Passive Investing in Syndicated Deals – Joe Fairless | PREI 009
From being the youngest vice president of a New York City ad agency to creating a company that in 6 months controlled over $7,000,000 of property, Joe Fairless lives up to his Fearless Fairless nickname. He’s the host of the popular podcast, Best Real Estate Investing Advice Ever show, and is closing on a 250-unit apartment this summer worth over $14,000,000.
In this episode we explore syndicated deals and how they compare to smaller 1-4 unit residential properties.
We also take a look at another available turnkey investment property in our Deal of the Day segment.
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Passive Investing in Syndicated Deals – Joe Fairless
We have a great show today. We’re going to be talking about syndications. I have an excellent guest who’s had an amazing success story. Today’s guest is Joe Fairless. From being the youngest vice president of a New York City ad agency to creating a company that in six months controlled over $7 million of property, Joe Fairless lives up to his Fearless Fairless nickname. He’s the host of the popular podcast, Best Real Estate Investing Advice Ever Show, and is closing on a 250-unit apartment this summer worth over $14 million. He’s on the Alumni Advisory Board for Texas Tech University and the Board of Directors for Junior Achievements. Joe, welcome to the show.
Thank you so much, Marco. I am glad to be here.
It’s great to have you. I have to be honest with you, I’m really excited to have you as a guest because not only do you guys have a great podcast, and I really don’t know how you put out one episode every day, I don’t know where you find the time, but you have a great success story. I’m really excited to have you on.
I’m glad to be on the show. Really quick on how I have the time, I just prioritize it because I’ve seen that the daily podcast is incredibly valuable from a friendship and from a business standpoint. Really, it makes room for itself.
Those relationships you could really leverage and there’s probably a small percentage of those people that you could bring into your projects and your syndication. I think that is time well spent. Give our listeners a sense of geography. Where are you located?
I am in Cincinnati now. I recently moved to Cincinnati from New York City about a month or two ago. I was in New York City for ten years, a decade. Prior to that, I’m from Texas. I grew up in Texas and I went to Texas Tech University. You mentioned I am on the Alumni Advisory Board there. Once I graduated in 2005, lived in New York for ten years, and then a couple months ago moved to Cincinnati.
Was that a big move? Was that a culture shock?
A little bit different of a culture in Cincinnati than New York City. It was time for a life change, a different lifestyle for me. I’ve been living in the same apartment for the last nine years in the East Village in Manhattan. It was time for something else. Now, I’m living in Cincinnati. I’ve got a girlfriend here and doing more of what people typically do outside of New York City.
I would have to imagine that probably the biggest change or the biggest shock was the price difference between the cost of your rent in New York versus where you are now.
I’m actually living in a model unit for a property I have. The cost for rent is extremely low, AKA free. It’s a big difference.
Here’s a head scratcher. Being a vice president of a New York City ad agency sounds like a good paying job or maybe a high paying job. Why would you leave a position like that and how did you get started in real estate, because that’s a 180-degree shift.
I’ll start by saying I started at the bottom of advertising and it was not a good paying job. I was making about $30,000 when I first moved to New York City. For anybody who remembers making that or currently makes that or wants to make it, you’ll know that it’s about 750 every two weeks after taxes. My rent was 750. Everything else went to living when I first moved up to New York City. After I progressed in my advertising career, I was making $150,000, not including bonus. I was making well into six figures, 150 base salary. What I realized is what got me to that point where I went from 30,000 to 150,000 was because I cared about what I was doing and I was passionate about it. I was living and breathing it. Whenever I just became disinterested in advertising as a profession, working in ad agencies, I knew I had to do something else.
One thing about me, whenever I’m focused on something, it is scary how dedicated and persistent I am. But on the flip side, if I do not care about something, then I’m completely and utterly apathetic towards it. I knew that once I got the itch to leave advertising, I better move quickly just because I know myself. I needed to do something. Similar to the podcast that I’m doing now. I’m all in on it. I’m doing it daily. A lot of people mention, “How the heck can you have time to do that? Plus, you’re closing on that 250-unit deal. You’ve got a 160-unit deal.” Now, I have a girlfriend. I’ve got clients that I teach multi-family and raising money. How do you do it? I prioritize my time based on my area of focus and I make it.
I was teaching real estate classes in New York City on the side while I had my advertising job. I was teaching people how to invest in other places but live in New York City, because I live in New York City but invested in Texas. I have three homes in Texas. I had four at the time, I sold one. I have three single family homes. I was teaching people how to do it. How to invest passively in homes and have a management company rent it out for you and then it’s turnkey more or less. I spend about five minutes a month on my properties, my homes. Completely different case with apartments, but on my home it’s about five minutes a month.
That’s where my real estate passion and interest came from. It was just an evolution. I actually went to a Rich Dad Poor Dad seminar. They said, “Single family homes won’t get you to where you want to be.” I was like, “What?” Because that’s all I knew. They said, “You’ve got to invest in larger stuff. You’ve got invest in apartment buildings.” That’s when I started studying up on it, read some books. I’ve read a lot of books, not just some. I read a ton of books. I ended up meeting with some people, learned from them and started doing it on my own. Before I left advertising, I started studying it. I started studying it in around October of 2012. Then, in January of 2013 is whenever I made the leap and started my own company.
You bought those four properties in Texas before you made the leap into syndications. You were still working in New York?
That’s how you qualify for the financing obviously?
Yes. That’s also a main reason why I did multi-family and raising money, because after I left my job I couldn’t buy anything on my own credit or on my own W2. It necessitated me to learn how to be creative and how to raise money and buy something with investors.
How do you make the leap from going from single family homes to syndications? How do you make that jump? Because for a lot of people, that seems like an enormous leap.
Usually what people recommend is what they did or what they’ve learned from that they shouldn’t do and you shouldn’t do. I’ll tell you what I did and what I learned. I think that’s the best approach to this. You make the leap by first educating yourself. There’s no substitute for knowledge. All I did was I just read as many books as I could. I read Buying and Selling Apartment Buildings by Steve Berges. It’s really a good book, a really applicable and practical book. I read Commercial Real Estate Investing For Dummies. I’ve read Contrarian Investor. I’ve read Dolf De Roos’ book, Commercial Real Estate Investing. I read a lot.
By the way, the process I’m talking about right now is the process I recommend taking in anything, whether it’s jumping from residential to commercial or from storage units to mobile homes or one job to another. First, I educated myself with books. Secondly, I started talking to as many people as possible who are successfully doing what I want to do. Then I attempted to implement it myself. I hit roadblocks. I reached a plateau where I was needing some advice and some one-on-one help. At that point, I reached out to someone who I came across and I paid him as a consultant. He helped me get to the next level and specifically close on my first multi-family property, which happened to be a 168-unit, which is mind boggling looking back on it. I purchased single family homes, only four of them, then I buy a 168-unit by raising over a million bucks. It’s not the typical path. There are all sorts of psychological things that we have to have in order to make that happen as well. But tactically speaking, that’s how you do it.
Can you tell our audience what a syndication is or a syndicated deal is?
It’s really simple. Syndication is a group of people who are putting a little bit of money up to participate in something that they likely couldn’t afford on their own. An example is when you fly from one city to another. You pay a ticket and everybody pays a ticket, a price. Then collectively, you’re paying enough to cover the cost of the airplane, the pilots, the crew and all the other expenses. You get from point A to point B. You have an objective and you participate with others to achieve that objective together. That’s all syndication is.
Now for real estate, what I do and what a syndication is, is where you raise money from investors and you buy something together. In this case, I buy apartment complexes or communities. Then we share the profits together based on the success of that property.
Great analogy with the airplane. Offline you’ve mentioned that your first syndication, the 168-unit apartment is about two years old now and that you’re in the process of selling it. I scratched my head and I thought, “Why would you want to sell that if you had turned that property around, you have a low vacancy, and now you’ve got ongoing cashflow? Doesn’t it make sense to keep that property?”
It does make sense to keep the property in certain circumstances. Ultimately, the first question I would ask myself and my investors is, what are our goals? What’s the lifecycle of the property? Quite frankly, where we are at in the multi-family cycle in the market that we’re in? The perfect storm of all of that is that we’ve basically completely refreshed the resident profile. We’ve turned over the majority of the units at our property over the last two years. We’ve gotten it to a place where it’s cashflowing and it’s stabilized.
Now, there’s an opportunity based on how hot our submarket is. There’s actually a retail development literally, right next door to us breaking ground in a couple months. Because of the hot activity, there’s an opportunity to take our property to another level. That level would require putting in, I am arbitrarily making this up, say 2,000 a unit. When you put in 2,000 a unit, when you multiply 2,000 times 168, that is 336,000. That’s about $350,000, plus a lot of man hours or woman hours, plus a lot of other things.
Ultimately, when I look at the exit of anything, I look at it from the buyer’s eyes. I look at it from the stance of, “Would this be appealing to me as a buyer?” This property that we have definitely would be because there’s a major opportunity to take it to another level. You always want to leave some, as they call it, meat on the bone for the next person to own it. Where we’re at is anytime we can exceed our stated objectives going into the deal, then we’re going to take a hard look at that, especially if we can still set up the next buyer for some opportunity to make money as well.
That’s a great philosophy. It sounds like the market conditions there, maybe it’s a seller’s market. The market conditions are conducive for you to take this property and sell it for a profit. But you’ve also executed what you might call forced equity. You’ve taken an asset that was maybe in fair condition and you’ve improved it. You’ve built in additional equity. You’ve taken it from X to $7 million and now you’ve got a lot of equity sitting there that you could put to better use. You and your partners have just decided to sell the stake of your equity and go on to the next bigger project.
If you read Contrarian Investor, he talks about that. He talks about how you go in, you add value, you force appreciation, then you exit and you put that money towards a 1031 exchange where you can defer your taxes to a later date. You use that to buy a larger property. You just keep going up the food chain. That’s what our plan is going to be on this as well.
Briefly speaking, I know the biggest challenge with syndications is finding investors and raising capital. It’s not that difficult to find a good deal if you put the effort in. But the problem is with the securities laws in the US, you can’t advertise so you’re very limited in what you can do. You often have to resort to the people that you know. How do you go about finding investors and raising capital for a syndication?
I’d say there are two levels. One is the first level I was at on my first deal. Two is the second level I’m at on this deal in Houston. There are different ways. The first one, as you said, it’s people I know. The first one, no family members invested in it, it was all in. I only say that because I don’t have a rich uncle. I wasn’t born in a wealthy family. It wasn’t a poor family, but it wasn’t in a wealthy family either. It was people who had known me through life. I had three people invest from my advertising career days. I had one guy invest, who’s on my flag football team. I had two people invest who were on the Alumni Advisory Board with me at Texas Tech. I had two people invest with me who were college buddies and are good friends of mine.
It really boiled down to the opportunity, the credibility, and the relationship that I had with them. The second part is now on my second deal. It’s been a lot faster, I’ll just say that, because the first one went well and it’s going well. The second one, I had $200,000. You mentioned the podcast, I raised $200,000 from people who had known me from the podcast. That’s it.
The key thing is the relationships that you just mentioned.
That’s the key to life. It’s the relationships.
For anybody listening to this thinking that they want to go down the road of a syndication, starting a syndication, you can’t advertise. There are a few small exceptions, but you won’t raise enough capital to do what you want to do in terms of apartments. Now, some of those rules have changed recently with crowdsourcing, crowdfunding, these new laws that came out of the JOBS Act. But still, you need to be really careful. Usually that’s limited to accredited investors who are people who make more than $200,000 earned income every year and have a net worth of over a million dollars and that excludes your personal residence. That really narrows the field down. I am reluctant to ask you this question, but did you make any kind of promise or offer in terms of returns? Because that’s usually an area that people get into trouble.
I never make a guarantee about anything. Because if anybody guarantees you a return in real estate then you should run the other way, in my opinion. What I do with my deals is we have the next best thing, which is called a preferred return. A preferred return is a promise to pay the investor first before I make any money on the deal off the cashflow of the property. A preferred return could be say 6%, 7%, 8%. They get the first 8% of the cashflow based on what their investment was. Then there’s usually a split after that and then maybe another split. It depends on how it’s structured. A preferred return is the next best thing.
Before we segue to the passive investing side of this, what did you like the most about syndications? What have you learned to like the least about syndications? Everything has its exciting and positive side, but everything has a little bit of baggage.
What I like the most is it’s an incredible business model for the investors and for myself. It allows individuals to participate in a purchase of a very large apartment community that they likely wouldn’t be able to a purchase otherwise. They can do it passively, keeping with the theme of this episode. You do it passively. I’m not a CPA, but you get some tax benefits as well based on your investment and the depreciation of the property. While you might be receiving money in reality, on paper the IRS shows you’re losing money because of the depreciation on the property. That’s huge. That’s probably the number one reason why my big time high net worth investors invest in syndicated deals with me.
What I don’t like about it. This is what I’ve looked at with my model. It’s kind of a self-reflection in what I enjoy doing and what I don’t enjoy doing. What I don’t enjoy doing as much is getting in on the management and managing it very closely with my management company that doesn’t have equity in the deal with us. What I found is a management company that has equity ownership in the deal with us will act very differently than a management company that’s just collecting their 4% fee. I would say working with management companies that are participating in the deal with us, like I’m doing in the Houston deal, is the way to go. That’s one thing that I’ve learned especially with syndication.
Was that hard to do?
No. You’ve just got to find the right partner.
The theme of being a passive real estate investor, there are a lot of people who like the idea of syndications but don’t necessarily want to be an active investor and put the syndication together. Is there a way for an investor to find a syndicated deal? The problem is, as a syndicator, you can’t advertise. It’s not like you can do a Google search or pick up the newspaper. It’s not like you can look it up. Unless you know somebody who’s doing a syndication or knows somebody who knows somebody, you really are walking in the wilderness. How do you find a syndicated deal?
You’re right. You shouldn’t find it in the newspaper. Although as the government regulations continue to evolve, I think you’re going to see more and more opportunity for that later, but that’s another topic. I would say, how do you find it? You listen to real estate interviews, number one. Number two, just Google syndication and see what comes up. There are a couple people. You can reach out to me and if I don’t have an opportunity, I can recommend people who I know that I can trust who do syndicated deals. I’d be happy to do that. Really, it’s a word of mouth network. It’s funny, people who want to learn how to do syndicated deals and how to raise money, there’s not a lot of books out there that teach about this stuff. I think Gene Trowbridge has one. I think it costs like $10 billion. I know he has a course. There are some others, some I wouldn’t recommend. Shoot me an email. I’ll be happy to give you recommendations for people. Bigger Pockets is a good resource. It has a good BS meter when people post things. That would be another source. I actually posted my opportunity in a way I could on Bigger Pockets and raised some money through that website from people. That’s a good resource as well.
Just to go full circle and wrap this topic up. At a 40,000-foot level, how would you compare investing in residential investment properties, meaning one to four unit properties, how would you compare that to syndicated deals? I know they’re quite different, like an apple to an orange, but at a 40,000-foot level, how would you compare and contrast those two?
If someone were looking at investing in a single-family home versus investing in a passively syndicated deal, I’d say your involvement will be more on single family home because you’re the one responsible. You might have a management company, but you’re the one responsible for managing the management company. If you buy it correctly, it might not be time intensive, but you will have to spend a little bit more time. I would say there’s less risk in syndicated deals because the people who are putting the syndicated deals on and you’re choosing to invest with them. You’re choosing to invest with them because they have experience and a track record and it’s not their first, second or third rodeo. I would say, this is with anything in real estate, the more experienced team and the more you know, like, and trust the team, the more likely your project’s going to be successful.
Ask any experienced person who invest passively in deals, and they say the number one thing they look for is who are the people who are putting the deal on, the sponsors of the deal. This is generally speaking, there’s less risk in syndicated deals and there’s a little bit less time. But with single family homes, I’d say they’re more liquid probably because you can probably sell them faster than if you had shares in a syndicated deal. Although you still can sell shares in a syndicated deal, at least the ones I do. I’m proud of my single-family home. I’m proud of the 250 and 168 units too, but it’s cool to say, “I own three homes, four homes.” Another advantage of single family homes is if you hold on to it for 15, 20, 30 years, it’s yours and nobody else can tell you what to do with it.
And control. Whereas in a syndicated deal, you might have a vote but you won’t have control of the deal. If you get voted in a different direction that you want to go, then you just go along for the ride. Now, I doubt that would ever happen because typically there’s a very clear option in what the recommendation is, but you don’t have the control that you would with single family.
Those are all great points. Call me a control freak, but episode number two, The Ten Rules of Successful Real Estate Investing, one of the key things I harp on is maintain control. This is why I don’t like investing in mutual funds and stocks and paper assets and things that you have no control over. That’s the great thing about investment real estate, is you have complete control. Now, that may not be entirely true with the syndication but I still do like the concept of a syndication. I think it’s a great investment opportunity for many people, for the right person of course. That’s a great comparison. Joe, tell me what your favorite real estate book is.
I would say Equity Happens would be one I always recommend to people. It just talks about how to build equity. They focus on single family homes, but the principles can be applied for other types of investments in real estate as well.
It’s a good book. Unfortunately, it’s not in print anymore. The last time I checked, it was going for $200 a copy. However, the good news is they are looking at releasing a second edition of the book later this year, so that book will be coming back out. It’s fantastic. It is a good book. Joe, tell our listeners how can they find you and your podcast? Where can they contact you?
It’s really simple, JoeFairless.com. On my website, there’s a free crash course for real estate investing. You can go check that out. It has to do with passive investing because it has to do with buying single family homes. I’ve got my podcast. If you just Google my name, Joe Fairless, my podcast is probably like the second link. It’s a daily show. I’ve interviewed Barbara Corcoran, Robert Kiyosaki. I’ve interviewed you, Marco. I’ve interviewed all the greats. You can go check that out. That’s a very quick hitting format. We don’t talk about any of the fluff. We get straight to what is the real estate investors’ best advice ever, and we talk about that.
I agree. Great podcast. I suggest you check it out. It’s well worth your time. Joe, you’ve been a great guest. I really enjoyed having you on the show. I appreciate your time and I look forward to doing some other things with you.
Thanks so much, Marco.
Thanks, Joe. You take care.
That was a great interview with our guest, Joe Fairless. A great guy and really ambitious. He’s just gone from a good start with four residential properties in Texas and just exploded his depth of real estate knowledge and experience through some syndications on a 168-unit deal and now a 258-unit apartment. Congratulations to Joe.
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