Finding enough capital for real estate investments can be a challenge. Once you have the capital, finding the right sponsor often means using your network and asking tough questions – both contribute to the success of your investment. Jim Pfeifer sits down for a discussion on syndication sponsors with Greywhale Capital’s founder and managing partner, Alex Moore. Alex examines what you need to know about reviewing syndicators — from finding sponsors to what you need to ask prospective sponsors. Learn more about the passive investment game by tuning in!
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Ask The Right Questions, Find The Right Syndicators: A Guide To Passive Investing With Alex Moore
I’m pleased to have Alex Moore with us. She is the Cofounder and Principal at Greywhale Capital, a private equity firm focused on commercial multifamily real estate. She works with partners to secure assets that are tax-advantaged, stable, and will bring consistent returns to investors.
Alex, welcome to the show.
Jim, thanks for having me.
It is a pleasure. We had a great conversation when we first met and I’m hoping to repeat that here. The first thing we usually talk about is your journey. How did you get into real estate? What was your financial journey? How did you get to where you are?
A lot of folks get into real estate because of wanting to get a secure asset to help make their futures more stable. That was true for me. I realized that there is only a certain amount of hours in the day and I can’t make more off of those hours by doing my traditional jobs. I’m a nurse practitioner by trade. I have done it for years. It is a very great career but it is high burnout.
I have worked with intense patients in a lot of settings, from in-patients, out-patients, refugees and immigrants to Silicon Valley with high net-worth individuals. It is super rewarding but there is not a lot you can do besides more time. Real estate is a great way to create passive income on the side to supplement that. I do that full-time working with Greywhale to secure multifamily assets that allow other investors to put their capital into secure assets.
How did you make the transition to doing real estate full-time? That is an interesting topic for our community. A lot of people’s hope in the W-2 is to reduce hours or transition it and be independent. How did you do that?
That is a goal that a lot of folks have. A lot of people are looking to reduce hours. That works for a ton of people where they can create supplemental income and then reduce their W-2. If you love what you are doing, that is a great way to prevent burnout, especially in medicine. I’m full-time. I have a little one at home and it allows me to spend a lot more time with him.
In the future, it is going to be something where I can pick up part-time if I want to but I made that transition after replacing my income through our investments. When that came to fruition, I had the option of like, “What do I do? Do I continue working full-time or do I take this time that is limited to having a little son at home?”
That is what you want. You don’t necessarily have to quit your job. You want the option. You have the freedom to decide, “I’m going to quit my job or not going to quit my job.” That is the freedom everybody talks about. It is financial freedom but it is the freedom to make your own choices. Did you get there through passive investments or active investments?
It is a combination of both. I thought the only way to get into real estate was to be an active investor and that is not bad because it teaches you a ton. I started with a short-term rental and a small multifamily, a two-unit. I did both in the same six weeks. I bought it all in cash, did a quick refinance, took that money out, and bought a short-term rental that needed a full rehab.
A lot of people think about the deal as the key point to look at when they’re looking at an investment opportunity.
I knew enough about appreciation to be like, “This’ll be a great way to make the asset worth a lot more by buying it way below market and then it will have great cashflow.” I did it as a play against the two multifamily versus short-term and quickly realized my risk tolerance is much more aligned with multifamily. I realized you could do this passively by getting into large investments as an LP. I run my shop, bringing other people into these investments together. I didn’t really know you could do it passively.
People don’t. I started actively. As soon as I learned you could do this passively, I sold everything and went fully passive because that is what I want to do and what I’m best at. How did you find passive? How did you figure out, “This is something I can do?”
It was honestly through listening to a lot of podcasts. Once I found out that that was possible, I started connecting with people who did pass investment opportunities. We have a few folks through family offices that have firms they work with and we talk to them. That is how the network branched out and then also realized that a lot of investors do this passively. It was a relief because you are spending so much time on these active investments to find a way to get this much more of a time saver.
When I was doing my active, I thought I was a passive investor then. I was hiring a property manager to do things for me or contractors but that was not passive at all. Some people still think that you can own properties and have it passive. That is very hard to do. For those that have figured it out, that is fantastic but you are always ending up being an asset manager. When you do passive investing, you hire an asset manager to do everything for you so all of your work is upfront. The active part of being a passive investor is finding a sponsor, evaluating that sponsor, and then looking at the deal. Can you talk to us a little bit about as an LP, a Limited Partner? How do you vet a sponsor? How do you find new sponsors? How do you decide, “I’m going to invest with this one?”
A lot of people think about the deal as the key point to look at when they are looking at an investment opportunity. I have a lot of people when they are starting, where their focus is, “How do I get the highest returns?” They are thinking, “That IRR looks awesome. It is a twenty. I’m going for it.” That is where it is important to know your sponsor and their motivations. Also, how do you get a twenty IRR? For a sponsor, I always ask about what their experience is. What assets do they typically invest in? How familiar are they with the location? It is market and assets.
I ask about their track record. A sponsor should be able to provide that for you. This is a deal that they have under holding, what their performance is, closed deals, or if they are a new sponsor, their partners might have a track record. That is an important thing to ask for too. It is a combination of that key sponsor and their partners. What is the experience being brought together? Those are the things that I start with.
From there, I ask about their partners. This includes the people who are co-sponsors of the deal and also their property management. I have a lot of people who don’t ask about property management. They think of it as the last thing like, “We will stick a property manager on there.” After actively managing my properties, your property manager is a key to the performance and executing the business plan. They are the person who is going to be carrying out the business plan for the property and helping you figure out, “Is the CapEx coming in where it should be? Are we doing the right construction plan, staying under the numbers and meeting our rent projections?” If the property manager is not focused on that, you won’t meet your projections for the performance on that asset.
I haven’t heard that before, at least not very often, that you are analyzing or looking into the property manager. CapEx is Capital Expenditures, so everyone is on the same page. That is the money that you are spending to improve the property and do some of the rehabs. Talking about the property manager. If I get a deal and they say, “Here is the property manager,” what do I do? Do I call them and ask them questions? How do I evaluate whether they are any good or not?
I recommend asking your sponsor, “Have you worked with this property manager before?” If not, “What is the property manager’s experience in that market? Do they manage other buildings in the area that are similar? Have they executed a business plan that you are planning on doing?” This shows the track record for the property manager, both in the market and in executing your business plan.
Another key one, which some property managers will do and some won’t, is to help with due diligence. When you are in the due diligence phase, has the property manager visited the property? Have they done a walkthrough? Do they verify the rent projections that you have and the finishes that you’re planning on doing for those units to get those projected rent bumps? They are in tune with the market. They are placing renters into units so you should know, “Is this something that’s aligned with the market demand?”
Do you ask anything about the rehab cost? Is the property manager managing that? Is that a question you ask? Does the sponsor have somebody else doing that? Is that something you address?
That is, bid out with your contracting or construction team. What I want to do is have a partner that I have worked with before for that construction and contracting work. They have done something similar to this, provided a fixed bid and stuck to that or have a plan if those bids go above what is expected. You don’t want someone who is a sponsor on a deal saying, “We will figure that out. We know that the market is somewhere between $10,000 to $15,000 per unit for the type of term we want to do.” You want them to have a partner that said that that is the real cost because that CapEx is where you enter a lot of risk into a deal if you have significant work that needs to get done on a property.
One of the things I found when I was actively trying to be passive was my property manager did the rehabs for me. When we bought the property, they cost about $5,000 per unit and ended up costing $10,000 per unit. You can see that that was a disaster for the pro-form and the way I thought the property would perform.
You had mentioned evaluating a new sponsor versus an experienced sponsor. There are lots of new sponsors that have sprung up over the last few years, and that is great. I love to try to give them opportunities. Maybe they have a podcast and they are good at marketing, but how do you tell if they are going to be a good sponsor? What are some of the things that you look for in a new sponsor? It is easier with an experienced one because they have deals they have already done. Talk about a new sponsor. How do you evaluate them? What are some of the things that they might have that would say you are going to take a chance with this new person or group?
There are a bunch of new sponsors out there that are starting from scratch. The biggest thing with a new sponsor is what partners they are working with. A lot of new sponsors will have a mentor or partners that they have worked with who are going to help them on this deal. That is great. You want them to have that network because that adds the experience part of it. It gives them a sounding board.
Those people can often be brought in on a deal. They might be a co-GP or on the mentorship board for that person. That is a good way to ask for a new sponsor. Another thing is how many years have they been in commercial real estate? Have they underwritten deals regularly? What is their business before this? What did they do professionally? How does that play into what they are doing? A lot of people will come from a business background. You can ask about what those skills are that they are bringing into this deal and what their performance was previously too to have a professional track record.
Talking about partners, I have seen that there are a lot more partners on deals than it seems there used to be. Maybe I’m noticing it more because that is something that I’m focused on. There are a lot of deals where you come out and it is from a sponsor. You look at the pitch deck and there are six other people on it. How do you go about figuring that out? Do I need to evaluate each sponsor, person or different GP? Do I need to have a call with each one of them and evaluate all of them? What do I do with that?
It is based on your comfort level if you feel comfortable with a sponsor that you are going with and you have worked with them previously. They have done all their homework on the other co-GPs they wouldn’t want to get into a deal or a partnership that they don’t want to get into. The reason that you are seeing a lot more people on deals together is that you can take and get into larger assets by being a team. Often, this team requires more than one KP, so signing on a debt. You need to have a few people to get enough net worth to be able to sign on bigger loans for bigger assets.
You need to have a few people to get enough net worth to be able to sign on bigger loans for bigger assets. Bigger assets tend to be more secure.
Bigger assets tend to be more secure too. When you are getting into that $100,000-plus range, it is typically less volatile and you can negotiate for better property management. For taking down, a $100,000-plus unit, especially in big markets, you are going to need more people into that. Oftentimes, what happens when you get the partners together, there are either 1 or 2 partners that are specifically assigned to asset management and assigned to acquisitions. When you are looking at that team, I always ask, “What are the roles of the people that are on this deal together? How is that going to play out for the lifetime of the asset?”
We have heard the term GP, which is General Partner and LP, which is Limited Partner. Tell us about KP.
A lot of folks on the passive side don’t know this, but a key principle is a person who is guaranteeing that they have enough net worth that they can sign for alone. A lot of people refer to this as the “older person.” Someone who has been around for a while typically has been in real estate for quite some time. They have had the time in the industry to be able to build up enough net worth to say that they are worth X amount of dollars to be able to secure the time.
Commercial loans are typically non-recourse, so that means that no one in the deal can be held liable for the deal’s performance because the loan is dependent on the performance of the asset. That is how most commercial loans are done but they still need a guarantor on a loan. That is where a key principle comes in.
With that key principle, are they on the hook if the deal goes South? How exactly does that work? How do you find someone that wants to sign up for that?
They can be, it depends on your lender, but oftentimes, it is still a non-recourse loan for the majority of the holders on the deal. The KP may have it. Folks tend to sign up for this because they have been in real estate for so long and are willing to take a portion of the GP for signing on that debt. It is a bonus for them because they have looked at the deal, underwritten the deal, confirmed that it is a great one, and taken a portion of the GP for signing on it. To them, that is an easy win.
A lot of GPs have multiple partners. A new GP might partner with somebody more experienced. In 2020, we saw 6 or 7 deals from one particular sponsor in a matter of weeks. They were one of those sponsors that trained other people. They have these deals coming to them from one of their new people and they were co-GPs on that deal.
How do you analyze that? You have a new sponsor who is partnering with a very experienced sponsor but that experienced sponsor is in six deals that they are trying to get going because they are mentoring all these different people. Is that something you take into your analysis? How should we feel about that? What I did was I said, “I’m out. I’m not investing with that person for a while because it seems they have a lot on their plate.”
That is all about first tolerance there too. A lot of mentors will help their students get into smaller assets. It might be as small as a 30-unit or might be as big as a 75-unit but it is in that middle range where it is difficult to get the numbers to be great for property management. What they might do is have an umbrella property management, where their students pick up a few of these deals and then group property management over those to make the numbers work. This is good for geo-located properties. The reason why they are able to offer those many deals at the same time is that they have got access to probably off-market or pre-listed deals that come directly to the lead sponsor.
What the students will do is pick up those deals as being the lead on that. For asset management, that would be one of my key questions because the experienced sponsor may not have the time to look over that many active deals at one time. I tend to assign to asset manager for each of these deals. The studies show you typically cap out at 3 to 5 properties for one person to manage. That is where you start seeing the staff higher up and you get more asset managers brought on to the team. That is where you want to know, “What is your bandwidth?” It is a personal preference there. You can sometimes get great IRS from these smaller deals because it is more like a fix and flip model. If you are doing it, turn it and then get a good IRR because you have turned it so quickly.
Can you give us a few key questions that you ask sponsors every time?
I always ask, “How are you being compensated?” This is a common question but there are a couple of different ways that a sponsor is compensated. One is by the fee structure and the other one is how the promotional splits are happening. There are a couple of different ways and I have seen this happen for different sponsors. Some will waive the fees so there will be no acquisition fee but then they will do 50/50 splits after a pref hurdle is met.
Back to the GP, giving more on the other side is less upfront. It is a little bit less expensive getting into the deal but then it is more expensive on exec because you are splitting that 50/50. Another way that I have seen it is that there will be an acquisition fee somewhere between 1% and 2% and then an asset management fee of typically between 1% and 2% too. It also depends on the size of the management group. I always ask how those fees are going and how those are split up.
Pref is Preferred Return and hurdle is how they set that up. Can you explain what you mean by that?
The preferred return is how much is given back to the LPs that have to be under returns before it becomes a split between the GP and the LP. Sometimes there will be multiple preps. You might see that some deals will have a preferred return of 8% on your money. After that point, there is a 70/30 split but if we hit 10%, it might go more to the GPS. They make it a 60/40 split.
There might be multiple hurdles. You typically see this with bigger groups, the ones that have been around for a long time. You often see lower pref hurdles, meaning they get those splits sooner. The folks who are in that middle ground, who has had a couple of deals, tend to be a little bit more generous on their pref because they are not huge. We would still have a small investor pool that is very loyal. They want to keep giving returns to them so that they are incentivized to keep coming back.
When you are evaluating a sponsor, is there anything that you uncover that you might look at and say, “No way, this is an automatic no. This is easy. I’m leaving. See you later?”
It is 100% if your sponsor is not able to be transparent about the risks on the deal and they don’t have a mitigation plan. If they start getting defensive of the risks about the deal and what the plan is to mitigate those, I’m out every time. I won’t partner with people who don’t have a plan. If you are hoping and praying things go well, they won’t. If there is one thing that real estate is true about, it is an asset. It is hard to screw up but if you don’t plan for the bad, you are not going to be able to mitigate that. That is the first one.
The next one is if they are dodging any questions, there is a response where it feels like they are not being transparent or they can’t give you more information. If you say, “I have a question about this deal. How did you come to the number that you are calculating here for exit cap?” If they are not able to give sound reasoning on entry and exit and how they are doing the slip between those years, then you should get out.
There are plenty of sponsors out there. If one gives you a funny feeling, move on to the next one. You don’t have to feel obligated to invest. That is what I try to tell people. I want to move on from the sponsor evaluation to the deal because we have vetted the sponsor. We think they are great. We are confident in them. They send us a deal. What do we do then? How do we evaluate the deal? You talked about the exit cap so you could explain that a little bit. Other than that, how do you evaluate a deal and decide you are going to invest or not invest?
Especially with the market, the caps are going to be compressed. Part of that is because of inflation and the lending terms are aggressive. With the report that came out from the Federal Reserve, it is key that you ask about your debt and how that is structured for this deal. A lot of people are putting bridge debt on these buildings because they are doing very competitive terms. Bridge debt offers you competitive terms with interest-only periods, a high LTV and a low loan but there is typically a cap rate float. That is market-dependent.
You need to make sure if there is bridge debt on this building that the cap rate float is not too high, wherein the building won’t perform at that higher cap. The other thing you want to make sure is that the base of that rate is low enough so that you are entering on a point that makes sense. On top of that, the interest rate is still a good performance metric. Specifically, something I would ask about is bridge debt. Agency debt is your long-term debt and that is going to be more stable because you have a long-term on it. Typically, it is ten years. That gives you a locked-in rate and hedges against that inflation.
What are some other key metrics that you look at besides debt and maybe the entry and exit cap rate?
Make sure rent adjustments are reasonable for the market because you don’t want them projecting something that the market can’t sustain.
IRR is another one and I always ask how we calculated that. The ways that you can get more aggressive on IRR, a few different ways that I don’t think that everyone knows I ask about GP contribution. I want GPs to be contributing to the deal but if they are contributing more equity to a deal. If you see that they are contributing 20% to a deal, that increases the IRR on the deal because there is less of that LP contribution. It was less expensive.
That IRR can jump because of that. It is not bad. It just means, “This might signal that this still needed more equity on the GP side to make it work.” Another thing is that if you get the IRR, all of a sudden, it is changing. I have had this before where there is an initial IRR that is projected and then you get an update and the IRR jumped. You are like, “What happened?” I asked that too. If any of the numbers change, I need to know that information there. It might be a rent adjustment that they weren’t expecting but make sure those rent adjustments are reasonable for the market because you don’t want them projecting something that the market can’t sustain.
Are there any metrics that if a number comes up in a certain way, similar to the sponsors, that it is just a no-go like you are out?
If you are overaggressive about where your rents can go and it hasn’t been confirmed by your property management team, that is a no-go for me because it is a business that you are buying into. If that NOI is not easily achievable, I’m out because it is getting to be a projection at that point and possibly an appreciation buy. To me, that is not anything that I would go with.
Another thing is, one, your assets should cashflow. I’m not about putting my money and being like, “Let’s do a quick flip and pray someone else buys it for more than we spent.” Cashflow should be able to sustain its debt service at a fairly low economic occupancy. When you are looking at a building, you should always test it and stress test it to see how low can your occupancy rate go and still maintain that service.
You work with a lot of investors so I assume some of them are first-time investors. How do you get the courage to send your check or that first wire for $50,000? How do you make them feel comfortable with that? What is that process? People get to a place where they are like, “I want to invest in a deal.” That’s a lot of money to send to somebody who might you’ve talked to once or twice.
The reason why it is so important for people to understand the LP and GP side and invest as an LP is to understand the limited information given before sending a check, which was a pretty big commitment. Asking your questions, feeling comfortable with the sponsor and then knowing the deal fits you what you feel comfortable with.
Is this something that you would want to invest in? Some people have more appetite for a higher-risk investment strategy. Other people want this to be, “These are going to be safe, secure returns. The asset is a good one because I would buy it.” Some of the higher-risk ones could be more of your dirt cheap, low occupancy. You fill that sucker up and make some great returns. That is a higher risk, in my opinion.
Some people want that and you are going to make some great returns. I am super conservative and it would make me feel uncomfortable. I wouldn’t want to pitch that deal to my investors. As long as the investment structure aligns with you, you align with the sponsor and you feel comfortable, it should never be an amount of money that you wouldn’t feel comfortable saying, “If I lost all of it, I would be broke.” That should never be. That is part of why you have to be an accredited investor is because this is not going to be a life-changing amount of money, but certainly, it is an amount of money that your sponsor should feel great ownership over. It should feel like they are taking care of it.
Talk to me about Greywhale Capital. What do you do? Are you a GP on deals? Are you bringing deals to your investors?
I’m a GP. What I do is work with partners across the nation to get into large multifamily assets that are secure in a tax advantage. These follow my investment principles. They are working with good partners who have good track records and good PMs. They are in markets that are growing that are not iffy. I’m a pretty conservative investor. I want good returns but I’m not going to be shooting for that twenty-plus IRR to get rich quick. This is something where my money will be growing and stable, then getting the tax benefits there.
That is what Greywhale does. We acquire those $100,000 plus-unit buildings, usually in major metros, Texas triplex, Phoenix areas, Salt Lake City, and Denver. We may expand into Carolinas and Florida if we find the right partners to go there. We work with credit investors. Usually, they are working professionals like I was up until July of 2020. Typically, in the tech medical sector, we have some small business owners and lawyers who are in our pool too. These are people who are looking for an alternative investment outside of the stock market, especially with the market.
What is a great podcast that you listen to and you recommend? You can get me more than one if you want.
I listened to so much. It is something where you don’t have a lot of time to read and when you have little ones at home. I love listening to The FORT with Chris Powers. It is a great one. He talks more about business and real estate. I also like Acquired. That is a great business podcast as well. BiggerPockets is always inspirational for people who are trying to learn about what real estate is. That is very active investing focused but it has a lot of great inspirational stories for people as well.
If readers want to get in touch with you, what is the best way to do that?
The best way to do that is through the website GreywhaleCapital.com. We have Connect With Us. You can also email me directly at [email protected]. I have a couple of resources for people if they are looking to compare deals by the deal. It is pretty easy. It is a spreadsheet but it gives you key questions to ask. You can compare, “Is this deal aligned with my investment goals?” If you want it, feel free to drop a line, connect with us like a deal analyzer, and I will send that one over to you.
We are always looking for tools that will help our community become better investors. I’m sure you will have several people join you on that, myself, as well. Thank you very much. It was great having you on the show. We appreciate it. We will talk to you again soon.
Thanks, Jim. I appreciate it.
That was a great conversation with Alex. There were a few things that stuck out to me. She quit her W-2, which is always nice to hear someone gaining that financial freedom. It is not about quitting the W-2. It is about putting yourself in a situation where you have options. You can reduce hours and quit your job. You have options to do what you want because you have found a way to be financially free. It doesn’t mean you don’t have to work anymore or don’t continue to build your wealth. It means you get to choose what you do and that is pretty powerful.
There is some new stuff that came up evaluating the property manager. Usually, we are more focused on evaluating the sponsor and that is the most important thing. That is the thing we do the most, but to dig a little deeper when you are looking at a deal and find out who the property manager is, some of their experience, and all that, that was a great idea. I’m going to start focusing a little bit more on property manager when I look at deals, so I appreciate that conversation.
When you are talking to the sponsors, don’t be afraid to ask them any questions. That includes how you are compensated. That is important to know exactly how they are getting compensated on these deals. If they are afraid to tell you or they waffle, that tells you something right there, which dives into the next thing. Alex had a couple of automatic noes when she was evaluating a sponsor. Some of that was if they dodged questions like how are you paid or if they are not transparent.
There are plenty of sponsors out there. You don’t have to feel obligated to hook into one and invest with them but if they are being dodgy, not being transparent, and not willing to answer questions, then move on to the next one. There are plenty of people that are looking for your capital, so only invest with the best and with quality people. Alex gave us a few more ways to figure out who those people are. I’m appreciative of her being on the show. We will be talking to her again in the future. We will see you next time in the left field.
About Alex Moore
Founder and Managing Partner. Graduate of University of Pennsylvania, Alex has over 10 years of experience in medicine and has taken her keen attention to detail to her full time focus on multifamily real estate.
Alex is a seasoned multifamily investor and is head of acquisitions and asset management at Greywhale Capital, which has doubled growth year over year since its inception. She works with close partners nationwide to secure assets that are tax advantaged, stable, and will bring consistent returns for Greywhale Capital’s investors. Her number one focus is acquiring assets that are the best opportunities to meet the investment goals of Greywhale Capital’s investors.
Our sponsor, Tribevest provides the easiest way to form, fund, and manage your Investor Tribe with people you know, like, and trust. Tribevest is the Investor Tribe management platform of choice for Jim Pfeifer and the Left Field Investors’ Community.
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