documents. Oh ring.

Jessi
But I know I know people people who have more wealth than me.

James
I again was kind of like, man. I I mean it's a thing. We've all heard about it. There's tax benefits. What are they? And so we went into like he talked about K1s, which is kind of an interesting I like it from a set of expectations standpoint. I was kinda like, I don't know if this is a dinner conversation. Like I people don't necessarily care about the mechanics of it yet. But maybe. And so he talked about how you can pass on depreciation, income losses, it can offset stuff. He then talked about depreciation and how um Just how that works, I guess. Um, and and he gave an example of you know that $600,000, you might be able to depreciate $40,000 per year, and that passes on to the investors. Yay! He did talk about a cost segregation, but he's choosing not to do it. And which is the idea of so typically there's a very blunt instrument where you say, well, what percentage of it is laying, what percentage of it is building, and then you can write off the building. And the bigger ones, it's 39 years. 39 and a half? 39 years. And but what you can do is you go, well, like there's a bunch of appliances in here. Those aren't 39 years. Those are five years. And so you go through and you do that for appliances, carpet, ever anything and everything.

Jessi
Yeah.

James
And you have someone official go through and calculate it all out and they do all the math to say This building was worth this property was worth six hundred thousand. Turns out ten thousand of it is appliances and twenty thousand of it is carpeting and some percentage of it is the roof and And then the land and the building and and like they go through because each of those have different amounts. And then so they then break that out. It's not just One number divided by 39, we're good to go. Now it's well, we have like six categories, and we're gonna divide all those by their different numbers. So it allows you to front load a lot of depreciation early on. It costs money to do the cost seg. And the biggest objection that I've had to it is a bunch of the cost seg people have like they've optimized their what they charge. Yeah. Because they can be like, hey, if you do this, we can accelerate On average, $200,000 worth of depreciation and we're only going to charge you $150,000 or whatever, right? Like I've just made up those numbers. But it's like where you're like, huh. So I'm gonna, it's Definitely a lot of money up front. And I was going to get that depreciation no matter what. I just get it today rather than tomorrow. Now for his deals, he wants to be out in five years. I'm like, yeah, you know what? That actually makes a ton of sense to do it for that kind of project. So I was kind of surprised that he chose not to. Where for like Baker Tower, I want to hold on that that one for a long time. So I'm like, I'm eventually gonna get it all in. It's not worth it. And I have a bunch of retirement accounts that don't get to participate in it anyways, so I'm like, this isn't just not worth the squeeze. But talked about that. He then talked about the 1031 exchange, which I thought was really interesting that he brought that up and the way that he presented it was like you can do a 1031. It's like, uh not like really because you don't you're not you don't buy the property, you buy shares in a company. And the only way you can do a 1031 is if the company then goes, sells that property and buys another one. Right. Which means all the investors got to come along for the ride.

Jessi
Hmm.

James
Yeah. Now there's ways to get around it. You can do a tenant in common. And it's a thing that you can do for like if you have major investors, people who put in a significant amount of c capital, you can say, hey. By you were going to own the property along with the syndication and you become like a non-voting whatever member of this purchase and now you own some percentage of the property, which is what you're gonna own anyways, as a limited partner. And then you can go 1031. It's like, but It's a lot of it's just it's it's a lot more paperwork and a lot more complicated to do it that way. So it's like, so I only want to do it for the big investors. Sure. But yeah, but So I was surprised that he talked about that. I guess I don't know. He's trying to get ahead of particular objections. He didn't talk about opportunity zones. Which was whatever. Um oh, and then he goes, and I'm not, this is not tax advice, go talk to your CPA. So I was like, that was good. He then went into talking about Corvallis, and he threw up a couple graphs, which I thought were interesting. Like Corvallis is Um stable in the sense that when the recession hit, it didn't dip down as much as some places. But When things boomed, it didn't boom as much either. It was just more down the middle. Which when you're talking about investors and preserving capital, like yeah, we don't get the boom, but we also don't get the bust. Yeah. So it's just gonna be a lot more steady even. So thought that was good. Yeah, that is a good idea. He then talked about vacancy and how Corvallis has very low vacancy and it's just stable in general. And he went into things like the urban growth boundary, Oregon State. He said we have a diverse economy. Is that true? And um and then he was just like, and there's quality of life. This place is awesome. I was like, yeah, I think I agree with that. And um yeah, so that was that was his presentation. Oh, I guess he closed saying real estate syndications aren't magical. Um they're just really good if they're handled well. And the mechanics of how they work are learnable and the vetting process isn't terribly hard. They just skip it. And so yeah, that was his uh That was his presentation.

Jessi
Right.

James
That was what he went through.

Jessi
See, I don't think you would steal that presentation like word for word.

James
Yeah, he had he had one slide which I thought was really good. I took a picture of it. I was like, ooh, I like the way that just the way it was presented was nice. And and he, I mean, and that's the other thing. That's one of the cool things about this. He's like, hey, if you're just ask, like I'll send them to you. That's cool, whatever. Yeah.

Jessi
And um I mean you're gonna have to adjust them to whatever your deal is anyway for it to make sense.

James
Yeah.

Jessi
General education, sure.

James
And I have a different design aesthetic too, so You know, what you gonna do? I'm gonna change the logo up. No, I the dinner thing was interesting. I was intrigued by that. But um yeah, that was my That was what I heard. It was good. So hopefully that was educational. Yeah. And you're like, oh, cool. That is a good overview of what needs to happen. And that is what you should do before writing a check to sign.

Jessi
Or maybe you're like Man, I wish I was eating dinner right now.

James
Dang, right?

Jessi
While I heard that presentation.

James
But I'll tell you what, hey, here's the deal. Here's the deal I'll make with you. Anybody, if you want to invest with me on my next deal. I'll take out the dinner. That's cool. We could talk about a deal. I have investors. We hang out regularly. It's awesome. I get if you're out of the area, it is what it is. But man, if you're local, pfft totally. Now if you don't invest, no dinner. No I'm kidding. I'm totally happy to meet and talk about this And if you do want to learn more about us in general, the best place to start is to go to Furlo.com where you can learn more, all about what we're doing. And yeah, we'd love to connect and talk about what your investment goals are and how we can help best get you there. So with that, thanks for listening. Have a great day.