WS1888 How to Leverage JV Equity | Andy Sinclair

Welcome back to another compelling episode of The Real Estate Syndication Show! In today's continuation with the insightful Andy Sinclair, we delve into the world of JV equity and preferred equity. Andy, representing Midloch a distinguished real estate operator and investment company, shares valuable insights into their partnership approach with smaller and medium-sized real estate companies.
 

He emphasizes the significance of local relationships and the pivotal role of an investor in bringing essential resources to aid their local operating partners. Furthermore, Andy sheds light on the challenges Midloch is currently facing, the importance of tracking key metrics, and the habits that have contributed to his success.


Additionally, he offers invaluable advice for passive investors, stressing the significance of communication and consistency in a successful real estate venture. Don't miss this episode, as Andy provides a wealth of knowledge and expertise that will empower you in your real estate investment pursuits.


So, whether you’re an investor, a family office, or simply intrigued by the dynamics of real estate syndication, gear up for a fact-packed session with Andy Sinclair. If you’re hungry for more detailed information on investing with Midloch, email Andy at asinclair@midloch.com , and don’t forget to leverage the data-rich resource, CRE Daily News, for your market analysis needs. Let’s uncover the layers of successful real estate investment strategies right here, on The Real Estate Syndication Show.

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Transcript

Andy Sinclair [00:00:00]:
Got a mentor one time tell me, to be successful in any business, not, not just real estate investing, is you got to be a binder, a grinder or a finder. And to be successful, hopefully you have two of the three. You know, a binder is someone who puts all the pieces together so it works. A grinder is someone, I think, like an analyst or property manager, taking care of the small details you don't see. And a finder is someone who goes out and finds that business and brings it to the group. And if you can have two or ideally three of the three, those things matter.

Whitney Sewell [00:00:35]:
This is your daily real estate syndication show. I'm your host, Whitney. So we are diving back in with our guest today, Andy Sinclair. I'm going to remind you, I hope you'll go back and listen to yesterday's segment with him, if you didn't already. Today we're going to continue the conversation, but we're going to dive into what is a JV equity and preferred equity, and why is that maybe a good option for investors or not? Or some questions that you may want to be asking if you are an LP. Andy, welcome back to the show. Honored to get to spend some more time with you and diving in to midlock and how you all operate and a number of things. And you added so much value to us and listeners yesterday.

Whitney Sewell [00:01:15]:
I hope the listeners will go back if you didn't and hear yesterday's segment where Andy dove into markets they're focused on and why and a number of other things around distressed funds and even some buying criteria that they stick to. I think it's valuable for whether you're an LP or an operator, you need to listen to that and think about that as you're going into deals. So, Andy, welcome back again today.

Andy Sinclair [00:01:38]:
Thank you for having me. Glad to be here.

Whitney Sewell [00:01:41]:
Well, let's jump right back in. I know at know you're coming in with what we talked about a little bit, some of that rescue capital, right, rescue funds. And you're finding deals that way as well. Sometimes it may be through what's called JV equity, preferred equity, maybe even on a high level. Tell us what that means a little bit for a newer LP that's listening. Maybe they hear that terminology, JV Equity, preferred equity. And as an LP, I'm not really.

Whitney Sewell [00:02:07]:
Sure what that means for know.

Andy Sinclair [00:02:10]:
Well, happy to break that down for you, Whitney. And so Midloch at our core is we're a real estate operator and investment company. While we have operations, meaning property people, construction people, accountants, we also have that can operate the property. We also have our brand in Midloch, which we are quite avid in being real estate, LP, JV Equity, preferred equity, or COGP Equity. And what that means in a simplistic form, Whitney, is we partner up with smaller to medium sized real estate companies. Now, some could be a full fledged operator. Maybe they syndicate, maybe they do not. But most real estate companies, for the most part, they do two things really well.

Andy Sinclair [00:02:52]:
They find deals, which that's important, and then they do really good operations. But what they're lacking is the full picture, right, which might include equity, which Midloch provides from our funds and our syndications. They might lack banking relationships, they might lack accounting or some other stuff. And so Midloch, we act as a strategic investor, that is an operator, to bring all those pieces together. But what we get in exchange, though, is while we are an operator or a real estate person, we're a real estate person that also happens to be an investor, and we put all those pieces together to bring a good deal. And sometimes, Whitney, that means we're bringing more than just money, we're bringing resources. I know I was sharing kind of in our pre show, for instance, last know we've got national vendor relationships that we will bring to our local partners. For instance, one was trying to appeal taxes and didn't have a good vendor to appeal property taxes.

Andy Sinclair [00:03:49]:
And so we referred them a vendor, or we were working with a vendor in Phoenix, or an operator in Phoenix, I should say, that needed a small amount for like 100 year flood insurance. Well, in Phoenix, they're not very avid in bidding flood insurance. So midlife as an operator, we brought our insurance people in that operate both in the midwest and in Florida and Texas to help them bid out that flood insurance. So at our core, we're an investor, we're an operator, but we're also bringing resources to smaller and medium sized real estate companies that are our local operating partners.

Whitney Sewell [00:04:22]:
I can see that being very advantageous for operators. Right. That don't have some of those resources.

Whitney Sewell [00:04:27]:
Right.

Whitney Sewell [00:04:27]:
And it could be the difference in the deal working or not.

Whitney Sewell [00:04:30]:
Right.

Whitney Sewell [00:04:31]:
In a lot of scenarios, I think even in one we were talking about before we started recording, right. In the insurance piece, right. You all had a connection that drastically reduced their insurance. Or maybe there's that example or another one, maybe could you share of how you all have come in and made.

Whitney Sewell [00:04:46]:
That work like that?

Andy Sinclair [00:04:48]:
Yeah, it's a good example. So we had a property in Phoenix, and it's at the very edge of a hundred year plus floodplain and so the lender and that property in particular would require us to buy emergency insurance, like, if it ever happened. Right. And so our local partner contacted their local insurance agent, and they brought us very expensive quotes to get this very sliver called almost pandemic flood insurance. Now, if you don't actively bid that pricing out, though, on a consistent basis, then there's not really a lot of incentives for insurance companies to give you the best pricing or tell you how to do that. And so we brought our resources, we brought some of our insurance people that operate nationally and regionally to help better get that pricing down. We were able to get the insurance costs down 70% on that 100 year flood insurance that we needed to meet the lender requirements. So that's just one example.

Andy Sinclair [00:05:46]:
But every property needs something, whether it be on a daily, weekly, or monthly basis. There's always a resource we're providing here at midlock to our local partners. And I think that's key to having not only a good marriage, but a good partnership. Right? You got to communicate and bring resources to each other to make it successful.

Whitney Sewell [00:06:05]:
How are you all, say, finding the partners that are in distress or that.

Whitney Sewell [00:06:09]:
Need help from midlock? Yeah.

Andy Sinclair [00:06:11]:
Whitney, one thing I want to caveat. We work with a lot of partners that aren't distressed, and we also work with partners that are distressed. We do know it's not just one bucket or another. Ideally, our partners are not distressed, and they're a full fledged company that's operating normally. At our core, though, it's about local relationships. So midlock, my partners and I, and our team, we've been in business here. Between the group of us, everyone's been in business for 15 to 20 years. And so we have both regional and national networks that across the United States of real estate groups.

Andy Sinclair [00:06:44]:
But then also we have other contacts, whether it be bankers or accountants, that help us kind of further identify people that we think are good candidates to work with. And then once we identify them, though, or they come to us, we have to evaluate them. So it's not just about the real estate. You also need the operator, the local people to work. And like I tell every operator, every deal is an encore for a future at real estate, property investment. And so you need to get the first one right, so that way, investors will stick with you for the long term. And so that's why we spend a lot of time up front to make sure we have the right people.

Whitney Sewell [00:07:21]:
How are you all raising the most capital right now? What's your ways of getting in front of the most investors or types of investors.

Whitney Sewell [00:07:28]:
Yeah.

Andy Sinclair [00:07:29]:
SoMidloch has a dual prog source when it comes to funding. We have our discretionary funds. SoMidloch is on its third fund. Right now it's my 7th fund that I've worked on personally predating midlock, I worked on four funds for a different group known as MLG Capital, as a multi billion dollar real estate operator. And then as well as we have our individual property syndications, and we use them kind of yin and know for smaller properties or for properties that we think have just the right amount of money, we keep those typically in the fund. But then when we think the property is too big or we want to maybe diversify some risk and share maybe a good deal with investors, we'll also offer a syndication, or what we refer to as a sidecar alongside our fund for investors to come in. And that way you have the ability to pick individual properties, but also you've got the fund. And the way we keep it all fair, Whitney, is we typically give a little bit of a fee discount.

Andy Sinclair [00:08:28]:
We give the best deal to our fund investors. So that way if you're in both, you get the best deal. But we've got two options to raise money, and we try to keep both groups of investors happy. And I'm proud to say most people are doing both for us or investing in both.

Whitney Sewell [00:08:44]:
Yeah, I like that. We've done some sidecars at times as well. But just for the listener that may not understand that ultimately you have a large multi asset fund, right? So I can invest and I'm diversified across maybe a number of assets, right. But then you all will do a sidecar almost like its own little fund on a per deal basis. So maybe if I'm an investor, because I hear this often from our investors, too, it's like, well, wait a minute, I want to know the deal that I'm investing in, or whatever the reason is every investor has different things they're trying to accomplish, and so I want to know that deal so they can invest through the sidecar and accomplish that same thing.

Whitney Sewell [00:09:20]:
Is that accurate?

Andy Sinclair [00:09:21]:
That is 100% accurate.

Whitney Sewell [00:09:23]:
You got it? Yeah. Love that.

Whitney Sewell [00:09:25]:
Love that thought process. And just the opportunity for investors.

Whitney Sewell [00:09:30]:
Right.

Whitney Sewell [00:09:30]:
Depending on what their goals are trying to accomplish, what does the fund typically look like? How many deals are you all putting in a fund, and what's the lifecycle of the fund?

Andy Sinclair [00:09:41]:
Well, we probably diversified a little too much, but we typically are looking to put anywhere from 15 to 20 properties in a fund in all shapes and sizes of different property. Types. So I know apartments is a very popular syndication type, but apartments only make up about 40% of our funds. We're big believers in industrial warehouses and retail and to a lesser extent, some self storage or maybe even some distressed office. And so we try to keep it diversified because that way you're hedging, your risk of any one property ends up maybe not going the way you think, but you still want to maybe overweight a few winners in there.

Whitney Sewell [00:10:18]:
Yeah. Wow.

Whitney Sewell [00:10:19]:
What's your best advice for passive investors right now?

Andy Sinclair [00:10:23]:
My best advice right now is your capital is needed, so don't take that lightly. So if you're looking to get in, make sure this is the operator that can take you through this cycle and into the next one, but also make sure that they're doing what they say they're going to do. So, a couple sins I see. And so, as a disclosure, Whitney, I invest my personal money with more operators and syndicators other than just midlock, which is the brand I represent. And so I'm able to kind of see stuff and how other people do it, both good and bad. And so if they're not communicating, that's strike one. The second thing I will tell you, other than communicating on strike two, is, are they hitting their underwriting or is their underwriting off? So, so often before a deal starts, Whitney, I will tell you, most operators and syndicators, their underwriting is wildly optimistic. And often there's times I say to my colleagues, I'll say as a friend, hey, just take a 10,000 foot view.

Andy Sinclair [00:11:19]:
If I said this to you, would you still invest? And they usually say no. And then I always say, well, why would you raise someone else's money? And then if you don't believe those assumptions? And that's because the incentives are misaligned. Right. The incentives for them to do a deal and make a fee are high. Right. And so you got to be really careful. You can't just do a deal. So strike one is communication.

Andy Sinclair [00:11:40]:
If they're not doing communication, get out. If it's strike two, if they're wildly missing and they aren't actually conservative, even though they told you they were the most conservative investor you have ever met, that's strike two. And finally, strike three, I would tell you, which is what's their track record. Right. And consistency. It's okay to have a deal, maybe not go the way you think. So try to evaluate those things, then know as an investor, your capital is needed right now. So try to pick the people you think are best going to make it through the next few years and take care of you financially.

Whitney Sewell [00:12:15]:
That's right.

Whitney Sewell [00:12:16]:
No doubt about it. And that's one thing I love about this business, is the relationship component. Right, man, get to know your operator before you invest. What's the big challenge you all are facing right now just at midlock?

Andy Sinclair [00:12:30]:
Yeah, I think right now, and this is obviously not anything new right now. The amount of investable deal flow is low. Our deal flow, the number of deals coming through the gates every week is high. It's remained high. But we have talked in the past, Wendy, about the bid ask spread, and even though it's come down, it's not necessarily come down enough. Now, while the Fed has slightly pivoted to maybe easing the treasury, rates have come in just a tad. I feel like that has only helped deals that got price a week ago or a month ago. Right.

Andy Sinclair [00:13:06]:
Unfortunately, the market is somewhat efficient. So just because the Fed talks about easing, the brokers and sellers try to get their price to go up, and I don't blame them, but finding that right balance of consistency and having the underwriting work as well as things you can perform on, that's very tough right now. And so midlock has taken a patience. While we have capital to invest, our belief is you don't need to rush. You much rather be doing deals you believe in and stress tests than rushing in to deals because we thought it was the right time. So patience matters.

Whitney Sewell [00:13:43]:
It does matter.

Whitney Sewell [00:13:44]:
No doubt about, uh, what are some of the most important, uh, that you track.

Whitney Sewell [00:13:49]:
Andy could be personally or professionally.

Andy Sinclair [00:13:52]:
We track every metric you could imagine, but know look, consistently, one of my favorite metrics just off the bat is just two easy ones at a property level, which is occupancy and revenue. Now, expenses matter, so revenue can't be the end all, be all. But it's always interesting to see what's your occupancy, how full are you and where is your revenue growing? Because that's going to tell you if you're hitting your business plan or not. One thing we try to do at midlock, when it comes to apartments and even some of our commercial assets, one of the areas we try to hold some conservatism in is let's say the market might be 95 or 97% full. Well, maybe that means we underwrite that market 90% to 93% full. So we're not underwriting every ounce of occupancy. And hopefully in reality we will get that income associated with it being more full. But we try to build in certain areas in our modeling that when it comes to real life operations, we'll be able to track and hopefully exceed those goals.

Andy Sinclair [00:14:52]:
And for the handful of deals where it goes a little slow, well, that means we're right on the money then with our operations. But from a metric standpoint, we look at everything, whether it be irr, equity, multiple occupancy, revenue, everything matters. And then, as we've talked about in the past, Whitney, your debt part matters just as much. So you got to track those metrics. You can't just look at one. You got to look them all in a vacuum.

Whitney Sewell [00:15:18]:
What about some habits, Andy, that you are focused on that are produced a return for you on a daily basis?

Andy Sinclair [00:15:25]:
Yeah, well, I think the first part is you got to set a business plan, and then you got to be able to go out and hit it. Right. So we always say at Midloch, you're looking for kind of two or four ways to make money. And so on a monthly basis, Whitney, you got to kind of set goals that you think you can hit and then break that down into 90 day increments, then down to monthly, down to down to weekly. And so midlock, we get together on a weekly basis and we track how are we doing to hit those metrics? And are there tweaks we have to make at the properties? Everything can be from apartments. Take like, is our rate high or is it too low? Is our occupancy too low? What are things we need to tweak? For instance, I was at one of our properties just a few weeks ago and beautiful renovation, but the property had been vacant, or that unit had been vacant for about 75 days. Well, it just meant our pricing was too high, and we had to do a few tweaks on maybe some final renovations to maybe make it rent ready, those type of stuff that if you ignore it, can become a long term problem. So it's being on top of your metrics and your business plan, but you got to start high level and then work it down to a daily basis.

Andy Sinclair [00:16:34]:
Otherwise you'll never make it out. I see too many people focused on the day to day and not focused on the long term.

Whitney Sewell [00:16:41]:
Yeah, I appreciate even the 30 day check in like that, like you're talking about. Or there's things like that that you need to build habits around. Right. That may not be every day. You may notice other trends. Right. Looking at it over a week or four week basis. Right.

Whitney Sewell [00:16:54]:
Versus every day. Yeah, totally.

Whitney Sewell [00:16:58]:
What about the number one thing that's contributed to your success?

Andy Sinclair [00:17:02]:
Communications hands, always. You can't just be one thing, Whitney. One thing I mentioned, I think, on a pre call, is got a mentor one time tell me, to be successful in any business, not just real estate investing, is you got to be a binder, a grinder, or a finder. And to be successful, hopefully, you have two of the three. A binder is someone who puts all the pieces together so it works. A grinder is someone, I think, like an analyst or property manager, taking care of the small details you don't see. And a finder is someone who goes out and finds that business and brings it to the group. And if you can have two or ideally three of the three, those things matter.

Andy Sinclair [00:17:43]:
I like to say, whitney, any given day, I'm all three or just one. I'm wherever I need to be for my company. And so that's the secret to success. And then you layer on good habits, like communication and consistency, and that will be things that will hopefully take you to the next step.

Whitney Sewell [00:18:00]:
And how do you like to give back?

Andy Sinclair [00:18:02]:
Well, I try to be very generous with my time. I'm very big into mentoring. Obviously, there's always charitable giving, which my team, we always pick a few charities a year. So this year we donated to the Chicago Furniture bank, which one of our teammates is a part of, which helps supply furniture and housing for those that are in very desperate need. But then there's also other charities we give to, such as like the Boy Scouts of America or Marquette University, which we've got a charitable relationship with. But I'm a big believer in our team, though. Everyone should make time then to go volunteer. So it's not just making money.

Andy Sinclair [00:18:40]:
You have to go do things in the community. One thing, Whitney, and I've said this on a different podcast, I shave my head every year in honor of my parents who passed away from cancer. So my hair actually just grew back in time for this podcast recording. But if you would have caught me about eight weeks ago, I was totally bald. And so raising awareness for cancer and people that have gone through their struggles. So it's one part making money, but other part doing good.

Whitney Sewell [00:19:05]:
Yeah. Wow.

Whitney Sewell [00:19:06]:
Appreciate you just raising awareness right in so many ways and giving back, even the mentoring, like you mentioned, also even giving back to us today, Andy, and yesterday through a series of shows, spending so much time with us and sharing the successes of midlock and things you all are learning and things you put in place to be successful as well. So we can all learn. And so tell the listeners again how they can get in touch with you.

Whitney Sewell [00:19:29]:
And learn more about you. Yeah.

Andy Sinclair [00:19:31]:
So I have a fairly simple email. My email is just Andy. Andy at Midloch, which is M-I-D-L-O-C-H. So just like the Loch Ness sponsor. So, asinclair@midloch.com.

Whitney Sewell [00:19:47]:
Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the real estate syndication show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.