Cash Flow Champs Real Estate Podcast

Paul Senior- That’s great to know. In fact, I’ve heard some people say that running a 360-unit apartment complex is easier than a 36-unit apartment complex. It’s because of scalability, economies of scale, and everything that comes with it. However, it’s still a significant transition. Many individuals are used to single-family investments and find it challenging to move to larger multifamily deals like yours. How did you prepare for this transition? Did you create a database of potential equity investors? Could you share some insights on the steps you took to ensure a successful transition?

Bikran Sandhu- Yeah, absolutely. The initial syndication deals we embarked on involved partnering with experienced individuals in the syndication industry. We didn’t go from buying deals on our own to suddenly buying deals with a couple of investors. Throughout the process of searching for deals, we simultaneously built up our investor database. We attended conferences, met people, and discussed our future plans rather than showcasing what we had already accomplished. We would ask if they would be interested in receiving information about our deals once we had one under contract. We encouraged them to review the opportunity and consider investing, but we made it clear that it wasn’t a requirement. It took around 12 to 15 months before we secured our first syndication deal after I started my multifamily journey. During that time, attending meetups and networking events was incredibly beneficial. Initially, the conversion rate from meeting potential investors to actual investors was low, around 1%. Out of every 100 people we met, only one would invest with us. This was primarily due to the lack of a track record. However, my family and close friends from my previous workplaces were the first investors who took a chance on us and they continue to invest with us today. I’m truly grateful for their support as it has contributed to the growth of everyone involved.

Prashant Kumar- Bikran, I know that you raise equity from private investors, including your friends, family members, and referrals. Have you considered accepting larger investments from REITs or family offices? If you haven’t, why not? And if you have, what are your thoughts on it?

Bikran Sandhu- Yeah, it’s a great question, and I think that was the second part of Paul’s question here as well on preferred equity. So we’ve always been a syndication company. For every single deal that we buy, our median check size is always $50,000 across the spectrum. So the first few deals we bought, we had maybe 50 to 60 investors. And now we have close to 200 to 300 investors every single deal, essentially, just because the check sizes for the overall deal have gone a lot bigger. But we have kind of flirted with preferred equity. We have flirted with like, family offices and seeing how they work, right? And you guys probably already know this but as a check size kind of gets bigger and the equity share gets bigger, you have to start giving up on special member rights, you have to start giving up control of the deal to these preferred equity providers. And a perfect example is a deal that we bought in 2020, where we had a family office partner come in and essentially put in a check for about 40% of the total equity, and we brought in 60%. Well, in order to put in 40%, this person wanted to have special member rights where they decided when we could sell the deal, refinance, pay off the loan, or do any sort of capital transaction. If you wanted to fire the property manager or get a new a property manager, they needed to sign off on it. Every budget, every year, they needed to approve it. And then if we were over budget or under budget by 10% or more, they need explanations of what was happening. I mean, we do all that internally, right? So we follow these things in a very detailed manner. So we want to make sure we do right by the investors because we have a fiduciary responsibility for our investors to essentially help them increase their valuation of the property that they’re investing in. But what happens is, when you have somebody coming in with a large check size, when they start taking control over these little things, that’s when things can kind of go a little sideways, because your interests now are not 100% aligned. A case in point is when we try to sell a deal, that one deal did very well for this family office that had come in. They were essentially going to end up around forex their money in about 12 to 15 months, which is a phenomenal return for anyone right in that time period. And for us to sell the deal, they still wanted to sign off on it. They wanted to see all the details of whether to, whether to refinance or sell it right now. And they were actually leaning toward just refinancing and holding it for ten years. And we were just going crazy. We’re like, oh my God, where do you see forex your money in 15 months? I’ve never heard of that in my entire life. Like, sure, you can do that with like, the startup tech company, but you can’t do that in real estate that makes sense to sell. So we had to essentially pay them so we could sell the property. So that kind of left a little bit of a bad taste in our mouths. So we decided to, at that point, not take in any significant check sizes because we didn’t want to give up those special member rights. And then around that time, we had a deal under contract where we brought in a preferred equity provider just to kind of supplement the total equity that we needed. And that relationship was okay as well. It wasn’t too bad, but again, they had their own lockouts. They wanted to approve a sale before we could sell anything. And this was obviously in the heart of 2021 2022 when you could sell a deal, keep your eyes closed, and double people’s money. Really, if you bought at the right place or right time, you didn’t really have to do anything. So around the time that we sold that second deal, they wanted to be paid extra money as well, just so we can induce them to sell the deal. So we didn’t want to be in a situation where it was a good deal for our investors and a good transaction for our investors. And then some other party actually held the right to essentially stop us from doing something. So since then, we haven’t done any pref equity. We don’t work with family offices very often. We will once in a while, but we tell them, your maximum ownership is going to be 10%. We will not give you any special member rights because at the end of the day, even if you are coming into the deal, at the end of the day, we have a fiduciary responsibility to make sure that we don’t just take your money and run away. We’d get in trouble very quickly for that. So if you don’t feel comfortable investing money with us, that’s perfectly fine. We’re not forcing you. But if you do want to invest with us, know that we’re going to have to keep your best interests at heart because that’s the only way we’re going to grow and that’s the only way we’re going to bring everybody up to the next level.

Prashant Kumar- This is an awesome answer. It’s a very humble approach. I think that rather than trying to go high fly and try to get more deals into the belt in a shorter amount of time, which you did already anyway in the last couple of years, you were able to remain humble, and remain to keep interested in retail investors at your heart. You were able to produce the best results for them while not giving up. What you do best is control the deal. Right? So that’s super awesome.