The Alternative Investing Podcast

#135 Dissecting a Killer Socially Minded Alternative Investing Deal

January 03, 2023 Salena Kulkarni Season 1 Episode 135
The Alternative Investing Podcast
#135 Dissecting a Killer Socially Minded Alternative Investing Deal
Show Notes Transcript Chapter Markers

Welcome to the 135th episode of the Alternative Investing Podcast!

In today's episode, we'll take a closer look at a unique alternative investing deal that aims to not only make a profit but also make a positive social impact. 

On top of that, you'll also learn the specific reasons why I find this opportunity lucrative no matter what happens to the economy. 

We cover:

  • What Syndication Is
  • What I Love About Syndicated Deals
  • Reason #1: No Construction Risk
  • Reason #2: Specialised Strategies
  • Reason #3: Getting Paid Before the Deal Maker
  • Reason #4: No Day-to-Day Management
  • Reason #5: Multiple Exits
  • My Final Thoughts

If you're an investor who wants a deeper understanding of what makes a successful alternative investing deal, then make sure to listen to this episode! 



Today, I'll share with you a recent deal I did and explain why I think the market is still full of opportunities. 

Being in the right network at the right time is key to finding these opportunities, so it's important to focus on the actions you take and the education you get. 

In my opinion, actual deals are the least important thing to focus on. 

Honestly, I haven't discussed deals much in my podcasts because people tend to focus too much on the deals themselves.

But since so many of you have asked me to show you the deals, I’ll start including more in my podcast episodes. 

What is Syndication?

So the deal I want to discuss today was a syndicated deal.

For those who don't know, a syndicated deal is when a group of investors work with a single dealmaker to buy a specific asset. 

I've discussed syndicated deals in more detail in past episodes, so if you want to learn more, you can listen to them here.

What I Love About Syndicated Deals

But all in all, what I love about syndicated opportunities is they provide clear information about the asset, how it will be managed, and how the project will be executed. 

You can also get detailed profit, loss, and cash flow analyses.

So from the viewpoint of making investment decisions with a high degree of transparency and control, it’s a great strategy for many people.

For this particular sponsor, I like the fact that they have a proven track record because, in this specific asset, they're executing a syndicated model of a hotel-to-apartment conversion. 

Due to COVID, many second-tier hotels and motels went bankrupt, and there’s a shortage of affordable housing. 

So this hotel-to-apartment conversion is not only a good investment for investors but also a socially conscious way of creating high-quality yet affordable housing for people who can't afford a standard apartment.

In this deal, the cost per unit is low compared to buying a block of units that already have tenants. 

Essentially, they’re going to work with the local government to convert the motel or hotel into individual units that can be rented to individual tenants. 

The property is bought vacant, so there’s no initial cash flow, but as each unit is renovated, they will start to put tenants in them.

As a two-year project, the income will be steady but slow, and as the project progresses, they will convert the units by adding amenities like kitchenettes, and most will be one-bedroom units or studio apartments.

In this market, there is a huge shortage of these units, and they are in high demand. 

So once they convert the property into individual units with the help of the local government, the cost per unit will go up significantly because commercial valuations are based on income over the two-year project plan. 

Regarding the current purchase price, they’re getting a significant discount because they're buying it as a once-operating hotel with 441-bedroom units, and the scope of work is only cosmetic renovations.

So, if I were to tell you what I love about this deal, there are a series of things. 

Reason #1: No Construction Risk

The first thing I love is that there's no construction risk. When I say that, I mean that no ground-up construction is required. And with the current situation with supply chain issues and the high cost of materials, it’s difficult for many construction projects to be completed. 

However, the minor renovations that will be done for this project don't require specialised labour or equipment, which means that materials and labour will be easy to come by. 

I also love the idea that the deal sponsor is experienced because I know this is a complex strategy. 

There are many different parts to it, such as property management, renovation, and repurposing of the hotel. 

These different aspects need to be properly managed for the project to be successful, so I'm glad that the deal operator has a proven track record of handling whatever challenges may come with this project.

In the alternative space, I’m starting to witness inexperienced deal operators offer investors a large share of the returns to attract them to their projects. 

While this can be attractive, I would rather work with someone with a lot of experience and knowledge and accept a smaller return because I believe working with experienced people is more likely to lead to a successful project.


Reason #2: Specialised Strategies

Another reason why I like the strategy is that it’s very niche, so there are not hundreds of people trying to compete. This means that the deal maker can choose deals that have good potential for profits and high returns.

As I’ve said earlier, I love that this deal is very socially-minded.

The rents for the one-bedroom apartments in this area will be about 20% higher than the apartments in this new building once it's finished. The building will also have nice amenities like gyms and pools, and people who live there will have a resort-like experience.

Obviously, the rooms and the kitchen will be smaller, but it’s still very attractive for Gen Zers, millennials, and people who want to live in a certain area but can't afford the high rents.


Reason #3: Getting Paid Before the Deal Maker

The metrics around this particular deal are very compelling as well. 

There’s a lot of market data about how much each unit will be worth once it's finished, and a lot of information about how much rent they can expect to earn. 

On top of that, there’s also a plan that shows how they will increase the value of the building through renovations and changes. 

To give you an idea of how this deal works, the investors have raised about 4.5 million dollars, and the deal itself is worth about 15 to 20 million dollars. 

 The goal is to earn a 20.3% return over two years, which means I would make about 1.5 times my money back. The first 8% earned yearly will go to me before anyone else.

 Another thing I like about this deal is that the dealmaker is investing their own money, meaning they have skin in the game. I don’t know about you, but it's always good to see when the person making the deal is also taking a risk. 

 It shows that their interests are aligned with mine and helps ensure that we all have a shared stake in the outcome.

 So now that you have an overview, the minimum investment for this deal is $50,000, and you need to be a wholesale investor to participate. 

Reason #4: No Day-to-Day Management

 The project is set up so you can invest and then let it run without worrying about it too much. You will receive quarterly reports that let you know how the project is going and any updates or successes. This is important for staying informed about what's happening with your investment.

 What I really like about this deal is that I don't have to do anything. 

 I don't have to worry about tenants or toilets, and I don't have to deal with day-to-day management. If something goes wrong, it's not my problem because I’m a passive investor in this deal.

 The downside of being a passive investor is that I don't get to decide things like paint, colours, or finishes. But I'm not too concerned about that because I trust the deal operator and I've seen the quality of their work.

Reason #5: Multiple Exits

The final thing I like about this deal is its multiple exits. 

 In this case, it doesn't matter what the economy does - whether the market goes up, down, or stays the same - this is still a killer deal.

 From an exit point of view, the dealmaker is looking for a clean sale as the preferred exit. However, if the market isn't doing well and the sale price isn't what they want, they can keep the investment and continue to make money from it.

 When the property is fully occupied in two years, the cash flow will be significant, and as an investor, I'm happy to continue receiving a double-digit return from that cash flow while the market does its thing.

 There are also options for refinancing and paying back invested capital while still allowing investors to participate in the cash flow. From a risk perspective, I think this is a good project to be part of in the current environment.


Final Thoughts

The most exciting part is that they're buying each unit for about $114,000, and the targeted sale price in two years will be about $215,000 per unit. 

 That's a huge increase, and there's a lot of margin for error in this deal. I believe the internal rate of return will exceed expectations like it has in the past. 

 As I've mentioned in my previous episode, engaging in this deal is like having your little paper bag and a few coins of money; the biggest challenge is choosing the right lollipops.

What is Syndication?
What I Love About Syndicated Deals
Reason #1: No Construction Risk
Reason #2: Specialised Strategies
Reason #3: Getting Paid Before the Deal Maker
Reason #4: No Day-to-Day Management
Reason #5: Multiple Exits
Final Thoughts