15 Ways To Multifamily Success€¦ · many others which led Ben and Max to expand their real estate investing to multifamilies in emerging markets. In November of 2016, Ben and Max

Introduction to 200-300 Unit Multifamilies 15 Ways To Multifamily Success, Revised July 2017

Benjamin Kelley and Nathaniel Max Rock MultifamilyGeeks.com

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15 Ways To Multifamily

Success

Revised July 2017

#MultifamilyGeeks

Introduction to 200-300 Unit Multifamilies

Benjamin Kelley and Nathaniel Max Rock



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15 Ways To Multifamily Success © 2017 Benjamin Kelley and Nathaniel Max Rock Act Level 42, Inc., 2168 S Atlantic Blvd #155, Monterey Park, CA 91754 Call Us To Speak At Your REIA or Multifamily Event (310) 658-7178 [email protected] All Rights Reserved. No Reproduction of written, audio or digital material is authorized without written consent. Violators Will Be Prosecuted. Disclaimer: This work is merely an introduction to the topic of 200-300 unit multifamilies and is not meant as a warranty or prediction. It is the reader’s responsibility to manager his or her own work and obtain proper review by governing authorities and council. This material is presented for educational and discussion purposes.

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Table of Contents Introduction 15 Ways To Partner With Us………………………………………………… 4 01 Invest In Syndicated Multifamily Deals……………….………………………………. 6 02 Become An Asset Manager / Sponsor………………………………………………….. 13 03 Find A Partner………………………………………………………………………….. 17 04 Get To Know Brokers & Get The Pocket Listing and Pocket Deal……………...…….. 22 05 1031 Your Current Property or Properties……………………………………………… 26 06 Know Great Local Suppliers / Vendors………………………………………………… 30 07 Raise Capital……………………………………………………………………………. 33 08 Become A Multifamily Property Manager…………………………………………… 39 09 Know Emerging Markets………………………………………………………………. 45 10 Know The Path of Progress……………………………………………………………. 50 11 Become An Expert At Value Plays…………………………………………………….. 53 12 Become A Deal Syndicator…………………………………………………………….. 58 13 Become An Underwriter……………………………………………………………… 63 14 Become An Expert At Due Diligence…………………………………………………. 69 15 Become A 15 Ways To Multifamily Success Trainer…………………………………. 73 Additional Bonus Ways 16 Surround Yourself With People Who Are Doing What You Want To Do…………….. 74 17 Start a Multifamily Investment Fund…………………………………………………… 76 18 Host an Emerging Market Tour………………………………………………………… 78 19 Get Connected on LinkedIn…………………………………………………………….. 80 20 Set Up A Website………………………………………………………………………. 82 21 Invest Out Of Your Home Market……………………………………………………... 83 22 Prepare For The Downturn……………………………………………………………... 85 Glossary……………………………………………………………………………………. 87 Contact Us………………………………………………………………………………….. 88



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Introduction

15 Ways To Partner With Us

Ben & Max History

Ben and Max have been interested in real estate since 1980 and investing in real estate since 1996. Their activities and holdings have included single family houses, rehabs, a duplex and a four unit in originally two markets: Los Angeles and Cincinnati, OH.

In 2015 Ben and Max discovered the Lindahl Group, Lance Edwards as well as many others which led Ben and Max to expand their real estate investing to multifamilies in emerging markets.

In November of 2016, Ben and Max traveled to Boston to the Lindahl Group’s Sponsorship Event. At that event, Ben and Max were able to meet twelve Sponsors. Ben and Max are still working with several of these Sponsors at this writing. Currently, Ben and Max are investors in 900+ units in four markets: Los Angeles, Cincinnati, Atlanta and Warner Robins, GA with 2 Sponsors in 4 syndications with a total value of $35MM. On one of the properties, Ben and Max are capital partners with an equity share.

Ben and Max have pursued multifamily investing from various

perspectives and referred to this multifaceted approach as “15 Ways….” When discussing what to pursue next, Ben and Max would pull up their ‘15 Ways Presentation’ and ask what could be done on each front to constantly be moving forward. This ever-growing presentation on the 15 Ways to Multifamily Success or 15 Ways to partner with us is an effort to document their journey.

Almost immediately, Ben and Max received requests for documentation and audio recordings to better communicate what they had learned from their multifamily investing experiences. What you are reading or listening to is the response to those requests.

Partnership

Multifamily is different from single family homes in that multifamily progress will almost always be multiplied through value-shared partnerships.

In finding successful partnerships, significant time will be spent on “First Who” partnering. First who is a phrase adapted from Jim Collins, which means the



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partnerships should come first, and then the tasks can be decided on by the team. Because the most functional partnerships are based on shared values, a pre-step to functional partnership is value definition. Ben and Max will present one perspective on the foundational-values-development process. More on this will be covered in Way #03, Find A Partner.

Overview

15 Ways to Multifamily Success is designed as an overview to the subject of multifamily investing. Additional documents are produced or will be produced on each of the 15 Ways to stand alone as individual presentations.

The underlying premise is that by constantly re-examining your place within the 15 Ways, you can continue to proceed forward into the life-changing world of multifamily investing. While there is no getting-rich-quick to be found here, over time, the multifamily investor will be rich.

How To Use This Information

This information is geared toward helping the real estate investor become the multifamily investor in as much of a safe and deliberate fashion as may be possible. To use a sports analogy, Ben and Max want to see base-hits – singles and doubles – and every once-in-a-while a home run. That is how they like to play the multifamily game. Or, to express the use of this information in a slightly less flattering, but still highly functional manner, Ben and Max often feel the ‘falling forward’ model of progress is an appropriate explanation of positive progress. ‘Falling forward’ implies seeing the ups and the downs in a positive light as a tool for personal growth and to open new doors.

The reader / listener should return to the 15 Ways frequently (maybe every week or so) to continue to work a little bit more at each of the Ways to multifamily success.

Dear Reader / Listener It is our sincere hope that you will find your success over time in real estate investing and especially in multifamily real estate investing. We look forward to meeting you and if we share the same values, maybe partnering together on a multifamily deal or syndication. We wish you all the best and success! Good Luck! Ben and Max, May 15, 2017, Los Angeles MultifamilyNerds.com



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Invest In Syndicated Multifamily Deals

What Is A Syndication?

In real estate, a syndication is a group of people pooling money to buy a property. Multifamily investing is particularly well suited for syndication for several reasons. One is that larger properties can be purchase when more investors are involved. We like 200-300 unit multifamilies. Larger properties have advantages like being able to afford (and require) professional management, for example.

Professional management for a 200-300 unit multifamily will typically include a property manager, an assistant property manager, a leasing agent, a maintenance lead and one or two maintenance assistants. Syndication allows investors to combine their investment money to buy a larger and therefore more professionally-managed property. Other economies of scale exist which we will continue to explore throughout this presentation.

Syndication also requires Security and Exchange Commission (SEC) compliance. Later we will go over the required disclosure documents that must be produced as part of a syndication. While such documents do not remove all risk from

an investment (all investments involve risk), filling out the required forms helps to communicate to investors the plans of the investment. It leads to a formal and commonly accepted partnering structure.

Typical Syndication Structure

A typical multifamily syndication structure will be comprised of two entities (often LLC’s), one a management entity and the other a general investor entity. The two entities will typically own a percentage of the total investment, for example, the management entity owning 30% and the general partner or investor entity owning



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70%. The exact split will depend on the individual deal. Investing in a multifamily deal will mean becoming a financial partner in the general investor entity. General investors will usually be offered a preferred return during the term of the investment and a proportional share in any profits at the sale of the investment.

Multifamily investments will often have a hold-term of 2-4 years. Two years is just about when an improved or turned-around 200-300 unit multifamily starts to reap rewards and four years is when diminishing returns starts to kick in from any improvements. Multifamily syndications often involve a value play or turn-around plan which makes the 2-4 year hold a typical improvement hold.

Returns are sometimes called “preferred” because they will be paid prior to other non-essential expenses, like fees to the Sponsor for example. Most investment operating agreements give the Sponsor or Asset Manager the right to withhold preferred returns if cash runs low, but almost all promise to add up the missed payments and pay them on the backend of the deal out of any profits from the deal. Again, these payments will typically be paid before others receive any share of the profit.

General investors will often want to calculate what percent of a property their investment will buy. If an investor puts $100,000 into a 70/30 split property which costs $10,000,000 and requires a $3,000,000 raise, then the percent ownership is calculated as follows: $100,000 / $3,000,000 * 70% = 2.3% of the total property. There can be other ways to calculate percentage ownership so be sure to ask your Sponsor how it works on the deal you are investing in.

Advantages of Investing in a Multifamily

Syndication

Some of the age-old advantages of investing in real estate exist in 200-300 unit multifamily syndication investing. Some advantages include: multiple forms of leverage, task-specific expert team members and professional management.

Leverage

Multiple forms of leverage, for example, are alive and well in 200-300 unit multifamily syndication investing. Two types of leverage at work are financial leverage and property value leverage or equity leverage.

Financial leverage has to do with the loan taken to purchase a property. For example, 80% Loan-To-Value (LTV) loans can be obtained even with a 200-300 unit property. On a $10,000,000 property, for example, only $2,000,000 cash is required down. Fees for the loan and improvements may push up the amount of needed cash higher – called the “raise.” As an example, let’s say the total raise for a $10,000,000 property is $3,000,000. Investing $3,000,000 gets 70% of the $10,000,000 property.

Secondly, we can think of the overall value of the property experiencing a gain and is called property-value or equity leverage. A 10% increase in property value, for example, would be $1,000,000 (10% of $10,000,000) of which $700,000 (70%) would be returned to the investor. $700,000 divided by the original investment of $3,000,000 is a 23.3% return. This is the leverage effect of real estate that makes all



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real estate purchased with a loan more interesting.

Sponsor

Syndications benefit from a task-specific expert called a Sponsor. In the above example, our investor gets 70% of the deal. Why might a single investor not want 100% of a 200-300 unit deal? The answer is that the bank will require an experienced expert multifamily operator, called a Sponsor, to sign on the deal. The advantage of having a Sponsor to the investor is the same as the advantage of the Sponsor to the bank – the Sponsor is an experienced expert 200-300 multiunit operator with an ownership interest. The Sponsor’s ownership piece comes out of the management portion of the property. The Sponsor brings value by taking the property from purchase to sale with expertise and experience along the way.

Multifamily investing is more complex than single family home investing. Banks will not give a loan for a 200-300 unit multifamily unless there is an experienced Sponsor involved. The complexity of multifamily is exactly what makes the higher profits of multifamily investing outside of the reach of the general investor. By partnering through the syndication structure, the Sponsor gets rewarded and the general investor gets rewarded.

Asset Manager

Another benefit of multifamily investments is that they may have the additional position of an Asset Manager. The Asset Manager’s job is to manage-the-manager over the long term. The Asset

Manager will receive weekly reports from the property manager with several key metrics: showings, applications, approved applications, move in’s and move out’s. In cases of underperforming property managers or property management companies, the Asset Manager is tasked with replacing that person or company.

In some cases, the Sponsor will dual as the Asset Manager, but the benefit of the larger property is to have both positions. These two positions, the Sponsor and the Asset Manager are the backbone of enhancing and maintaining the integrity of the investment.

Self Directed Retirement Accounts

Various types of retirement accounts can be directly invested into multifamily properties if they are set up or moved to a Self Directed 3rd Party Administrator. It is a common misconception that retirement accounts must be ‘cashed out’ to invest them in multifamilies. This is not so, a self-



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directed retirement account invests directly into the general partnership entity of the syndication and any proceeds or returns are put back directly into the retirement account. Depending on the type of retirement account, profits grow tax-free. In some cases, accounts can be passed on as an inheritance to heirs with the same tax benefits.

One complaint of individuals investing non-retirement monies into multifamilies can be a higher capital gains burden because of the payment of regular dividends. Depending on the situation, investing in 200-300 unit multifamilies with Self Directed retirement monies can address this issue.

Learning From Investing in Syndications

Investing in multifamily syndications produces a deeper level of understanding of the multifamily investment process. Here are some of the learning outcomes of investing in multifamily syndications.

Syndication Paperwork

There are several documents required in an SEC (Securities and Exchange Commission) regulated syndication. If investing from a self directed retirement account, the third party administrator will also require these documents be provided.

The required SEC documents include the Private Placement Memorandum or PPM, the Subscription Agreement or SA, a Confidential Investment Questionnaire (CIQ), and Articles of Organization for the

LLC involved. Such documents will need to be prepared by an SEC attorney.

Getting To Know Sponsors

Kudos goes to the Lindahl Group who hosts a annual Sponsorship Event where investors can meet Sponsors and discuss their investing criteria. Other groups also host events for investors to get to know Sponsors. Searching for Sponsors can also be achieved through LinkedIn and possibly other multifamily groups. Get to know your Sponsor through relationship building. We recommend spending time with Sponsors to get to know them. One great way to spend time with a Sponsor is to travel to their current syndications, meet the Sponsor there, walk the property and in that way, spend time with the Sponsor.

Building A Portfolio

The moment you invest in a 250 unit multifamily property is the moment you get



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to tell your friends you are an investor in 250 units. While many naysayers are afraid of investing in anything, the rest of us know that the majority of all millionaires made their wealth in real estate. We understand how important it is to own real estate and we want to talk to you about your experiences. Those who own real estate often are surprised at the celebrity-status of being a 200-300 unit multifamily property owner. Others want to know what properties you are now looking at and whether they can be a part of your next deal.

Other Parts of the Country

200-300 unit multifamily syndications will likely be in emerging markets or parts of the country which are growing. One of the first decisions investors will have to make is to invest out of their home market if such markets are yielded out or not growing. Yielded out is an industry term to describe a market at the top of its cycle.

Once the decision has been made to invest outside of one’s home area, taking a trip to an area is a good idea. Going to visit subject properties can be a fun exploration trip which is fully tax-deductible in most cases.

Investment Criteria

When investing in a multifamily syndication, it is necessary to develop a list of investment preferences. For example, an acquisition fee of 1-5% might be on the list. Quarterly or monthly update reports might be preferred. Some investors want a preferred return of 7-10% paid in the first year along with sharing of profits at sale. On the other hand, some investors want to limit capital gains taxes and therefore might actually want all profits held until the sale of the property. The list of criteria is completely up the investor. Each investor should think through his or her own criteria.



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Invest In A Property Checklist □ Print this checklist □ Go to SD Retirement Account Website

□ Search forms & Download Direction of Investment form (DOI) and Private Equity Representation Letter (PERL)

□ Fill our PERL – Private Equity Representation Letter

□ Fill in total amount you are investing, Example $50,000

□ List this according to the number of shares in the syndication you are purchasing, Example if syndication is $5,000 per share, list 10 Shares

□ Scan, send to Sponsor for Sponsor to sign and send back

□ Get back, scan and name “02 PERL (acct hldr name) (acct #) (Prop Nickname)

□ Fill out Direction of Investment form (DOI) □ Scan, Save as “01 DOI (acct hldr name)

(acct #) (Prop Nickname) □ Email-Fax both the PEARL and DOI to SD

Retirement Acct Company □ Make sure email is added to Ring Central

Acct fist (if using ring central mass fax feature!)

□ For Equity Trust, for example, use their fax# plus Ring Central: [email protected]

□ When get email back from Liaison □ Liaison name

□ Liaison phone

□ My Acct#

□ Activity #

□ Get these Documents together and save to

hard drive like below and same with number system to help track

□ 03 Articles of Organization □ 04 LLC Operating Agreement □ 05 Private Placement Memorandum

(PPM) □ 06 Signed Subscription Agreement □ 07 Confidential Investment Questionnaire

(CIQ)

□ 08 Offering Memorandum (OM) □ Email-Fax all documents 01-08 to SD

Retirement Acct Company □ If file has to be resubmitted, send in a single

EmailFax with subjet: Activity# Mem# and a note to replace all prior documents with these documents

□ EmailFax to Sponsor Subject: Confidential Investment Questionnaire

□ EmailFax to Sponsor Subject: Signed Agreement and any last signature pages from the package

□ Update this checklist 6/27/17 ChecklistMax.com “We need a checklist!”



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Exhibit 01 - #1 Syndication Structure

Syndication

Overall Entity(often an LLC)

Management Entity(often another LLC)

Often 30-40% ofthe Overall Deal

Often called “B” Shares

General Investor Entity(often another LLC)

Often 60-70% ofthe Overall Deal

Often called “A” Shares



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Become An Asset Manager / Sponsor

Why Second On The List?

Becoming an Asset Manager or a Sponsor is, admittedly, one of the most difficult things to do on your journey to multifamily success, and therefore it might seem out of place at 2nd on the list of 15 Ways to Multifamily Success. Its placement on the list is purposeful for a few reasons. First is that by thinking through the positions now, you can start to think down the road toward successfully reaching these positions and second, depending on your experience or background, the job of Asset Manager or Sponsor might be more within reach than originally thought.

What Is An Asset Manager Vs. What Is A

Sponsor?

We have started to define both of these positions and now we will dig deeper into what is an Asset Manager and what is a Sponsor. In general, an Asset Manager is responsible for the ongoing profitability and viability of a multifamily project and a Sponsor is responsible for the successful launch of a multifamily project.

Asset Manager

The Asset Manager maintains the ongoing profitability and viability of a multifamily project by managing the property manager. On a 200-300 multifamily, the property management team will be typically composed of a property manager, an assistant property manager, a leasing agent, a maintenance lead and a maintenance assistant. The property manager is responsible for directing this management team and reporting the team’s progress to the Asset Manager on a weekly basis.

The key metrics the property manager will communicate to the Asset Manager are: showings, applications, approved applications, move-in’s and move



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out’s as well as other numbers like make-readies and delinquent accounts. The Asset Manager reviews these numbers weekly to determine if the property is trending in an upward direction or in a downward direction.

The Asset Manager will monitor up or down occupancy trends. The Asset Manager will determine what the highs and lows are of the yearly cycle of vacancies in the fall and winter and increasing occupancy of the spring and summer.

The Asset Manager is responsible for editing and sometimes writing the monthly or quarterly report to investors. Whether the Asset Manager is the editor or writer will depend on the relationship which has been established with the property manager. Most property managers are accustomed to preparing month reports for the owners.

Property management teams are usually hired by the property management company which was hired to run the property. It is the Asset Manager who manages the property management company and this includes handling subpar performance. If the property management team or the property management company are not performing to industry standards, it falls to the Asset Manager to replace the property management company.

In the case of subpar team member performance, the Asset Manager will expect the property manager to correct the team members performance or replace the team member.

Finally, it is the Asset Manager who drives the disposition decision of the property (which is the decision to sell) and walks the property through the disposition process.

In terms of payment, the Asset Manager will share in the acquisition fee, may receive bonuses for fundraising, may receive a monthly management payment and will share in profits at the sale via the percentage of the management entity owned.

Sponsor

The Sponsor is responsible for managing the purchase of the property. The Sponsor will typically handle due diligence, for example, and handle interactions with the bank including handling upfront fees like loan fees and inspection fees.

Ultimately, the Sponsor is the signer on the loan. The bank will require the experience of a Sponsor in addition to a net worth equal to or greater than the value of the loan and a liquidity equal to one year’s worth of payments of the loan being taken.

For this work and risk-taking, the Sponsor is paid handsomely including a portion of the management entity, the reimbursement of all fees at closing, and maybe bonuses for participating in fund raising.

No “Skin-In-The-Game”

The concept of “skin-in-the-game” is the idea that when individuals put money into a deal, they are more motivated to stick to the deal. In general, Asset Managers and Sponsors do not put money into a deal with the exception of the Sponsor paying fees as part of the purchase process (which are returned as part of closing the purchase of the deal). The rational for this is simple, General Investors get their 8-10% preferred



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return by hiring professionals to find, purchase, run and sell the deal.

These two positions of Asset Manager and Sponsor are given equity as payment for their work and as their “skin-in-the-game”. The Asset Manager and Sponsor are well motivated to increase the value of their equity and to maintain their good reputation as providing value for the passive investors. The two positions are one of the benefits of the syndication investment model.

Sponsor As Asset Manager

Although the roles of Sponsor and Asset Manager are technically different, in many cases, the Sponsor will also fulfill the role of Asset Manager. There are a lot of reasons why this might make sense.

First, the Sponsor has the best and first view of a 200-300 unit multifamily property because the Sponsor is often found first. Second, the job of Sponsor carriers more risk than any other position on the syndication and therefore justifies the reward allotted to the Sponsor and the Asset Manager. Third, the better the job done by the Sponsor, the easier the job of the Asset Manager. Therefore, by combining the roles

of Sponsor and Asset Manager, the Sponsor is well motivated to go the extra mile to set up the property correctly so as to lessen the burden later. Finally, because the job of Asset manager is merely monitoring and only intermittently intense, Sponsors can continue working in both capacities on multiple properties.

How Many Properties?

How many properties is too many properties? For example, if a Sponsor has taken on 15 200-300 unit multifamilies in the dual role, is that too many? A couple points here include that a successful Sponsor will continue to move forward with the strength of finding and closing deals so in one way, many deals is a really good sign. Additionally, multifamily real estate cycles with the economy and therefore it is important to be active in an up economy so as to survive the down times. Every Sponsor should be making as many deals as possible to stock pile his or her own resources to service the downturns. Given a choice, choose the very active Sponsor.



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Exhibit 02 - #1 Sponsor and Asset Manager in Relation to Property Management Team

SponsorFinds the Deal,Syndicates theDeal

Asset ManagerManage-the-Manager

Property ManagerManages theManagement Team

Assistant Prop MgrBacks Up the PropMgr

Leasing AgentShows Units,Takes Apps, Han-dles Checkins /Checkouts

Maintenance MgrHandles AllMaintenance

Assist Maint MgrBacks UpMaintenanceManager



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03

Find A Partner

The Most Important

We will cover the topic of finding a partner from several different perspectives throughout this presentation. Simply put, partnership has more power to effect your progress in multifamily (and life) in a positive or negative manner than any other single factor. Ben and Max are found of saying, “Partnership is more important than the deal because this business is all about relationships.”

Define Your Values

The most important aspect of selecting the right partners is personal value-definition. What are the values we want to see in our partners and more importantly, what values we do not want to see in others? We call these “anti-values”.

Anti-values are those values that hurt people. Mountain climbers have an elegant way of presenting the solution to the values issue, “Select partners you would be willing to get stuck on the side of a mountain with.” This is good advice for multifamily real estate teams too.

First Who

We like to say, “first who,” to imply that the challenge is not just about partnership but the selection of the right partners. Asking something of others should immediately direct our intentions self-ward. We can never ask something of others, unless we first ask that of our own self. Therefore value definition stars inside our own self.

Personal Partner

One type of partner, and the most important partner, is a personal partner. In



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addition to selecting by values, when selecting a personal partner you will want to select based on strengths. Two very basic types of personalities exist: the “numbers person” and the “people person.”

Numbers Person vs. People Person

The numbers person is the engineer, the accountant or the statistician. The numbers person will naturally be inclined to do the underwriting, will already know how to use all the features of Excel and will often be able to recite market stats from memory. The numbers person is the back-of-the-house manager, to use the restaurant management model as an example.

Numbers people often go to bed early and get up early. Numbers people may be authors and prefer alone time.

The people person is the one who would rather have a conversation, place a phone call or meet for lunch. The people person will have a Facebook account with 1,000+ friends and actually know every single person by name. The people person will often opt to stay out late conversing and cavorting with friends and acquaintances and is therefore often a late riser.

Introvert vs. Extrovert

Another way of considering personality types is the classic introvert and extrovert personality types.

The introvert prefers to stay home and the extrovert prefers to go out. The introvert may be ferociously private and exist often up in his or her head. The extrovert will almost never be alone, choosing to spend time with friends instead. The extrovert will remember people, faces and names and have a warm and friendly manner of interacting with others. The introvert may be awkward or uncomfortable around other humans.

You Need Both

The most-likely-to-succeed team in multifamily will have one of each personality type in a two-person team. Multifamily work requires an abundance of work from both types of personality types. If you are currently alone or in a two-person team with same personality types, get ready to make a change. Set your intention on finding a personality-type-partner opposite of your own.

How To Find A Personal Partner

Step one to finding a personal partner is knowing you need one. Step two is knowing what personality type you are and that you are looking for an opposite personality type in your partner. Step Three is to advertise for the personal partner type you need.

Where to advertise is based on your comfort level. We recommend Facebook, LinkedIn, and at seminars, as a start. For



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best results, you should be able to openly state, “I’m an x-type personality and I am looking for a multifamily partner of y-type personality.”

Personality partnership can take varied splits but we would propose a simple 50/50 relationship at this point. The division of labor should be pretty obvious along personality type lines. There is roughly half of work for one personality type and half for the other.

If you do not have a personal partner or are in a same-personality-type partnership, this is your number one task – find your opposite personality-type personal partner.

Industry Partner vs. The “A-Team”

With your opposite-personality-type partner in place, it is time to move on to your industry partners. Some mentors and coaches promote an “A-team” concept.

The A-team concept involves finding a group of position-partners, for example, brokers, an SEC attorney, mentors, etc. Our experience has proven it is more productive to focus on two or even one position – the Sponsor.

If you can get to know a Sponsor you are comfortable with, you can invest in that Sponsor’s deals, “raise” for that Sponsor’s deals, walk properties with that Sponsor, Attend due diligence on those properties and ask many detailed and deal-specific questions of that Sponsor. The Sponsor is the next-most-important team member relationship to develop.

How To Meet Sponsors?

Here begins a gratuitous plug for the Lindahl Group. The Lindahl Group offers various multifamily trainings and events. The best event we have been to for meeting Sponsors is the Sponsorship Event in November in Boston. At that event we were able to meet 12 Sponsors and spend up to an hour with each. They talked about their deal criteria, investor criteria and backgrounds. We have invested in deals from two of these Sponsors and maybe a third by this publishing. It is the relationships with these Sponsors which have allowed us to learn.



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Personal Profile

The process for building a relationship with one or more Sponsors is the sharing of the personal profile. The personal profile should be used to track one’s own progress and to communicate it with Sponsors.

The basics of the personal profile include what property you currently own. This will help establish at what level you have reached so far. If you own no property,

then there will be beginning work to do. If you already own single family homes, then you will be on a middle growth path. If you have already entered the world of multifamilies, then you are closest to the goal of syndicating 200-300 unit multifamilies. These are the sweet-spot sized properties which make the most sense for syndication because they can support themselves and their own team.

Partnership Summary

We are proposing various essential partners on your multifamily journey. Number one is your personal partner. Number two is your Sponsor partner. Your steps are to know yourself and pursue your opposite personality-type personal partner and your Sponsor partner will be the best you can find to work with.



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Personal Profile Contact Info:

In what market do you live?

What property do you currently own?

What are your real estate goals?

What books have shaped your beliefs?

What is your strength? Numbers or People (you may only circle one!)

What is your personality? Introvert or Extrovert (you may only circle one!)

Do you have a personal partner? Who? What is their personality & strength?

Do you know any Sponsors? Who?

Other information you would like to share?



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04

Get To Know Brokers & Get The Pocket Listing and Pocket

Deal

Owners Who Want To Sell

Owners of multifamily properties are often looking for an opportunity to sell their properties. The reasons are many-fold and reasonably well known to most in real estate. Owners want to cash-out, retire, have family and health issues, need to trade up, etc. While many owners want to sell, actually selling requires a substantial amount of work. Therefore, there exists an inventory of owners who want to sell, but who have not actually listed their properties for sale with a broker.

Brokers spend their days and nights courting these sellers and are often given permission by these owners to quietly test-the-waters to see if a buyer can be found at acceptable price and terms without actually marketing the property for sale. Such listings are called pocket listings because they are not advertised in the open market.

Get To Know Brokers

By building relationships with multifamily brokers, you can get an initial

look at properties for sale which have not yet reached the open market.

Getting to know brokers is as basic as making regular contact by phone, email, text and in-person, if at all possible. Maybe the most difficult task is finding the right brokers to make contact with in the first place.

How To Find Brokers

One time-tested way to find the right brokers is to go on popular property advertising sites like Loopnet, for example.



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Focus on the emerging markets you have targeted and find brokers with listings in that area.

Pay attention to the brokers, not necessarily the properties listed for sale. These properties have already reached the open market and therefore are less likely to be very good deals. Many of these properties have been for sale for some number of months and have already been ‘picked-through’ by the experts.

Keep a record of the brokers and a log of our contacts with them. These are the brokers to with which to work at building a relationship.

‘Stalk’ Your Brokers?

Stalk is a strong word. With that said, keeping a call log should only be the beginning of your relationship-building.

Do your research on LinkedIn of your selected brokers. Try to find out what interests your brokers have and appeal to those interests, especially if you share those interests. Go out of your way to think of those brokers when you have the opportunity.

If you are able, meet with your brokers in person and take them to lunch or bring them coffee. It is the little things which naturally endear us to each other.

The Hook

The real way to endear brokers to yourself is to be a closer. Brokers will do research on you too and will want to see your activity and your history of work in and around multifamilies. See the section on improving your LinkedIn profile to help establish your track record.

But What If You Are New?

If you are new to multifamilies, this process will be more challenging. One of the best ways to extend your experience is to partner with successful Sponsors. Investing in Sponsor’s deals, fund raising for Sponsors and supporting Sponsors with whatever role may add value to their services will allow your name to be associated with their name.

A less effective but still worthy exercise is to ask your Sponsors if they will recommend brokers for you to call. This method seems like it would e one of the best methods but it has proven only marginal in our experience.

Be encouraged, time passes quickly. Any type of activity as prescribed by the various ways of the 15 Ways will continue to deepen your ability to develop relationships with brokers.



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Know Thyself

Getting to know brokers will naturally fit some personality styles better than others. If you are an introvert, for example, you will want to avoid this strategy and leave getting to know brokers to your people-person partner. If you are a people-

person personality type, then you may want the help of your numbers-personality partner to help you keep track of brokers and their interests and your past contacts with brokers.



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Exhibit 04 - #1 Path To Brokers

Brokers GivePocket Deals

Invest In Sponsor’s Syndications

Fund Raise For Sponsors

Bring Value To SponsorAny Way You Can

SponsorsWho Are ActiveAnd Who Close



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05

1031 Your Current Property or Properties

What Is A 1031 Exchange?

A 1031 exchange is a tax provision which allows investment properties to be sold and bought without having to pay capital gains tax on the profits. The benefit is that equity gains can be used to ‘trade-up’ to bigger and therefore better properties.

The advantage of trading up to larger properties is that property gains grow based on the overall price of the property. For example, a $1,000,000 property which gains 20% in value is now worth $1,200,000 yielding an actual gain of $200,000. Compare this to a property which is worth $20,000,000 which appreciates the same 20%. The actual gain will be $4,000,000.

Given the choice, the property which has the greatest overall value will produce the greatest actual gains. This is an advantage of investing in multifamilies. There are plenty of $1,000,000 properties and plenty of $20,000,000 properties and everything in-between.

Properties You Own or Will Own

To take advantage of this way to multifamily success, you or your partner

will need to already own one or more properties which are not your primary residence.

If you do not have properties already, you will want to keep the 1031 exchange in your thoughts as you consider which investment properties to buy or to invest in. 1031 exchanging allows purchasing initial investment properties for the purpose of eventually trading them for more desirable properties over time.

1031 as a strategy also leads to more in-depth questions about whether a property will become more valuable over time or not. We need to more conclusively answer the question of what factors drive property value. A start at answering the question of



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what drives property values is the concept or theory of emerging markets.

Emerging Market Theory

We will cover emerging markets more later, but basically we define an emerging market as a market with 2% job growth or better for two consecutive years. The US Bureau of Labor Statistics is the source of job growth numbers. Other groups put such numbers into easy-to-understand reports. One example are the Marcus & Millichap Multifamily Market Reports which are updated quarterly and can be found at MarcusMillichap.com.

Other concepts to help guide which properties will increase in value more quickly than others and are covered more later include the Path of Progress and Value Plays or Value Adds. We like to look for, “Emerging Market, Path of Progress, Value Play 200-300 Unit Multifamilies.”

Here is some sample data on markets just to wet your appetite which we will explain more in a later section of this presentation.

Third Party Administrator

When selling a property from which the proceeds will be used in a 1031 exchange, it is required to hold all profits with a third party administrator. Third party administrators are also called Qualified Intermediaries and Accommodators. We recommend you ask your CPA for his or her recommendation if you are looking for a qualified intermediary. Profits from one sale remain with this third party until re-invested into the new property.

Basic 1031 Rules

The basic rules of the 1031 exchange are that within 45 days of the close of escrow of the property being sold, three target properties need to be identified. One of those three properties needs to be completed within 180 days of that same initial date. If selling multiple properties to roll into one larger property, the 45 days and 180 days start from the sale of the first of the group of properties.

1031 Strategy

The goal of the 1031 exchange strategy is to buy a property in an emerging market and every 2-4 years trade-up to a larger multifamily property. As long as the market continues to expand, the values of the properties can expand at similar percentages.

In a later section we also cover dealing with downturns – which will occur in any market, eventually. Options include remaining conservative on the loan-to-value of properties purchased and the option of



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going outside of one market as it cycles downward and into another emerging market is an option too.

Buy & Hold Vs. 1031 Strategy

There is a classic juxtaposition between a buy & hold strategy vs. a 1031 exchange strategy. To resolve the conflict, we recommend generating spreadsheets on both scenarios to analyze the cost-benefit analysis of each option given a particular case and parameters.

Since being involved in syndications with specific hold periods and target sell-values, we have seen wealth created far more quickly with the 1031 exchange strategy. With all that said, the downturn comment above brings added complication.

Consider the 1031 strategy as one of the 15 ways to multifamily success. Over the course of time, a 1031 strategy can generate great wealth.



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Exhibit 05 - #1 $600k – to - $27,845,749 in 12 years?



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06

Know Great Local Suppliers / Vendors

Gold

Good suppliers or vendors are “worth their weight in gold.” Plumbers, electricians, roofers, painters, landscapers, insurance agents, etc. all play a pivotal role in the success of multifamily properties.

What Is A “Great” Supplier?

Great suppliers present a professional approach to daily activities. Professional behavior includes: returning phone calls, showing when promised, estimating accurately, sticking to estimates, performing quality work, taking before-and-after photos, billing accurately, being polite to residents and if we are lucky, caring for the property as if it was their own property. Finding such suppliers/vendors is difficult and keeping them is essential.

How Does It Work?

Knowing great local supplies is another way to multifamily success. Knowing great local suppliers allows you to sit as a servant and adder-of-value between multifamily owners and multifamily tenants

or multifamily property managers. Knowing great suppliers works especially well on smaller multifamilies form 2-50 units.

Smaller multifamilies in the 2-50 unit range suffer from being too big for many owners to manage and too small to generate enough revenue to hire a full-service property manager. Therefore owners look for alternatives and dispatch or referral services is one option.

Dispatch/Referral Service

By making agreements with great local suppliers, a dispatch or referral person can serve owners of small multifamilies. Such a service is perfect to pair with starting to purchase 2-50 unit properties of your own.

The dispatch/referral service is composed of a telephone number and or a website address. The number is advertised to multifamily owners at Real Estate Investment Associations (REIA’s). When owners need help they can contract with the service. The service uses its great suppliers/vendors to call and coordinates the



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work to be done. The service usually performs the billing and bill collection.

Such referral services are not property managers and therefore usually are not required to have the same license requirements as property managers. Often referral services are not even in the same city they serve.

Getting to know great local suppliers/vendors is another of the 15 ways to multifamily success.

Back To 200-300 Unit Multifamilies

The focus of this presentation is on 200-300 unit multifamilies for several reasons. The main reason is that such a property can completely support its own professional management team. Knowing great local suppliers / vendors is a way to multifamily success with a slight change in course because it works better on smaller multifamilies in the 2-50 unit range. This way to multifamily success, therefore fits better with those who have made the decision to start with investing in smaller

multifamily properties and work their way up to the larger properties.

Taking such a route is perfectly legitimate and has many advantages. The first and best advantage is that some will never get into multifamilies unless they first start with smaller, more embraceable properties.

Lastly, it is true that the owners of 2-50 units do, on a regular basis, trade their smaller properties through 1031 exchanging or through simply selling such properties and as the person who knows these owners, the person who has been serving these owners may have first option at these properties. It is not uncommon, for sellers of such properties to help others purchase these smaller sets of units with owner financing and other beneficial terms.

The strategy of knowing great local suppliers / vendors is one of the 15 ways to multifamily success for good reason. This may be the way which allows you to enter the world of multifamilies and eventually move up to 200-300 unit multifamilies.



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Exhibit 06 - #1 Get Between Owners and Tenants and Provide Value

Owners of 2-50Unit Properties

Your ReferralService ofGreat LocalSuppliers

Tenants With Needs(Plumbers, Electri-cians, HVAC, etc.



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07

Raise Capital

Start With Almost Nothing

Raising capital for multifamily syndications is one of the ways to get into multifamilies starting with almost nothing. The one requirement you will need is knowledge so as to not violate the Securities and Exchange Commission’s (SEC) rules for syndications.

No Solicitation Rule

The most problematic SEC rule is the No Solicitation Rule. To protect investors from predatory investment practices, the SEC has gone out of its way to regulate investment offerings. In general, groups and individuals offering investment

vehicles to the general public are required to be licensed (like a stock broker or licensed securities agent). Since most multifamily syndicators are not licensed, specific rules must be followed to get around the license rule. One of those rules is the restriction on general solicitation of the public for an investment.

What is An “Accredited” Investor?

The SEC considers wealthier individuals to be more capable of making their own informed investment decisions. The SEC labels wealthier individuals as “accredited.”

The SEC’s definition of accredited is either a net worth of $1 million (excluding the value of one’s primary residence) or an annual gross income of $200,000 for an individual or $300,000 for a couple for each of the past two years.

What is A “Sophisticated” Investor?

A sophisticated investor, according to the SEC, is a person who is not an accredited investor, but because of his or her



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profession or training or experience, is still capable of making informed investment decisions.

The ‘sophisticated’ investor status is a gray area because the SEC may or may not agree with an individual’s history and training as meeting the sophisticated investor threshold.

Individuals with accounting, finance or investment experience are more likely to be sophisticated investors. Individuals who have invested in multifamilies over some number of years are the most likely to qualify for “sophisticated” multifamily investor status. In the end, the SEC leaves this decision initially to the Syndicator and the Investor. But beware if problems ensue, the burden may fall upon the Syndicator to justify allowing the ‘sophisticated’ investor to invest.

Regulation D 506c Vs. 506b

For 80 years the only method for marketing private placement investments was to those with whom a prior substantive relationship already existed, basically family and friends. In 2013 the “506 exemption” allowed a 506b and a 506c change in rules for private investment offerings.

506b private placement continued the old approach of making private placement offerings to family and friends with the exception of 35 ‘sophisticated’ investors allowed into a single 506b syndication.

The 506c private placement is only available to accredited investors and allows general solicitation or advertising to the public.

In either 506b or 506c, a Confidential Investment Questionnaire or CIQ needs to be collected. The CIQ is the investor’s assertion as to his or her status as accredited or sophisticated.

Which Way To Go?

There will always be some deliberation as to which direction to go with a syndication. In the end, however, once a deal is advertised, that act, makes the deal a 506c and only accredited investors can invest.

What Is Allowed?

When it comes to marketing and the SEC, the SEC has the final word. All who have come up against the SEC describe a particularly unpleasant experience, which is by design.

What is allowed? General marketing to the effect of, “We Specialize in Multifamily Syndications,” and “Do You Need To Place 1031 Funds Now?” and “We Are EB5 Specialists,” are more likely to lead to a substantive relationship where investors can be protected. Luring investors in with promises of large rewards is a bad idea and should be avoided.

EB5

Many Americans do not realize there is a foreign investment provision which essentially trades 500k of investment for green card status under strictly-followed guidelines. The number of EB5 visas is limited to 10,000 a year. Applicants can invest individually or through a pool via



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regional centers which are approved third party administrators.

Back To Starting With Almost Nothing

Raising capital for syndications is one of the best ways to get into 200-300 unit multifamilies, even if you have zero money to invest. If you have family and friends who want to invest in a multifamily syndication, you may be able to share in a portion of a deal as long as you can do some of the work of managing the syndication. This is called being a, “Capital Partner with an Equity Share.”

In terms of developing a substantive relationship, we have found that traveling with those interested in 200-300 unit multifamilies has allowed lasting relationships to develop (see MultifamilyTrips.com for past and upcoming trips). If it is the first time travelling together, fund raising will have to be postponed until a future syndication. This ensures the developing of a relationship first.

Banks Care

There are advantages to building relationships, fund raising from family and friends for a private placement and being a part of the management team of a 200-300 unit multifamily syndication. One advantage is that banks can now see a history of experience with 200-300 unit multifamilies. Over several of these experiences, lenders will consider such experiences when allowing an individual to sign for a loan on a 200-300 unit multifamily. Banks and lenders will almost certainly not allow an individual to sign for a loan on a 200-300 unit multifamily without having had such experiences.

First Step Fill Out CIQ Now

Please find our Confidential Investor Questionnaire (CIQ) attached or at any of our websites. Complete that document and get it back to us as soon as possible so we can start the paper trail of our relationship.

Conclusion

In conclusion, by getting to know each other and learning about private placement fundraising, fund raising becomes an option for future deals on which some



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management work can be done. In the end, relationships can be started, built and strengthened through multifamily trip travel, prior to fund raising. Funds can be raised from family and friends for private placements according to SEC rules. Further, there exists the possibility that ownership of a 200-300 unit multifamily can be obtained through performing some aspects of management. Banks and lenders can then

see, over time, a history of 200-300 unit multifamily involvement through fund raising and ownership to establish experience to eventually sign on loans for such properties. Fund raising is, therefore, one of the best ways, given time, for getting into 200-300 unit multifamily properties.



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Exhibit 07 - #1 Regulation D

506b 506c

family & friendswith a “substantive”relationship -- can beup to 35 “sophist-icated” investors

advertise to the generalpublic -- now can onlyaccept “accredited”investors

Regulation D

Fund Raising to Protect Investors1. Learn about SEC fund raising rules for privateplacements2. Build relationships with other multifamilyinvestors3. Travel with other investors to meet Sponsors,meet brokers, and walk properties4. Fund raise for future syndications5. Share in a small portion of the managing enti-ty in exchange for some management work6. This starts the process of becoming qualifiedto eventually sign on the loan for a 200-300 unitmultifamily



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Confidential Investor Questionnaire Red Wagon Properties, LLC

Please Complete and Return this form so we can Send you Additional Information on the Investment Name(s) ____________________________________________________ date

Address

Phone(s) ____________________________________________________ Fax

Email

I am interested in exploring real estate opportunities. I understand I must meet either of the following requirements for income (Section A) or net worth (Section B) to be considered an accredited investor. Alternatively, I may qualify as a sophisticated investor by virtue of my own (or investment advisor’s) significant investment, business and/or financial experience or expertise, provided in Section C. □ Section A: My annual net income was at lease $200,000 in each of the last two years, or my joint income with my spouse was in excess of $300,000 in each of those years, and I have reasonable expectation of the same income level for the immediate future. □ Section B: My current individual net worth or joint net worth with my spouse is at least $1 million (excluding any equity in my primary residence) □ Section C: I am capable of evaluating the risks and merits of a group real estate investment offering by virtue of my investment, business and/or financial background: Occupation / profession

Business / financial experience

Degrees and designations

Current real estate investments

Prior real estate investments

Years / real estate investment experience

Current real estate investment value

Amount Interested in Investing: $ ___________________________ This is not an offer to sell or solicitation of an offer to purchase an investment or security. This information relates to possible real estate opportunities for qualified purchasers who have established an existing substantive relationship with members of Red Wagon Properties, LLC. Interested persons may qualify as investors by virtue of such pre-existing relationships and by proof of business experience, income and net worth. I/we hereby certify that the above is true and correct. Signature ______________________________________________________ date

Signature ______________________________________________________ date

Email Completed From to [email protected] and [email protected] or fax to 866.898.6449



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08

Become A Multifamily Property Manager

First Who

Property management is a challenge of ‘first who.’ With the right people involved, the job is easy. With the wrong people involved, the challenge is impossible.

‘First who’ applies to the right employees. In property management, attitude is everything. Recruit employees with a positive customer service and problem-solving attitude. This simple statement is easier said than done.

‘First who’ applies to the right suppliers. Seek suppliers who will work on a labor and materials basis. The right suppliers are suppliers who show up when they say, give accurate estimates, stick to those estimates, treat tenants well and care for the property as if their own. Again, these things are easier said than done.

‘First who’ applies to the right tenants. Seek tenants who take care of their own responsibilities without being asked. Work to find and keep tenants who 1. pay on time, 2. care for the home and 3. are good neighbors. Become consistent screeners according to fair housing laws of potential tenants.

If you can do the above things, you will have more clients than you can handle. Owners will beat a path to your door and gladly pay your fees!

Details

Property management is a business of details – the more detail, the better. After that, consistency is the challenge. Performing semiannual walk-through inspections is a best practice, for example, but actually doing the inspections and doing the follow-up work is what produces the results and requires relentless-determination.

What follows is a list of some of the best practices that we like to see in our



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properties and their property managers and practices almost any owner will appreciate.

Auto Rent Collect

Ask tenants to pay rent by auto-draft. Seeing rent being collected without direct involvement is like a dream-come-true. An additional benefit of auto-rent-collect is the heads-up generated when rent is not collected.

Set up auto-rent-collect to implement on the 25th of the month. We like to state in our leases, “Rent is due on the 25th of the month and late after the 1st of the next month.” Collections which are not successful are highlighted prior to the first of the month and immediate action can be taken to make contact with that tenant and find out what is happening.

Active Billing

Work to bill tenants for items which they are responsible for on a monthly basis. Maintain a full list with prices of materials, services and items for which tenants are responsible. Send out monthly bills to

tenants for items they are being charged for.

Even though inspections are semi-annual, there are many items which tenants can be billed for on a monthly basis. One is the popular vertical or horizontal blinds which are in many units. The condition of blinds can be seen from the outside of units. When blinds are not maintained, the property immediately starts to look run-down. The vigilant property manager can see a dismantled or damaged vertical blind from outside the unit, ask to inspect, replace and bill for the new blind on a monthly basis.

Tenants should be notified of active billing practices at the checkin orientation and active billing should start from month one. If active billing has been neglected, it can still be reinstated over a two or three month re-rollout. Some existing tenants and some potential tenants will object, this is part of the screening process and those tenants should receive a full disclosure of the active billing policies. Many will self-select out of such a program. An understanding owner will welcome such self-selection and encourage property management to compassionately implement and follow the rules.

Green RUBBS

Excellent property managers will use a utility billing system called Ratio Utility Bill-Back System (RUBBS). Rubbs should be promoted as "Green" because using less utilities reduces the consumption and carbon footprint of the property and is more socially responsible.



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Combine utility billing or bill-back systems with the monthly active billing invoice which is sent out. Notify residents at lease signing of the policies for utilities and then follow through with bills and collections. It has become more and more common for apartment renters to pay for utilities in addition to rent. With very few exceptions, tenants will use fewer utilities and natural resources when held responsible for consumption. What is good for the environment is also good for tenants and owners.

Semi-Annual Walkthroughs

Make semiannual walkthroughs of units a standard policy. Look for maintenance and non-compliance issues. Follow a checklist to make sure inspections are fair and consistent. Focus on follow-through from inspections into the active billing process. The goal is to keep units rent-ready.

Rent-Ready

The concept of rent-ready is based on the next goal of reducing turnover time periods down to zero. The goal is to

identify maintenance issues which deteriorate resident moral and to maintain units to a rent-ready or as close to rent-ready as possible. Rent-ready simply means what it says, units are ready to rent back out with little or no work.

The irony to rent-ready is that tenants will actually stay longer even though the point of the system is to turn over a unit more quickly in case of a tenant leaving. Many times tenants leave units because it is the only way to get a newly maintained unit. So rent-ready achieves two purposes at the same time: lower turnover and greatly reduced lost rent in the event of a turnover.

Check-In / Check-Out Times AND The

28 Hour Turnover

The benefits of many of the policies presented here are realized in the 28 hour unit turn-over. Ask tenants who are moving out to honor the “check-out” time of 11 am on their last day of tenancy. Additionally ask tenants who are moving in to honor the “check-in” time of 3 pm on their first day of tenancy. This gives a 28 hour window to make units ready.

As long as units have been maintained in a rend-ready condition through semiannual walkthroughs and active billing, units can often be turned over in 28 hours.

The effects of this policy on cash-flow and therefore Net Operation Income (NOI) are astounding. At first we thought a 28 hour turnover with zero lost rent was impossible, the stuff of folklore. But we have lived to see this policy a reality on our properties. If you are a property



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manager and master the 28 hour turnover time with zero lost revenue, you will have more clients than you can handle.

Aggressive Value Add Services

Depending on site specifics, it can be possible to consider adding some more aggressive services for tenants to add value to their living experience and to therefore attractive the best tenants possible.

Especially for class c and class d neighborhoods and properties, a major improvement service is a registered and licensed daycare for the children of tenants. Services like daycare allow tenants to go to work each day knowing their child care needs are being handled.

Many of the 200-300 unit multifamilies we have had the pleasure to own have been and are what we call work-force housing. We prefer the term of “workforce” housing instead of “low income” housing because the vast majority of our tenants are hard-working individuals with years of solid job history. We feel strongly that such individuals have every right to quality daycare. If such daycare services do not exist in the neighborhood of such a property, then it might be time to consider the aggressive option of setting up an onsite daycare facility for the children of tenants.

Even More Extreme Value Add Services

Even more extreme, but increasingly an option in educational systems trending toward charter schools, is the option of setting up k-12 schooling onsite for the students of tenants. In class c

and d multifamily properties with 200-300 units in school districts where public schools have become less-than-desirable, consider the extreme intervention of launching a charter school on the property. Generally speaking, tenants who care about quality education are more motivated to stay and pay rent than some that are not. This is an extreme intervention and all applicable state laws have to be followed.

Focus On NOI

Finally, understand that property management is about keeping an ever-vigilant eye on Net Operating Income (NOI). The reason is that when syndicating or investing in multifamilies, we want to maximize NOI for the purpose of reaching the desired disposition or sale price.

Sale price is the calculation of NOI/cap rate. Even before purchasing a property, as investors and owners, we want to understand current NOI and what changes we need to make to reach the desired sale price. Without going into it too deeply, if we buy a property for $1.7 million and want to sell it for $3.0 million, we need a sale price change of $1.3 million. Given a 7% cap rate in the area,



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that is $1.3 million times 7% or an annual change in NOI of $91,000 or a monthly change of $7,583. That means either an increase in revenue or a decrease in expenses of that amount. Given a 40 unit property, that is only $190 per month per unit. Maybe we bought well and rents are $80 below market, maybe units are improved for a rent increase of $55 and maybe units can be billed back for water $55 per month? It may take some years to get all this done and a strong and growing economy greatly helps, but you can get the idea. Working at this task is what a good property manager will do for the owner.

NOI is all about increasing revenue and decreasing expenses. Assuming an

accurate accounting of capital expenditures, the goal of increasing revenue and decreasing expenses is an ongoing and relentless pursuit of property managers of 200-300 unit multifamilies.

The bottom line is that the focused and motivated property manager is a dream-come-true for owners of all properties and especially for owners 200-300 unit multifamilies. Becoming a multifamily property manager is yet another way to 200-300 unit multifamily success.



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Exhibit 08 - #1 Multifamily Property Management Best Practices

Auto Rent Collect

Active Billing

Semi-AnnualInspections

Rent-Ready

Checkin, CheckoutTime, 28 hour turn-over Zero LostRevenue

“The Best PropertyManager Ever!”



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09

Know Emerging Markets

What Is An Emerging Market?

Our definition of an emerging market is a market with 2% job growth for 2 years in a row. At the very best, this is a general guideline and others will have their own definition of an emerging market.

The market with the better growth numbers is more interesting up to a point. Too high of job growth signals a potential stall. Just as with the economy, a maximum of 3-4% growth might be too much growth. ‘Too much growth’ is a very real concept. Remember the old saying about the candle which burns too brightly may burn less time.

Consider various other emerging market factors in addition or in relation to job growth including the following factors.

MSA & MSA Size

An MSA is a metropolitan statistic area. In general an MSA is a city and the surrounding economic area. Larger MSA’s might be better in terms of the opportunities available. For example, the Cincinnati MSA is approximately 2 million people. The Atlanta MSA of approximately 6 million people might present more overall

opportunities in terms of available deals, quality of suppliers and tenant pool.

Units Coming Online

Units coming online are the number of units currently being built in a market or MSA. These units are tracked through the number of building permitted units which have been applied for and approved. These units will be filled by individuals who are taking advantage of the job growth opportunities. So units being built in comparison to job creation is a consideration. We like to use two year unit online numbers to see if the delivery is accelerating or declining.

There is a complication in regard to the class of units coming online. Usually new units are not low income units. Almost always new units are class b or class a units. Many municipalities try to force developers to provide low cost housing in addition to their new class b and class a units. But in general, existing class c properties might be more resistant to new class a and class b units which come online.



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“2 Yr Jobs / New Units”

See the attached Emerging Market Targets data we have compiled to help us think through on which markets we want to focus. Take Columbus, Ohio, for example. If the number of jobs added for two years of 41,000 (21,000 + 20,000) is divided by the two-year total of new units of 5,300 (2,100+ 3,200) we get 41,000/5,300 is approximately equal to 8. The same number for Tamp/St. Pete is a 12. In general, the Tampa/St. Pete area is not keeping up with the demand for housing. Given this information, it may seem like Tampa/St. Pete is a better target market than Columbus, but consider two additional factors.

Rents

Rents are the average cost for a unit in a market or MSA. Looking at our data again, Columbus runs $862 per unit and $822 average per unit for the last two previous years 2016/2015. Tampa/St. Pete is at $1,078 and $1,013 for the last two years. The higher rents in Tampa/St. Pete are probably being driven by the lack of supply and since the 2 year jobs / new units is 12, we can expect rents to continue to rise as demand for units outpaces production. It still seems like Tampa/St. Pete is a better target market than Columbus.

Ave Unit Price

The last factor we will present is average unit price. Columbus has an average unit price of $49,000 per unit and Tampa/St. Pete has an average unit price of $96,000 – almost double. But does Tampa/St. Pete get double the rent per unit? No. In fact,

Columbus gets a 1.8% rent ratio while Tampa/St. Pete only gets a 1.1 rent ratio.

Rent ratio goes back to the “1% Rule of Thumb” for rental properties which simply states that a unit should get 1% per month rent of its unit price, minimum. Here is an example, if a unit is $40,000, then it should generate a minimum of $400/month in rent. If a unit is $100,000, it should generate a minimum of $1,000/month in rent.

Since Tampa/St. Pete is only a 1.1 and Columbus is 1.8, we like Columbus much better. Additionally, overall we like lower per-unit prices which make it much easier to get 2% and more. For one or our best properties, we bought 237 units for $18,000 per unit. That means anything over $180/month rent per unit is beating the 1% rule. We get 3% on that property with little problem. Plus, we are from Los Angeles and have seen our fair share of ridiculously high per-unit prices (200k – 500k per unit is very common at this writing). So if the choice were between Columbus and Tampa/St. Pete markets, given this data, we like Columbus.

Additional Factors

Of course there are many more factors which others use to analyze emerging markets. We considered other factors too, but this group of factors might be easier for a beginner to understand and consider while still representing substantial data.

Market Cycles

When it comes to market cycles, we like to think of the cycle as a circle. The



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circle mostly represents that the cycle repeats – one of the aspects about the market cycle which humans seem to forget the most quickly and the most often. After we remember that good times mean there will be bad times and bad times mean there will be good times, there are the traditional aspects of the up cycle and down cycle.

Starting at the low we see an upward trend, but slow at first. The acceleration hits a point which it is straight up and everyone starts to believe there is no end to this upward trend and everyone, including the “common” man jumps in to the market. At this point, properties will stay the least amount of time on the market.

But the upward trend starts to slow and eventually hits the peak at which we all

look at each other in disbelief as prices start to fall and properties seem to basically stop selling completely.

Then we pass through the free-fall point where most people believe real estate has seen its day and will never ever recover again. And back around to the bottom of the cycle we go to start all over again.

This is our presentation of market cycles, but we remain a fan of Dave Lindahl and his market cycle work. We defer to Dave for a more complete presentation of the topic.

Knowing emerging markets is another way to multifamily success. Choosing the right markets greatly increases the probability of success.

Market Cycle Theory

Peak of Market hasbeen reached and pricesstart to drop

Market continues todrop, but now slowsheaded toward the low

Market Starts BackUp but most are un-sure so stay on sidelines

Market Accelerates asall now realize we are grow-ing again and even the“common” manjumps into themarket

Peak

Low

Free-FallSeemsUnstoppable



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RedWagonPropertiesLLC.com Emerging Market Targets

San Antonio metro 3 million 2016/15 22,000/26,000 jobs 2.2/2.7% 7,300/4,400 units 5.9/7.0% vac 2 yr jobs/new units = 4 rents 4.2/4.4% $933/895 ave price per unit 85k (1.1) concl: sellers phase 2 submkt: central San Antonio, New Braunfels and Boerne

Houston metro 7 million 2016/15 13,000/21,000 jobs 0/1% 27,000/17,000 units 6.6/6.2% vac 2 yr jobs/new units = <1 rents 1.6/5.5% $1,030/1,014 ave price pr unit 52-78k (1.3) concl: sellers phase 2 submkt: eastern & southern areas

Cincy metro 2 million 2016/15 21,000/15,000 jobs 2.0/1.4% 3,100/2,000 units 3.1/4.5% vac 2 yr jobs/new units = 7 rents 5.3/3.1% $881/837 ave price per unit 50k (1.8) concl: sellers phase 1-2 submkt: core & n Kentucky

Columbus metro 2 million 2016/15 21,000/20,000 jobs 2.0/2.0% 2,100/3,200 units 3.2/4.5% vac 2 yr jobs/new units = 8 rents 4.9/4.4% $862/822 ave price per unit 49k (1.8) concl: sellers phase 1-2 submkt: core, Dublin-Hilliard, Upper Arlington, Grand Vw Hts

Indy metro 2 million 2016/15 23,000/25,000 jobs 2.2/2.5% 2,780/2,600 units 5.4/6.9% vac 2 yr jobs/new units = 9 rents 4.5/?% $821/786 ave price per unit 52k (1.6) concl: sellers phase 1-2 submkt: downtown & SW Marion Cty, Carmel & Plainfield vs. Speedway & Greenwood

Atlanta metro 6 million 2016/15 79,000/70,000 jobs 3.0/2.9% 10,800/7,600 units 4.5/5.0% vac 2 yr jobs/new units = 8 rents 6.7/8.4% $1,074/1,007 ave price pre unit 85k (1.3) concl: sellers phase 1-2 submkt: Buckhead & Midtown

Dallas/Ft Worth metro 7 million 2016/15 130,000/127,000 jobs 3.8/3.7% 22,000/16,400 4.2/4.7% vac 2 yr jobs/new units = 7 rents 7.4/6.9 $1,055/982 ave price per unit 86k concl: sellers phase 1-2 (1.2) submkt: Plano, Frisco, Richardson & n suburbs – Solana Bus Park in Westlake & Southlake

Tampa/St. Pete metro 3 million 2016/15 36,000/46,000 jobs 2.8/3.5% 3,200/3,400 units 4.0/4.6% vac 2yr jobs/new units = 12 rents 6.4/7.3% $1,078/1,013 ave price per unit = 96k (1.1) concl: sellers phase 1-2 submkt: cores of Tampa & St Pete

Phoenix metro 4 million 2016/15 52,000/75,000 jobs 2.7/3.8% 7,400/6,100 units 4.4/4.6% vac 2 yr jobs/new units = 10 rents 6.5/6.7% $937/880 ave price per unit 95k (<1) concl: sellers phase 1? submkt: Tempe & Scottsdale

Columbia metro 800k 2016/15 8,400/? Jobs 2.2/?% 5.3/4.3% vac 2 yr jobs/new units = ? rents 5.7/? $890/842 ave price per unit 55k (1.6) concl: sellers phase 1 submkt: Columbia



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Orlando metro 2 million 2016/15 59,000/50,000 jobs 5.0/4.8% 7,000/4,700 units 3.4/3.7% vac 2 yr jobs/new units = 9 rents 6.5/6.9% $1,113/1,045 ave price per unit 104k (1.1) concl: sellers phase 2 submkt: E Orlando

Ft Lauderdale metro 6 million 2016/15 39,000/24,000 jobs 4.8/2.5% 3,100/3,400 units 4.1/3.6% vac 2 yr jobs/new units = 10 rents 4.6/8.5% $1,492/1,426 ave price pr unit 187k (<1) concl: sellers phase 1-2 submkt: Coral Springs, Plantation/Sunrise 172k – Hollywood, Donia Beach 92k

San Jose metro 2 million 2016/15 35,000/43,000 jobs 3.3/4.2% 6,000/3,500 units 4.0/4.6% vac 2 yr jobs/new units = 8 rents 0/7.9% $2,478/2,450 ave price per unit 300k (<1) concl: seller phase 2? submkt: offerings near corporate campuses

Salt Lake City/Provo metro 2 million 2016/15 39,000/7,500 jobs 3.4/3.5%(?) 5,000/4,000 units 2.9/3.8% vac 2 yr jobs/new units = 5 rents 8.0/5.1% $985/912 ave price per unit 111k (<1) concl: seller phase 1-2 submkt: Provo/Orem

Los Angeles County 10 million 2016/15 75,000/114,000 jobs 1.7/2.7% 12,900/5,300 units 2.9/2.8% vac 2 yr jobs/new units = 10 rents 5.0/6.1% $1,986/1,891 ave price per unit 260k (<1) concl: seller phase 1-2 submkt: downtown

Louisville metro 1.3 million 2016/15 13,000/6,000 jobs 2.0/1.0% 1,200/2,000 units 3.5/4.4% vac 2 yr jobs/new units = 6 rents 5.9/2.6 $825/779 ave price per unit 86k (<1) concl: sellers phase 1-2 submkt: NE & SE Louisville

Sacramento metro 2 million 2016/15 29,000/28,000 jobs 3.1/3.1% 1,000/1,300 units 2.8/3.0% vac 2 yr jobs/new units = 25 rents 11.0/8.9% $1,247/1,123 ave price per unit 102k (1.2) concl: sellers phase 1-2 submkt: core, Davis, near the Carmichael area

Austin metro 2 million 2016/15 23,000/46,000 jobs 2.4/4.9% 13,000/9,000 units 4.3/4.7% vac 2 yr jobs/new units = 3 rents 5.6/6.7% $1,200/1,136 ave price per unit 103k (1.2) concl: sellers phase 2 submkt: Hyde Park & n of core

Riverside/San Bernardino metro 4 million 2016/15 30,000/48,000 jobs 2.2/3.0% 2,600/1,500 units 3.1/3.9% vac 2 yr jobs/new units = 19 rents 8.1/6.0 $1,337/1,237 ave price per unit 131k (1.0) concl: sellers phase 1-2 submkt: Corona, Ontario/Chino, Rancho Cucamonga & Apple Valley



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10

Know The Path of Progress

Where To Buy?

If you have decided to invest in multifamilies, your next question might be, “Where do I buy?” If you remember the previous way to multifamily success, then your answer should be, “In an emerging market.”

But what if the emerging market you have chosen is an MSA with 6 million people? Now where, within the MSA, do you buy? The answer is, “In the Path of Progress.”

The path of progress might be explained most easily as being something like, “The multifamily property is on the

same street (or in the same area) where a brand new Costco superstore is being built.” Substitute any major retail chain store into this sentence and it works. Path of progress means in the vicinity of any new development which is an indication that a particular area is growing or expanding or being redeveloped.

Large retail companies have entire departments devoted to researching and establishing new locations. Even without knowing the specifics, it makes sense that Walmart may establish new stores according to certain criteria and Starbucks may pursue another.



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Knowing the path of progress is one of the ways to multifamily success. Path of progress is the understanding that even in a growing city or region, some parts are growing more than others. Such thinking leads us to better purchases which are more likely to appreciate faster.

If you are familiar enough with an area to now where the path of progress is, you can have the inside track on where the better multifamily purchases should be located. You can use this information to make your own wise purchase decisions. Or you can use this information to advise others who are looking to buy and possibly share in their deals.

Marketing / Brokers

What if we know an area is in the path of progress, how can we find 200-300 unit multifamilies for sale in that area? Some of the basic tactics of marketing to sellers in target purchase areas include the following options. Direct mail can be sent to owners of buildings asking if they would like to sell. Bandit signs work better for single family properties but might also work in a hot area for multifamilies. Remember the experts in an area are the multifamily brokers. Find a multifamily broker who knows the value-add strategies you like and

ask them to help you find multifamilies in your path of progress area.

Middle Upper School Districts

There is one exception to the Path of Progress rule and that is a Middle-Upper School District. We have been able to purchase some of our rentals in a school district that we have deemed to be middle-upper or a 6 or 7 on a scale of 1-10. The benefit has been that although the area was not necessarily in the path of new progress, the solid school district continued to attract individuals to our units.

Notice we did not say a school district rated an 8 or 9 out of 10, but a 6 or 7. We found that the middle-upper school district struck the right balance between a good school district and a really good school district allow rental units to still be purchased at a relatively good value.

Path of Progress

Path of progress is the idea that even in an emerging market, development is a sign of growth and increasing property values. Focus on areas which are growing and progressing.



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Exhibit 11 - #1 Path Of Progress

City or MSAor Marketwith 2% jobgrowth for 2or moreprior years

Pathof

Progress

The Path of Prog-ress is an Areawithin and emerg-ing market whereexpansion, growthand or redevelop-ment is occuring.

Emerging Market



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11

Become An Expert At Value Plays

“EMPOPVP200-300MUM”

Now that we have covered Emerging Markets and Path of Progress, let us talk about Value Plays. Value plays are also called Value Adds. Value plays are the strategies to be implemented to improve or add value to a 200-300 unit multifamily property over the 2-4 year hold of most syndications.

Example ofValue Play on 200-300 unit multifamily

Rents are under-market by $50 per unit...

Sale Price Bump is $50 x 200 units x 12months / .07 (cap rate in area, say 7%) =$1,714,286

We like to use the made-up word “EMPOPVP200-300MUM” to describe the combination of the essential aspects of the best properties. The EM is for Emerging Market, POP is for Path Of Progress, VP is for Value Play and MUM is for Middle Upper (School District) Multies. For us, the middle-upper school district is a bonus and we have not always been able to find properties in such school districts.

“EMPOPVP200-300MUM” is our secret code for a property which combines the best aspects for optimum value growth.

Why is the typical hold for a syndication 2-4 years? In other words, if the property is good now, why won’t it be good for the next forty years? The answer to this question is that syndication-buying is driven by return to investors. Investors demand 7-20% returns. Such returns are less realistic over a long-term hold of five, six, seven or more years.

The 2-4 year time table is the optimal hold for many multifamily improvement value plays. In Year 1 the property is purchased and stabilized. Stabilizing includes removing non-paying tenants and tenants who refuse to follow the property rules, policies and procedures. Additionally unit-repositioning can begin as leases end. (In multifamily, rehabbing is called repositioning.) In Year 2 unit upgrading is continued and a better-screened group of tenants is brought in to fill the newly repositioned units. In Year 3 the benefit of all of the prior two years of hard work begins to be realized in terms of a smoother-running property and improved cash flow. Year 3 is also important for the



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documentation of the better-running property. In general, buyers will want to see twelve months of the new higher NOI resulting from the implemented value plays. By Year 4, the maximum bump in NOI is reached. The best NOI produces the highest sale price and therefore the maximum return to investors over the shortest amount of time.

Cap Rate Leverage

Net operating income (NOI) is defined as income minus expenses where expenses are operational expenses rather than expenditures on capital improvements. Therefore NOI can be increased either by improving revenues and or by decreasing expenses.

NOI = Income - Expenses

Cap rate is a ratio of NOI to sale price. Or, sale price is the NOI divided by cap rate. So if we know that a cap rate in a given market is between 5-7% and our property is producing an annual NOI of $750,000, we can find the price of the property by dividing $750,000/.07 to get a price of approximately $10,714,000.

Sale Price =NOI (annual)

Cap Rate

This formula is most helpful to us when evaluating the effectiveness of value adds in terms of how they effect NOI. For example, If we can show that a value play increases income or reduces expenses by a given number on an annual basis, we can figure the increase in sale price by dividing that number by the cap rate.

Example ofValue Play on 200-300 unit multifamily

Previous Owners Specialize in deeplydistressed properties and improve prop-erty-wide water leaks by installing allnew water lines and a water meter perunit...

Sale Price Bump is $150,000 annualwater bill / .07 (cap rate in area, say 7%) =$2,142,857

Here is an example. In a 200 unit multifamily we are able to raise rents by $100 per unit because the units are currently underpriced. To figure out how much of a bump in sale price raising rents by $100 will produce, here is the calculation. 200 units x $100/mo x 12 months = $240,000/.07 (let’s say a 7 cap is standard for this area) = $3,428,571. That means that if we can buy a 200 unit property and actually raise the rents by $100 per month over 12 to 18 months, all things being equal, we could sell that property for an additional $3,428,571 profit. This is what is meant by cap rate leverage.

Value Plays

The definition of a value play is anything which improves NOI. This is a limited definition for the purpose of this presentation. There can be quite a few value plays for any given 200-300 unit multifamily property and therefore the following list is only the beginning. The greatest assurance of buying a property and selling it for more comes from combining value plays. Basically, the more value plays, the better. Here are a few.

Value Play

Anything WhichIncreases NOI



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Management Value Plays

A management value play exists when current management is subpar or somehow less-than-desirable. Maybe it is an owner who has decided to hire his own team and does not have the capacity to manage the managers. Or maybe it is a management company which should have been replaced long ago. Regardless, a management value play means improving or replacing management to increase the property value. The example given of raising rents by $100/unit is a management value play.

Another management value play could be a failure to remove non-paying tenants. Say the manager has failed to remove non-paying tenants. As an example, if 5 units per month are non-paying and the average rent is $550 per month, if this situation could be fully corrected, the bump in sale price would be: $550 x 5 x 12 = $33,000/.07 = $471,428.

There can actually be many ways a negligent or lax management can let revenues slip away. Correcting each of those situations is a management value play.

Reposition Value Play

Reposition is the word used in multifamily meaning to rehab. Repositions in multifamily are often planned by the unit. A typical micro-reposition might be $3,000/unit. It might include resurfacing kitchen counters, repainting kitchen cabinets, installing a new appliance, maybe a new kitchen floor and an inexpensive upgraded lighting fixture package.

The goal is to be able to raise rents some predictable amount, like $100/month. $100/mo x 30 months would be the length of time to pay back a $3,000 upgrade. But if the money to do the upgrade is in the raise, we can get the equity bump back in a refinance or at the sale with an increased sale price.

Utility Bill-Back RUBBS

RUBBS stands for Ratio Utility Bill-Back System. Water is a huge focus of 200-300 unit multifamilies as water bills can be $100,000, $200,000 a year or more. By allocating to each unit its water usage and charging the tenant for that usage, the water bill can be reclaimed. As we have already discussed, a $100,000 annual savings divided by a 7% cap rate ($100,000/.07) results in an increase of $1,428,571 in selling price.

Other Value Plays

Other value plays may be more subtle and nuanced. Maybe we own the property next door or several in the MSA and this property will share from economies of scale in management or materials. There are any number of value pays which we can measure against the NOI-bump and cap rate leverage to increase the sale price in the value play model.

Syndications Set Sale Price Goals

It is typical for syndications to establish a sale price goal. As an example, if we pay $8 million for a 200-300 unit multifamily and want to sell it in 2-4 years for $13,000,000. That is a $5,000,000



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increase in sales price. We can work backwards to come up with our necessary monthly NOI change by multiplying $5,000,000 x .07 (cap rate) and dividing by 12 months divided by 4 years equals a change in NOI of $7,292 monthly.

The equity bump goal might be to rehab 73 units at $100/mo rent increase. Maybe it takes 1-2 years to rehab 73 units as they become available.

This value play will handle 1 of the 4 years of the desired increase in sale price. We will need 3 others to cover the other

years of the hold. Presuming we have 42 value plays planned and we implement them faster than 4 years, we could sell for the desired price sooner.

If the market is heating up, and cap rates are dropping, say from 7% to 6% or even 5%, we can sell even sooner at the desired price.

The expert who understands improvements or corrections to a 200-300 unit multifamily can plan and execute value plays to make millions for the investors of his or her syndications.



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Value Play or Value Adds Checklist

Property

ck description property specific detail

Raise rents, rents are under-market

Remove non-paying tenants

Make small upgrades to units, raise rents

Gas appliances and water heaters can be replaced with electric, saving gas bill

Water can be billed back to residents through a RUBBS, saving up to 80% of water bill



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12

Become A Deal Syndicator

Syndication

Syndication is bringing together many small investors to invest in a larger asset. Multifamily syndication targets larger properties which are typically out of reach of individual investors. At the same time, multifamily syndication is small enough to stay out of the way of institutional investing groups like hedge funds or retirement / pension funds.

The sweet spot we like to target is 200-300 units. 200-300 unit multifamilies are large enough to cover all the costs of syndication (like attorneys fees for paperwork, for example) yet small enough to be completely ignored by pension funds.

General Partners / Limited Partners

Typical syndication structure divides the property into two ownership components. A typical split might be 70/30 with a majority part typically for limited investors and a smaller part for a management portion or general partners. Management or the general partners are typically given their portion so they will have skin-in-the-game and limited investors are fine with this as long as they get their 7-20% returns.

Keep in mind that most limited partner investors are not multifamily operators and do not want to become multifamily operators. Therefore they are happy to bring in professional managers or general partners which we call a Sponsor and an Asset Manager (covered previously in this presentation). The Syndicator may fill these roles or pass off the property to these positions.

Paperwork

Syndications are Securities and Exchange Commission (SEC) regulated and therefore require the standard paperwork of



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a syndication. Such paperwork includes: a Private Placement Memorandum (PPM), a Subscription Agreement (SA), a Confidential Investment Questionnaire (CIQ), and Articles of Organization (for the LLC). Syndicators will use an SEC attorney to produce these documents. The cost of these documents is rolled into the syndication expenses.

First Come, First Serve

When raising for a syndication, the Syndicator will always raise on a first come, first serve basis. The goal is to have limited partner investors lined up prior to starting the raise. The chronology of events is roughly: produce the paperwork, fill up and close the raise before all who want to invest get to invest. If investors know space is limited, they hurry to get their investment funds into the deal. If investors know space and time is plenty, sometimes they wait. While completing a raise as quickly as possible is the goal, all syndicators eventually come up against the opposite which can produce some serious stress.

One strategy is to always include a construction or reposition amount in the raise or other amount which allows for a

“min-max” raise. A min-max raise is a lower amount or minimum which is required to close and a maximum which includes the construction or improvement or repositioning funds.

It is the syndicator’s job to create excitement, raise, close and get on with the project.

Syndicators Always Close

One essential requirement of a Syndicator is to always close. No matter how many deals, it seems there is a never-ending flow of challenges to closing on a 200-300 unit multifamily. At the risk of using a double-negative, the bottom line is that successful Syndicators never do not close. Syndicators always close.

What happens if a raise is not met in time? Experienced Syndicators will want to have short-term funds at the ready as a backup to meet the min to close.

Experienced Syndicators will work to expand their capacity to deal with last minute problems from a plan B perspective and from an emotional-capacity perspective. Emotional stability in the face of closing pressures is not a small request. Calm level-headed thinking is what will save the deal.

Never Miss A Dividend Payment

Another essential requirement of a Syndicator is to never miss a dividend payment. A typical syndication agreement may state that limited partners will be paid a return on their investment of 8%, paid quarterly during the hold, and a share in the profits at the sale. Even though most agreements allow for the Syndicator to



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withhold the 8% interest payments paid out quarterly and pay them on the back end of the deal if cash flow is low, it is essential that Syndicators allow for sufficient cash reserves to continue these payments under normal circumstances. When Syndicators raise for a deal, being able to say, “I have never missed a dividend payment,” is a huge selling point.

For those Syndicators who have missed a quarterly payment, it is not the end of the world. Nonetheless, we believe a full disclosure of those times and the reasons behind the missed payments is an important thing for future investors to be told.

Relationships

Experienced Syndicators will build relationships with Brokers, SEC Attorneys, Suppliers, Management Companies, etc. These relationships will allow Syndicators to solve problems quickly and effectively when they arise.

Becoming a deal Syndicator is another way to multifamily success.



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Summary of Syndication Documents

The following are provided as one possible example only, in actuality, an SEC Attorney will develop these documents and the contents will vary depending on the offering, the state within which the offering is being made and additional considerations.

Private Placement Memorandum (PPM)

• Summary of Offering

• Important Notices to Investors

• Executive Summary

• How to Review This Offering

• Table of Contents

• Suitable Standards

• Summary of the Company

• Source and Use of Proceeds

• Distributions to Class A Members

• Sponsor’s Fees or Other Compensation

• Conflicts of Interest

• Duties of the Sponsor to the Class A Members and Indemnification

• Risk Factors

• Prior Performance of the Company, the Sponsor and Affiliates

• Investment Objectives and Policies

• Property Information and Exhibits

• Federal Taxes

• Definitions

• Summary of Limited Liability Company Agreement

• Offering Exemption from Registration

• Integration

• Limited Time Offering

• Signatures

Limited Liability Company Operating

Agreement

• Article 1 Definitions

• Article 2 Name, Office, Registered Agent of the Company, Etc.

• Article 3 Duration

• Article 4 Purpose

• Article 5 Members, Capital Contributions, Membership Interests, Etc.

• Article 6 Allocation and Distribution of Certain Items

• Article 7 Appointment of Sponsor; Obligations, Representations and Warranties of the Sponsor

• Article 8 Status of Members

• Article 9 Transfer of Membership Interests

• Article 10 Dissolution and Termination of the Company

• Article 11 Accounting and Reports

• Article 12 Special Limited Power of Attorney

• Article 13 Amendments

• Article 14 Miscellaneous

• Company, Sponsor and Class B Member Signatures

• Class A Member Signatures

Subscription Agreement

• Preliminary Notes

• Forward-Looking Statements

• Company, Number of Shares and Share Value

• Subscription

• Delivery of Check or Wire Transfer

• Acceptance of Subscription

• Receipt of Information and Documents

• Purpose of Company

• Restrictions on Transfer of Class A Units

• Investor Suitability Standards

• Nature and Exemption from Federal Registration



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• Accredited Investors

• Further Representations and Warranties

• Indemnification

• Revocability

• Notices

• Applicable Law

• Entire Agreement

• Assignability

• Signatures Confidential Investor Questionnaire

(CIQ)

• Accredited Investors

• Sophisticated Investors

Offering Memorandum (OM)

• Description of Property

• Price of Property

• Market Analysis

Additional Documents Required by Third

Party Self Directed Retirement Account

Administrators

Private Equity Representation Letter

• Investment Information

• Investment Documentation

• Investment Representation

Private Equity Direction Of Investment

(DOI)

• Account Holder Information

• Processing

• Investment Information

• Exchange of Asset

• Investment Funding Information (Wiring Information)

• Documents Requiring Signature

• Document Titling Instructions

• Delivery Instructions

• Payment of Fees

• Important Account Owner Relationship Representation

Articles of Organization of Operating

LLC or Entity

• State Required Items

Foreign (Non-USA Citizens) Require an

additional form as well.



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13

Become An Underwriter

What Is Underwriting?

Underwriting is analyzing the numbers and other related aspects of a project and comparing them to an established standard.

In multifamily investing we like Dave Lindahl’s trinity of three factors to establish a baseline of property or deal performance. Dave’s three are a cash-on-cash return of 12%, a debt coverage ratio of 1.6 and a cap rate of 8%.

Dave’s “trinity” numbers are a fantastic starting point, but we have done deals which do no exactly match up with those numbers. One of the advantages of being Lindahl-trained and working with Lindahl trained people is the common language we share. We can ask, “Does it meet the trinity?” and we can address a whole slew of variables about a deal quickly and simply.

Spreadsheet

We have included images of the underwriting spreadsheet we use. Many different underwriting spreadsheets exist. We highly recommend never using an

underwriting spreadsheet unless you have personally verified every formula for your own self. You can find a copy of the actually spreadsheet on the contact page of 15WaysToMultifamilySuccess.com. Fair warning, this is a very brief introduction and any reasonable underwriting training is likely a 1-3 day classroom experience.

We like to compare three columns when underwriting: the industry standard numbers for the property, what the seller says the expenses are and what we believe the expenses should be, based on our experience in the market. For example, it is common for sellers to list their actual property taxes being paid. Since most tax jurisdictions reassess property taxes based on sales price, it is important to drop in a new, more accurate, property tax estimate into the third column.

Industry Standard Numbers

There are industry standard numbers for any of the typical categories of 200-300 unit multifamily expenses.

Property Taxes = 80%*Price*Mill Rate Insurance = $250/door



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Repairs & Maintenance = $300-600/door General/Admin = $150-250/door

Management = 4% Marketing/Advertising = $100/door

Utilities = Varies Contract Services = $200-400/door

Payroll = $700-1,000/door Total Expenses Exclding Finance = 50-60%

T12, RR & OM

When underwriting a property, the three important documents are the T12, RR and OM. The T12 is the trailing 12 month report of all revenue and expenses. The RR is the rent roll which has all tenants, what they are paying in rents, what deposits they put down and the date their leases expire. The OM is the Offering Memorandum which has the property, its sale price and comparable properties in the area of the sale property. In general, these three documents are the baseline for underwriting a property.

These are also typically the same three documents Fannie Mae will also require when underwriting a loan on a multifamily.

Pre-Worksheet

The pre-worksheet is designed to help collect and organize information to facilitate filling out the underwriting spreadsheet. Often the property information is presented in a different manner and needs to be aggregated differently for our analysis. The pre-worksheet aids in this process.

Market Analysis Checklist

Contained in a typical Offering Memorandum (OM) is a market analysis. The market analysis will list comparable properties and show comparable rents and selling prices on a per unit basis. The market analysis checklist is used to more systematically analyze the given comparables.

School Review Checklist

We like using www.greatschools.org to find assigned schools and their rating on a scale of 1-10. We love to find schools/districts in the 6-8 out of 10 range. Anything higher than this, usually means we are overpaying for a property.

To be clear, many of the C class and below properties are in schools/districts in the 1-3 out of 10 range. The school review checklist allows for greater scrutiny of this topic.

Underwriting Personality Type

Underwriting is a numbers-intensive activity and a research exercise. You will need a person on your team with the personality to master this topic. Nonetheless, underwriting is one of the 15 ways to multifamily success.



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Exhibit 13 - #1 Underwriting Spreadsheet See 15WaysToMultifamilySuccess for Excel Copy



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Exhibit 13 - #2 Pre Worksheet Checklist



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Exhibit 13 - #3 Market Analysis Checklist



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Exhibit 13 - #4 School Review Checklist



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14

Become An Expert At Due Diligence

Due Diligence

Due diligence is the process of examining a 200-300 unit multifamily property to confirm or deny that the property is what was offered on. Two major components of due diligence include physical inspections and paperwork reviews.

Physical Inspection

All vacant units need to be inspected and some random sampling of the rest of the units need to be inspected. However, almost all of us will inspect every single unit because we are paranoid. By using a good checklist, even 250 units can be inspected in a day.

The physical inspection process involves one of the maintenance personnel

walking the small group around with keys and granting access to units. Tenants will have been previously notified of the inspection and because most tenants work, there is very little intrusion on tenants.

Cats / Hoarder

We always point to statistics to show that every 200-300 unit multifamily property has at least one cat unit and at least one hoarder unit. A cat unit is a unit where pet cats have been allowed to run wild and significantly damage the unit, especially the flooring.

A hoarder unit is a unit where the tenant has so thoroughly filled the unit with personal belongings, that there only remains restricted walking access to most parts of the unit. Typically only a small pathway will remain to the toilet and maybe to the couch.

This is simply to state that people are people and rarely does the prior owner clean up all those variables. To do so would be to overcharge for the property as cleaning up these problems is part of how we make our money.



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Be on the lookout for at least one cat unit and one hoarder unit. The cost of cleanup of these units will have to be considered. In extreme cases, these units may hold up the sale of the property and or require additional price/concession negotiations prior to closing.

Lease Review

A lease review is done to make sure the information system has been kept accurate and up-to-date with the leases. With a current rent roll print out from the information system (Yardi and Onesite are two common information systems), each lease is checked make sure the system has matching information for the deposit amount, the rent amount and the lease-end date. If the rent roll matches the information in the computer system, then it can be reasonably assumed this property is being well managed from a lease standpoint.

Maintenance Record Review

The maintenance log will need to be reviewed for completeness. If there is a lack of data on repair requests, repairs made and

a time lag between the two will signal trouble as to the state of property repair.

In general, look for hints which signal greater problems. One pleasant surprise is that 200-300 unit multifamilies which have been professionally managed will often be in pretty good management shape. Of course we often look for poorly managed properties and expect to get a discount for taking on the hard work of cleaning them up.

Help From Current & New Property

Management

In all cases, current property management will facilitate this review and audit process. Professional managers are familiar with such reviews and good ones are proud to show off their systems and their adherence to those systems.

If plans include replacing current management with a new management company, the new management company is often happy to perform the due diligence in order to get the new business. A caveat here is that the new management company may have a motivation to more harshly review a property or to overlook certain negative aspects of a property. Just keep this in mind as many property management companies are very professional.

Special Situations

Becoming an expert at due diligence becomes more relevant under special situations. This almost always involves a distressed property with a subpar management. A background in construction



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and property management will be very beneficial in these situations.

Becoming an expert at due diligence is another of the 15 ways to multifamily success.



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Exhibit 14 - #1 Physical Property Unit Review Checklist (Also see ChecklistMax.com for more checklists)



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15

Become A 15 Ways To Multifamily Success Trainer

15 Ways To Partner With Us

The presentation, 15 Ways to Multifamily Success is also entitled 15 Ways To Partner With Us. We are looking for partners. For us, partners are those who are interested in 200-300 unit multifamilies and who share similar values with us. If that is you, then we want to partner with you and one option is to give this 15 Ways presentation to your REIA or other investment group.

15 Ways Presentation

The 15 Ways presentation can be given through the cell phones of all recipients. Audience members first bring up the presentation on their phones and go through the slides one-at-a-time along with the presenter. In this way, it is not even

necessary to have a digital projector to give this presentation and the presentation can therefore be given anywhere, at a coffee shop, for example.

Many approach us with the proposition of partnership. There are requirements of this way to multifamily success. Here are a few.

• An SEC required standard Confidential Investment Questionnaire (CIQ) on file

• Being invested in or having invested in 200-300 unit multifamily properties

• Having met us and traveled with us

• Knowing us and sharing our values

Those who are interested should pursue a relationship with us.



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Additional Ways To Partner With Us Bonus 16

Surround Yourself With People Who Are Doing What You

Want To Do

Long Title

This way to multifamily success has the longest title, but it is a simple idea. The idea is to find individuals or groups who are already involved in 200-300 unit multifamilies and spend time with them. If possible, spend time with them practicing each and every way of the 15 ways to multifamily success. This entire presentation is geared toward the idea that a single person, a mentor or a tutor or a teacher or a friend can propel your multifamily career up into a higher trajectory. The idea is that partnership is a requirement of moving forward in this business.

Experiential

Real estate and especially 200-300 unit multifamily real estate investing is primarily an experiential business. Learning requires going through the steps personally. There really is little other way to gain the exposure necessary to personally be able to repeat the processes.

Lots of Help / Costs

Fortunately, many real estate investment practitioners produce trainings much like this presentation. Many engage in trainings, coaching and mentorship programs. Many of these programs require a significant expense or financial commitment. The goal is not necessarily to avoid such expenses, but to make sure that after the education has been completed, the desired results are obtained.

Even if an individual has unlimited funds, engaging in expensive training or coaching may miss the mark. For example, engaging in an expensive coaching program which is exceptional, but focused on single family home investment strategies only to find out that multifamily investing is more of a fit. If possible, we do not want to waste our training money.

REIA’s A Start

Real Estate Investment Associations (REIA’s) are groups of individuals who band together to share their understanding of real estate investing. Many have regular



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meetings and membership for a low annual fee. The advantages of REIA’s is their low cost. The disadvantage is the disparate interests of the members and the widely diverse expertise levels of members. Most members of REIA’s, for example, will be interested in single family homes, not multifamilies and definitely not 200-300 unit multifamilies.

Secret Vs. Open

If you have wanted to invest in multifamilies for a while, but not found the right people to spend time with, we would propose a value to look for -- openness. Secret societies may seem interesting in the movies, but openness produces better and longer-lasting results in real life. Over the years we have found real estate trainers who seem to give just enough information to make sure the next module is purchase, but still not enough information to really understand the business.

Multifamily Trips

In another way to multifamily success, we address hosting emerging market tours and see our MultifamilyTrips.com. Touring an emerging market with a group of investors and Sponsors is a great way to spend time with others who are doing what you want to do. Walking a 200-300 unit multifamily property can produce levels of new

understanding which is priceless. To this day, one of our Sponsors, Steve Firestone, has “driven” so many properties that he literally gets a feeling of whether this is a right property or not. Steve has honed this feeling by driving and visiting literally hundreds of 200-300 unit multifamily properties.

Vetting Relationships

We always propose that traveling together is a great way to vet relationships. Being with potential partners over time and in various situations helps us to decide if we think such relationships will persevere under future pressures. Consider traveling to meet fellow investors and walk properties. Regardless, find ways to spend time with those who are already doing what you want to do.



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Start a Multifamily Investment Fund

Invest In A Syndication Vs. An

Investment Fund

There are two basic ways to invest in 200-300 unit multifamilies. They are to invest in a syndication and to invest in a multifamily fund.

Investing in a syndication is a per-deal investment. For example, a 200-300 unit multifamily is put under contract, a group is formed and investment money is put into the deal. After the deal runs its course, all get their money back with interest and or gains from the sale.

With a multifamily fund, investment money is accepted into the fund and many

similar-focus investments are pursued. A multifamily investment fund will search for and invest in multifamilies which fit the focus of the fund. For example, if a fund is focused on emerging market, path of progress, value play 200-300 unit multifamilies, then that is what the fund will pursue. The fund manager is free to invest in such deals if and when such deals can be found.

REIT

A REIT is a Real Estate Investment Trust and is a form of investment-specific fund. REIT’s can be public or private. If public, money can be directly invested through the stock exchanges.

Some private multifamily REIT’s have found success in trading shares in the REIT for properties. The advantage to the property owners is a degree of distance from their properties which is replaced by professional, full-time multifamily asset managers. The disadvantage of such groups is exactly the same as the benefit, distance from the asset leads to less control and often



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lower profits because now more individuals are involved.

Start Your Own Fund

For the financially experienced, starting a fund may be an option. All SEC rules will need to be fully followed. We

would highly recommend targeting properties such as 200-300 unit multifamilies because they are above most individual investors and below the target of most really big funds.

Staring a multifamily investment fund is another way to multifamily success.



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Host an Emerging Market Tour

Tours Are Fun

Organizing a real estate tour can be as complicated or simple as you would like it to be. Simple means calling all your friends and saying, “We’re going to this emerging market on these dates, want to meet us there?” For the multifamily ‘geek,’ such trips are great fun and present an opportunity to meet Sponsors, walk properties, meet brokers, eat together and generally get more familiar with the area.

MultifamilyTrips.com

We have formalized our trips only slightly by offering updates on our website and coordinating days and properties with our Sponsors. See our site and improve upon or simplify depending on your desires.

Eat Together

We like to make sure we spend meal times together. These times are the best times for discussing goals and interests and these times often remain longest in our memories. We often promote a “No Host Dinner” to make sure participants know they

are paying for their own meals. It just makes it easier for those who do not know each other to come together.

Partnership Testing

Multifamily trips are the perfect time to question if these individuals are the right partners or not. It is a fact of life that if we cannot enjoy the company of another individual, then maybe we should not be investment partners with that person.

Such trips also provide the opportunity to think about the possible situation that if we are not comfortable with any of these people, then we should strive to change our group. We continue to believe



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that partnership is more important than the deal.

Make Trips Annual

If you take a trip every year during a particular time, then make it annual. Trips which are annual are much easier to plan and execute because properties, Sponsors and investors repeat for consecutive trips.

Combine With A Vacation / Write Off

If your family vacations in an emerging market area, it might be possible to write off part of the trip because it is business. Make the multifamily trip the days before or the days after the vacation. If you have children who are older or siblings who are interested in 200-300 unit multifamily investing, then take them on the business trip too.

If you are able, pay for your multifamily trip expenses directly out of your real estate company account. Depending on your revenues and plans, using real estate money to pay for real estate trips is completely reasonable.

Post Trips On LinkedIn?

We cover LinkedIn in a separate way to multifamily success because LinkedIn has become a major player in building a multifamily community. Consider posting your upcoming trips on LinkedIn and looking for additional partners. Exposure on social media can sometimes be helpful and sometimes not helpful.

Hosting an emerging market tour is another way to multifamily success.



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Get Connected on LinkedIn

LinkedIn

LinkedIn has become the premier business networking site. If you do not have an account, open one now. The following are some suggestions to allow you to better network with other 200-300 unit multifamily folks.

URL

First update your URL. Do this from a desktop browser as doing it from a mobile phone is hard to find or inaccessible. Under profile, click update and find “update URL / user name.”

The standard system-given URL will probably have some part of your name and some numbers. Clean this up to be just your name or some phrase like MultifamilyGeeks or some saying that fits you.

This will have the effect of allowing you to remember and use your direct URL link more easily. For example, you could type LinkedIn.com/in/nathanielmaxrock/ and go straight to our contact information. By the way, go to this profile now to help better understand the suggestions below.

You can also include this direct link on your business cards and stationary.

Update Your Profile

Your profile is a calling card which thousands will use to get to know you better. Avoid the resume, but rather state what you can do for others.

Use all caps as headings and say things like WHAT WE DO, HOW WE DO IT, OUR BACKGROUND and any relevant links to your company website.

Use the photo/video uploads at the bottom of the profile to take advantage of placing photos/videos which help



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communicate who you are and what you believe.

Upload a background photo too. Make it a photo which helps to communicate who you are.

Connect

Connect with a group which has something you need AND to which you can give something back. Creating value for others is the basis of any successful business.

Reply to every person who accepts your connection request. Use a pre-written response that explains what you offer and how you can help that person.

Connect with us and you will see the return response we currently send.

Post

Make posts general, designed to attract like-minded individuals. We like our “15 WAYS TO MULTIFAMILY SUCCESS” headline followed by a few lines of suggestions and a link to the 15WaysToMultifamilySuccess.com website with all our suggestions to multifamily success.

Keep In Touch

LinkedIn is exceptional at keeping our business contact list up-to-date. We can scroll through past conversations and posts and be reminded of partners we need to touch base with.

Real Contacts

Lastly, LinkedIn has resulted in us finding real partners for our business. We have sorted through many, but definitely found good partners in amongst the masses. Bottom line, LinkedIn has real people doing real business. We highly recommend you use LinkedIn. Connect with us today!

Connect With Us Today!

Connect with us today at LinkedIn.com/in/nathanielmaxrock/ and LinkedIn.com/in/benjaminbrycekelley/.



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Set Up A Website

Rent Your URL

We have many websites and each has helped us build a community and credibility. The first step is to rent a URL or web address name. Go to Godaddy.com. Create an account. Rent your URL. Add “privacy,” there is no reason for others to know your home address. Once your URL is set, go to the next step.

Open An Account With Weebly.com

Follow Weebly.com’s site setup instructions. Publish your site name through Weebly as your URL.weebly.com.

Forward

Go back to your Godaddy account and click on “Forwarding.” Make sure the forwarding is http://YourURL.weebly.com.

The result of all of this is that typing your URL gets forwarded to your Weebly site. As of this writing, this is a cheap and functional system to set up all your websites.



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Invest Outside of Your Home Market

Utmost Importance

Often with investors, it can be difficult to make the decision to invest outside of their home market. The importance of this one decision can make-or-break a 200-300 unit multifamily investing career.

Consider The Numbers

Since multifamily investing is based on numbers, here is a critical issue. We use the 1% rule of thumb to get a rough idea of the profitability of purchases and compare options from a big-picture perspective. The 1% rule says we should get 1% per month in rent of the gross price of a unit. Here is an example, if a unit costs $40,000, then we

need to get a minimum of $400/month rent to hit the 1% rule. We like to get much more than 1% with 3% being most desirable. If we can get $800/month in rent and pay $40,000 for the unit then we are at 2%.

Unit prices in Atlanta, at this writing, can be as low as $40,000 per unit. In fact, we just paid $18,000 per unit on a 237 unit multifamily in Macon, GA. At $550/month in rent per unit, we are getting 3%+! Now contrast this with our local home market of Los Angeles. A 200 unit is for sale, at this writing, in the San Fernando Valley for a starting price of $40,000,000 or $200,000 per unit. It is expected that multiple bidders will push the price at least 10-20% higher! It is true the units do rent for between $1,800 and $2,200 per month, so the 1% rule is met,



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but consider 2% or 3% to be quite impossible.

Step one to correctly getting over the, “out-of-my-home-market decision,” is to closely examine the per-unit monthly rent divided by the per-unit prices.

Who Is Buying In Los Angeles?

After reading the above description, you might want to understand why there are multiple bidders for the Los Angeles property and how we had almost no competition for the Macon property. Many large funds have conservative parameters on their investment criteria. Here is an example, Los Angeles Unified School District pays money into a retirement pension fund called the State Teachers Retirement System or STRS. STRS is a huge pension fund with billions of dollars to invest according to strictly conservative investment criteria. Therefore they are the type of buyer on a $40,000,000+ property and much larger than that. The Macon property will not even cross their radar.

For us, the Macon property is a dream-come-true. The place looked horrible when we bought it. Sponsor Steve Firestone

immediately went to cleaning up and aggressively leasing up the vacant units. The NOI is headed up and a 2 to 4 year hold will pay back handsome profits to the limited partner investors of that syndication from the improvement work.

Numbers Don’t Lie – Then Why?

If the numbers are so much better outside of one’s home market, then what is the hang-up? To invest outside of a home market, it takes a team – people we trust with our ambitions and our money. Here is the real challenge: finding and building a team of people in which to entrust goals and money. This is why most will never invest in real estate outside of their home market and why such good opportunities will remain for those who are open to doing the work. This is why the Macon property was available in the first place. The locals were too close to see the opportunity and the outsiders considered it too risky.

The Test

One of the first questions we ask those interested in 200-300 unit multifamilies is, “Are you willing to invest outside of your home market?” It is the question which separates the amateurs from the professionals.

Are you willing to invest outside of your home market?



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Be Ready For The Downturn

100% Certainty

There is a 100% certainty that the next downturn is coming. There is a 100% certainty that all economies will cycle. The only question is, “When?” Since none of us can predict the future, the best we can do is to take steps to reduce the harm if and when the next downturn comes.

Classic Precautions

There are some tried and true precautions to take to lessen the effect of the next downturn. Here are a few.

Recession Resistant

While there may be no such thing as “recession-proof,” there definitely is a thing as “recession-resistant.” 200-300 unit multifamilies have some qualities which make them a little more recession resistant than other forms of investments. One is simply that people need a place to live. And class B and class C properties often benefit from those who leave class A properties.

Don’t Overextend

Classic human behavior does not look very far down the road. How many times when driving toward stopped traffic up ahead, does it seem like drivers brake only at the last minute? Sometimes drivers purposely speed toward the stopped traffic to secure a better position once the traffic does start to move again.

Multifamily real estate is often no different. When the economy is roaring, we all want to move as fast as possible. Even though we know the cycle is limited, we continue to race forward.

Resisting over-extending may include limiting leverage. For example,



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limiting loan-to-value leverage to 65% instead of 80%. This keeps payments on debt lower and provides more cushion if revenue were to drop suddenly.

One strategy we have used which is somewhat counter-intuitive is using a 15 year amortized loan instead of a 30 year amortized loan. While the payment is slightly higher, it is only a little higher. Once used to the payment and with only 65% LTV, when trapped by an economic downturn, we simply continue to pay the mortgage, providing a forced savings plan which allowed us to emerge from the tough times with a huge amount of equity.

Another strategy is to keep beak-even points on property to 70% occupancy on the outside chance large numbers of tenants are forced out because of massive job loss.

Of course all of these methods reduce return-on-investment and are therefore resisted by investors and suppliers alike. Be ready to be questioned by stakeholders as to reasons for being more conservative than absolutely necessary.

Read The Signs

Subtle changes in markets indicate the top of cycles. For example, when time-

on-market starts to collapse down to zero or less than zero, signaling a change from a hot market to a super-heated market, it can be time to step back.

Investing in 200-300 unit multifamily real estate often requires selling off property and stock piling cash to be ready for the next upturn.

One best practice is to put the most paranoid team member in charge of a semiannual or quarterly market review. Of course the most paranoid will often see disaster looming even when there is still more time. At least we can have a heads up of changing market conditions. In the end it is a matter of simply staying alert.

The Spoils

Economic downturns are the greatest advantage of patient money. Those who watch and act can multiply money through all phases of the economic cycle.

Being ready for the next economic downturn is yet another way to multifamily success. It is only a matter of time and it will be her soon!



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Glossary

1031 Exchange – A tax provision allowing

profits from one investment to be transferred to another without being taxed.

Disposition (Dispose of, Sell) – A disposition is the sale of a property. Think of “to dispose of”.

Emerging Market – Our definition of an emerging market is 2% or more job growth for two consecutive years or more.

NOI – Net Operating Income which is operating income minus operating expenses (as opposed to capital improvement expenses).

Path of Progress – An area where growth, gentrification, improvement or otherwise economic development is occurring.

Reposition – Another way of saying “rehab” in the multifamily industry.

Syndication – A group of people joining together to invest in a larger or more complicated investment.

Underwriting – Analyzing a deal against a know standard to determine an invest or no invest decision.

Value Play – Activities taken to improve the NOI of a 200-300 unit multifamily. Examples include a management value play, repositioning, utility bill back system to name a few.

Yielded Out – A market (like Los Angeles, New York City or San Francisco) where the amount of investment compared to returns does not make sense when compared to other markets.



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Contact Us

RedWagonPropertiesLLC.com

Please make sure to fill out an SEC Required Standard Confidential Investment Questionnaire (CIQ) before we talk details of any investment.

Ben Kelley [email protected] LinkedIn/in/benjaminbrycekelley/ Max Rock [email protected] LinkedIn/in/nathanielmaxrock/

If you like this pdf, will you please give us a recommendation at

LinkedIn.com/in/nathanielmaxrock/ ?



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