Insider Secrets Podcast Season 2, Episode 28

 Guest: Mike Morawski

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Guest Bio:

Mike Morawski brings over three decades of expertise in real estate investment, having managed transactions totaling more than $405 million. As a seasoned entrepreneur, author, real estate educator, public speaker, personal coach, and the Chief Investment Officer of a multifamily hedge fund, Mike’s career is built on personal resilience and a commitment to helping others achieve remarkable success in their lives. He has mentored hundreds of real estate investors, guiding them to reach their goals.

Mike’s journey began as a general contractor in Chicago’s Northwest Suburbs, where he built a business generating $5 million in annual revenue before selling it. Transitioning into real estate, he quickly established himself as a top sales agent, forming a team that consistently achieved over $20 million in annual sales. In 2005, Mike launched a private equity firm, raising $18 million and acquiring $60 million in multifamily properties, encompassing 4,000 units across five U.S. markets.

Today, Mike is passionate about sharing his wealth of knowledge and experience with others. He hosts the Insider Secrets Podcast and co-hosts the Multifamily Unplugged Vidcast. Through his platform, My Core Intentions, Mike offers training and coaching to real estate investors and industry professionals, teaching them how to generate short-term cash flow and build long-term wealth. His approach includes live and virtual training sessions, along with three levels of personal coaching.

What sets My Core Intentions apart is the focus on developing exit strategies and creating wealth through small multifamily properties. Mike’s clients are completing deals within 12 weeks and achieving business growth exceeding 20% annually. My Core Intentions helps clients set high standards in both their personal and professional lives, enabling them to realign with their core values, such as family and personal development. Mike’s guidance helps clients uncover their true passions, leading to a balanced and fulfilling lifestyle.

https://youtu.be/fhc5Q5LhPQo

SHOWNOTES

Key Takeaways

Multifamily investing requires a specialized vocabulary to navigate the industry effectively.

A rent roll is a critical document for understanding a property’s income potential. Key items include tenant information, unit numbers, market rate rent, collected rent, lease terms, and unit mix.

Understanding operating expenses is crucial for profitability. Key categories include payroll, utilities, repairs and maintenance, insurance, taxes, and property management fees.

Understanding financial metrics like NOI, DSCR, and investor returns (ROI, IRR, cash-on-cash preferred returns) is essential for evaluating a property’s performance.

Key terms like general partner (GP), limited partner (LP), share classes, waterfall returns, and sponsor fees are crucial for understanding deal structuring.

Thorough due diligence and underwriting are essential for evaluating a property’s potential and risks.

Standout Quotes

“I had no idea what anybody was talking about. Spent 15 years in the single-family business… and I thought I knew a lot about real estate.” – Mike Morawski

“Loss to lease is if my rent is a thousand dollars, but I’m getting 900, I’m actually have a hundred-dollar loss to lease.” – Mike Morawski

“Insurance has skyrocketed the last number of years. I bought a property in 2021 in Florida. Our insurance cost going in was $950 a door. And 18 months later, that insurance cost is $1, 900 a door.” – Mike Morawski

“Your DSCR is what the bank requires your property operates at in order for you to get a loan. So traditionally, your DSCR needs to be at 1.25 or greater.” – Mike Morawski

“Preferred equity gets treated like another investor. And it helps you to get a deal closed a little quicker sometimes.” – Mike Morawski

“I don’t know anybody who’s going to really go and take down a 40, 50, 100-unit complex on their own. So, what you’re doing now is you’re putting together teams.” – Mike Morawski

Episode Timeline

[00:00:00] Mike introduces underwriting as a foundational tool for multifamily investing decisions.

[00:04:00] Analyzing income and expenses is crucial for assessing profitability and NOI.

[00:08:00] Capital expenditures significantly impact property value and investor returns.

[00:12:00] Evaluating rent growth and market conditions helps predict future income.

[00:16:00] LTV and LTC ratios determine debt capacity and equity safety.

[00:21:00] Interest rates, amortization, and DSCR are vital for securing financing.

[00:23:00] The GP team’s structure and roles ensure effective collaboration and management.

[00:28:00] Various sponsor fees compensate the GP team for their contributions.

Contact

Website: https://mikemorawski.com

Email: mike@mikemorawski.com

TRANSCRIPT

Kristen: [00:00:00] Welcome to this edition of Insider Secrets, the weekly podcast that turns real estate investing goals into reality. Each show we interview guests who are seasoned real estate professionals, actively closing and managing real estate deals. Mike is the founder of My Core Intentions and would like to help you make your real estate investing dreams a reality.

Mike coaches you to buy investment real estate, creating short term cashflow and long term wealth. Your host and real estate coach, Mike Morawski, has more than 30 years of real estate investing and property management experience. Here’s your host, Mike.

Mike Morawski: Hey, everybody. Welcome back to the insider secrets podcast. Last week we talked a lot about relationships and the ongoing process of building relationships, something you need to be doing every day, whether you are raising capital or you’re building broker relationships for acquisitions and getting enough information across your desk.

But this is something you need to be doing every day. [00:01:00] So I encourage people, I say, Hey, figure out what you’re best at in the business. And go out and build those relationships in that area that’s going to help that business grow. And I will say that if you don’t think raising capital is going to be your part of the business, it needs to be your part of the business.

We all need to be doing that. So from the moment we get in the real estate business, raising capital is critically important. Telling people that we’re a real estate investor and that we partner with people to share in the profits and continuing to build your database. This week, we’re going to talk about multifamily language.

I did my first multifamily deal was an 11 unit apartment building, and I bought that property and I immediately realized I had no idea what anybody was talking about. Spent 15 years in the single family business. I built a team, we sold over 125 homes a year, and I thought I knew a lot about real estate.

I went in the apartment business and realized quickly, I didn’t. As soon as somebody said, cap rate, NOI, yield maintenance, I was totally lost. I had no idea what I needed to learn, but I quickly [00:02:00] learned. So what I did was I took a lot of initiative and I did a lot of research on terms and how the business works.

I talked to brokers. I talked to my attorney. And I got a lot of information. I talked to other peers in the business to learn about those terms and how do we use them. So I always believe that it’s asking a lot of questions. I’ll tell a quick story. It was just like the first time somebody called me tenacious.

I have always been a prospector. I get on the phone. I dial the phone all day long. I talk to people. I was prospecting for listings. And I walked into a guy’s house one time on a listing appointment, and he said, man, Morawski, you are so tenacious. And I didn’t know what it meant, thought it was a compliment, said, very graciously, thank you. And went home, looked in the dictionary and said, that is exactly who I am.

So it was the same thing with trying to figure out these terms and this terminology, and what do we do? Where do we find it? So I did a lot of research. In this session, I’m going to cover a lot of ground. So make sure you take some notes. And if you’re driving, I know you’re not going to be able [00:03:00] to take those notes, but listen in, go back, rewind, make sure that you get the information that you need to get that’s going to help you grow.

All right. So, let’s dig in. So, we’re going to start with language. I’m going to start on the income and revenue side. I’m going to go right down the lines of if I was going through the underwriting tool and how we put information in when we’re doing underwriting. But the first thing I’m going to do is I’m going to talk about a rent roll. And on the rent roll, there’s some different items that you should see.

You should see people, the tenant, their name. You should see the unit number. You should see what the market rate rent is. How much could this be if I got full rent? And then what they’re collecting. When did the lease start? When does the lease end? That rent role should also cover what the unit mix of the property is.

It should have the square footage of the units and give you a total square footage. All of this is data that you’re going to need to have when you’re doing the underwriting. So, when you read a rent role, and I suggest that you get a copy of an OM, an Offering Memorandum, or get a copy of a rent [00:04:00] roll from a broker and read through all the line items.

The next thing that we look at is we look at the gross market rent. Now, again, like I said, if you had a 10 unit building and that building was completely rented and you were getting $1, 000 a month per unit, that’s the market rate rent. But if you have units in there that are getting less than that, then that goes into another line item.

So I always start with the market rate rent in my underwriting. And then we have what’s called the loss to lease. And again, I talk about loss to lease as if my rent is a thousand dollars, but I’m getting 900, I’m actually have a hundred dollar loss to lease. So that goes in that line item.

And then I’m going to fill in all my vacancies. How many physical vacancies do I have in a property? Remember in vacancy that there’s physical and economic. Physical means if I have a hundred unit complex and 90 people live there, I’m 10 percent technically physically vacant. So I have 90 percent occupancy.

But then we have what’s called economic vacancy. So I might have 90 people living there, but only [00:05:00] 85 of them are paying their rent. So now that gives me a whole new perspective of when I look at the property. Then there’s concessions. How many concessions do we have to give? Sometimes in a down cycle, you have to give a tenant a move in special, a concession for moving in.

Having a couple of months of rent free, having maybe a one month free or a reduction in the move in fee, so these are all concessions. And then we have bad debt. Tenants that live there that didn’t pay their rent, you got them evicted, maybe you got a financial judgment on them, and now that bad debt sits on the books for a period of time. And you as an operator make your own guidelines as to when you move that bad debt out.

And then there’s model and employee units. So a lot of times you might have an employee that needs a place to live. We owned a 20 unit apartment building. And there were 2 other 20 unit buildings, and we wound up buying all 3 of them several years ago. But we have 1 employee who lived on the property when we bought that 1st, 20 unit. And because it was over [00:06:00] an hour from my office, it was great because he showed the property, he did the repairs, people knew him. People called them. We marketed. We got tenants there. He took application, got them over to us, and then we approve them or not approve them.

And then the next thing that we put on the underwriting is other income. And when we look at other income, and I always tell people, I say, when you’re talking about other income, you have to be thinking outside the box. How can I create more revenue? Remember that every dollar of revenue or NOI you add to a property gives you approximately 240 more dollars in value to that property based on a five and a half cap.

So if you think about that, how many $240 do you wanna add to the overall value of the property? So other income is gonna be things like application fees. It’s going to be late charges, pet fees, utility fees. Maybe you have a utility reimbursement program. How about bank fees? Maybe you have a collection problem with the tenant and they pay the bank fees. I think parking is a big thing. I owned a [00:07:00] complex in Indiana and it was 280 units. We had 20 buildings and each building had 2 doors and outside each of those doors were 2 parking spots and I had an idea one day walking the property.

I said, let me start charging for parking. So I took 25 percent of those parking spots. I started to charge $25 a month and I had a waiting list three months long for those parking spots. Within 18 months, I had all 80 parking spots rented at $75 a month with a waiting list and I created an additional $450, 000 in value to that property.

So think outside the box, where can you create more revenue? Laundry? How about bundled cable? We have properties today that we are going out, we’re getting cable contracts with vendors and having a one source cable put in our buildings. And then we are selling that cable or data lines back to the tenants.

Vending machines, maybe Amazon package machines, but all of those [00:08:00] line items go back into other income. And then you have that line item that’s called effective gross income or EGI. And what the EGI is now that’s your money to pay your bills. So remember, I’m going to recap real quick. You have your gross market rent that comes in and he lost the lease that goes out.

Vacancies, concessions, your bad debt, your model and employee units come out, and then other income goes back in. Now, this gives you your EGI, your effective gross income. Now, on the operating expense side, there’s a number of different line items. We have payroll. When I look at a property today that I’m going to have staff on, I am figuring around $1, 500 per door for payroll for my employees. That’s my office staff and any onsite management maintenance staff.

And then utilities. Remember, we talked a minute ago about utility reimbursement. There’s a program out there called rubs. That is the utility reimbursement program. And what that does is it helps you collect your outgoing utility [00:09:00] costs for electric and gas and water and sewer collected back from the tenants.

Again, those utilities are one of the highest expenses that you can have in a property. Then you have repairs and maintenance. This is your general repairs and maintenance. This is furnace filters and a tenant calls, they have a leaky faucet, those types of repairs. But then there’s unit terms. This is when a tenant moves out of a property and you’re getting that unit ready for a new tenant to move in.

Landscaping services, trash removal services. There’s administrative and general expenses. This can be like data service in the office. It could be toner, computer paper, things like that go into running that business. There’s marketing fees. There’s insurance. Insurance has skyrocketed the last number of years. I bought a property in 2021 in Florida. Our insurance cost going in was $950 a door. And 18 months later, that insurance cost is $1, 900 a door. That’s a very large increase. And that really hurts your cash flow on a property.

So, you have to offset [00:10:00] that by raising rents and getting more revenue in. And then we have contract services. So, you need to have an electrician come in and change electric service or sewer company come in and rot the sewer or jet the sewer. So all those contract services are going to go into that line item.

And then most banks are going to make you have a reserve line item where you’re going to be putting money on the side every month when you make your mortgage payment just in case something major happens or you can’t pay your mortgage, you got a little bit extra to help cover that cost. Then there’s some non controllable expenses, taxes. Taxes are a non controllable expense and actually insurances as well today.

Taxes have been going up pretty much nationally on every property that we own. And then I’ve seen some other operators own and then property management fees. Property management fees are very negotiable. Depending on who you’re using, if you’re using a third party company or you’re vertically integrating, and you’re going to manage those properties yourself, property management fees are something that you charge back on the gross rents in order to pay some [00:11:00] employees and people to manage the accounting, manage the day to day operations.

And then there’s replacement reserves. This could be a little bit different than just your normal operating reserves that the bank asks for. Your replacement reserves may be that you’re doing a construction project and the bank wants you to be putting money on the side to stay ahead of that capex dollars that you need to improve that property.

And then you get the line item that says total operating expenses. So now you take your EGI and you remove your expenses from your EGI and you get what’s called NOI, Net Operating Income. Your net operating income is what you have left over to pay your debt service, to pay the bank back. And then we have a couple of other terms and terminology to talk about when we’re talking about investor returns.

So I’ve paid my debt. And once I pay my debt service, now what I have is I have a net cash flow line and that net cash flow or net [00:12:00] operating income line, yeah, net cash flow. This is after operating income. So now you have effective gross income. Your EGI is what you have left over to pay all of your expenses.

You pay your expenses. Now what’s left over is your net operating income, your NOI. Your NOI is what you have to pay your bank debt. So you want to make sure that all that’s in line, because then we’re going to have another line item, which is called cash flow and cash flow is what we can pay our investors with.

So this is how the returns get calculated so that we can see what’s left over to pay our investors who have invested capital with us in order to buy these properties. So there’s two ways to look at returns. There’s ROI and IRR. Return on Investment or Internal Rate of Return. So your internal rate of return is dictated by time.

So I’ll give you an example. Let’s say that I borrow a hundred dollars from you and I’m gonna pay you 10 percent interest. Well, in 12 months, I’m going to give you $110 back, right? [00:13:00] That’s your ROI, that’s your return on investment. But if I pay you back in 6 months, your $10 plus your $100, so your 10%, you’ve now made 20%.

And so our IRR is calculated, it’s a time value of money. How much time is your money being used? And then we have Cash on Cash Preferred Return, kind of the same terminology, but a preferred return is what we pay our investors on a monthly basis, quarterly basis from the net cash flow of that property.

And then we have Return on Construction Costs. So when you are underwriting and you get to that part in our lessons, but when you’re underwriting that return on construction capital, you want to see that being somewhere above 10%. So if I put $1 or a $100 into a property, I want to make sure that I’m making 10 percent on that money that I put into that property.

Here’s a funny one, Cap Rate. Cap rate, the first time somebody said cap rate to me, I had no idea. And what I was explained at that time, the most simplest form for cap [00:14:00] rate is, is that if you invested cash into a property that was at a six cap, your return on that cash you invested is 6%. So if I buy a million dollar property, I pay all cash for that property.

It’s a six cap that money that I get back is at 6 percent is my return on my investment. Now, when we add leverage to that, and we have bank debt, and we’re paying a loan on bank debt, that increases your return for the investors. So it’s called the Unlevered Return, is that 6 percent from the cap rate, but the levered return is when we put bank on it bank debt on it.

So a levered return gives you more return back for the investors. Now, one of the financial items that you’re going to get is a T12. That T12 is a trailing 12 months. What that does is it gives you a snapshot of the expenses and we use the T12 in underwriting for expenses. And that snapshot of expenses over that 12 months [00:15:00] gives us 2 insurance payments, 2 tax payments, things like that, that happened throughout the year. So now we have a good picture of all the expenses.

But then there’s a T3. The T3 is a T12. And that T12 gives us a snapshot in time for the last 90 days. It tells us whether or not that property is functioning better than it has been the last several months or last year at the same time. T3 is what we take the income from.

So now I know what rents are real today. Now CapEx is capital improvements. That’s where we go in and we’re gonna make major upgrades, interior, exterior wise on the property. Concessions can also be called incentives. We’ve talked about amenities. An OM, the first time I heard somebody say, I’ll send over an OM, I said, okay.

And then right on the OM it said, Offering Memorandum. That’s kind of how I learned that at that time. But an OM is an offering memorandum. That’s the broker sales booklet to give to you to take a look at the property, what type it is, the rent role in it, the acquisition [00:16:00] model, some market data, and then some propaganda about the broker themselves.

Traps are a good one. We always want to look at the traps and that’s about the market. That’s things like population growth and job growth and household income. And we get to traps later on in the sessions. But traps, if you can check all the boxes on your traps and find a deal in that market. That’s a good deal for you to buy.

And then the underwriting process. Underwriting is just a fancy word for analyzing. It means we’re taking all the financials, we’re putting them into a spreadsheet, into a tool to calculate returns over one year, five years, 10 years, so that we can see, is this a viable product to bring to my investors?

And then we have due diligence. Due diligence is what I always say, that is, am I buying what the seller was selling? Brokers come out, they bring out these really nice presentations, these offering memorandums, the sellers got all kinds of great input. But when I dig into the due diligence, and let me say, if you want a copy of my due diligence checklist, just reach out to me.

I’ll be more than happy [00:17:00] to send that over to you so that you can see everything that you need to look at during that process. We want to look at taxes for the last 3 years. Everything we want to look at, we want to take about a 36 month picture if we can. Taxes, insurance, tenants, rent increases, everything that goes into the underwriting, we want to look at during that due diligence period, which normally happens after we go to contract to purchase the property.

Now, one of the things that I thought was fascinating when I got in the business and that is the property classes. And I always tell people, hey, do you know your ABCs? There’s A class property, there’s B class property, C class and D class, and I get into this a lot in one of the next sessions that comes up.

But those property classes distinguish, hey, what type of property do you want to buy? Do you want to own beautiful high rise assets? Or do you want to own workforce housing? And so that all falls into those categories. The other thing I will tell you is that markets are classified the same, A, B, and C.

So a lot of times people try to buy C class [00:18:00] properties in a B class market, increase the value of the C class property to make it a B class, and it works in some cases. But you can’t buy a B class property in a C class market and try and make it an A class because that will never happen.

There’s one thing that’s called a CFO. That’s a call for authors. So when you’re out underwriting and then you have a broker call, the broker is going to typically tell you, Hey, our CFO is X date. This is when your offers need to be in and at that point, you’re going to put in what’s called an LOI, a Letter of Intent.

Other terms is rent growth. What is the rent growth today right after renovation? What is the rent growth going to be year after year moving forward? Then there’s other income growth. And these are all line items that are on the underwriting tool. And we are looking at all of the financials and numbers that go into that. So how much can I grow my other income year after year over the next several years?

My levered and unlevered returns, I’m going to show that on my financial tool. My return on capital, my turn on the construction money that I put in, that [00:19:00] ROC, return on capital. And then assets under management. What do you have under management? You want that to play a part in your presentation and your business building.

There’s a study that’s called cost segregation. This falls into depreciation. Depreciation I always say is a gift that we still get from the government. This is where the properties still go up in value. The government depreciates the property, devalues the property. There’s a spread in between and that spread you get to write off your your income tax.

Cost segregation is an engineering study that depreciates things at different timelines and gives you the ability to take more depreciation the first couple of years and do accelerated Depreciation, which gives you more write offs. I have a lot of investors that their first year investing in one of our multifamily opportunities can maybe write off 50 percent of their income, or maybe even more in some cases.

So always think about doing a cost segregation study. When we start talking about financing, in financing, there’s a number of terms. First one is called capital stack. [00:20:00] Capital stack is all of the different money that comes in, in order to buy the property. It could be your debt service. Maybe you’re going to put in a mezzanine loan or gap funding loan.

Maybe you’re going to put in equity. You’re going to raise equity. So in your capital stack, traditionally, what you’ll see is maybe you’re going to see your debt, you’re going to see your equity, and now you know that your equity is 25 or 30 percent of the purchase. Your debt is a 75 or 70 percent of the purchase.

But then there’s a thing called preferred equity. Now, I like preferred equity because it could come in, in place of mezzanine or gap funding, gets treated like another investor. And it helps you to get a deal closed a little quicker sometimes. So all of these instruments go into that capital stack. There’s a term that’s called LTV, loan to value.

That is how much debt can I put on a property that’s going to give me safety and give me enough equity and enough in value in the property in order to get the loan from the bank. But then most of the time, what I encourage people to do is do a 65 percent [00:21:00] LTV. Means you’re going to have to come with 35 percent equity to that deal.

But then there’s another piece that’s called an LTC, loan to cost. This means, hey, I’m buying this for a million, I’m going to put a half a million dollars in capital improvements into the property. My total all in cost is now a million five, and I’m going to finance 65 percent of my loan cost, but my all in cost now, I might be financing 69%.

So this all flows through the underwriting tool and you’ll be able to see it. How about interest rate? Interest rates are fluctuating all the time. They’re up, they’re down. We went through several years where the interest rates were really low and now they’re more normalized today at five and six percent.

So interest rates are always going to dictate your cash flow on the property. So you always want to get that loan quote as you’re underwriting, see what your lender thinks that you’re going to be able to get for an interest rate. And then there’s an amortization term. That’s how long are we holding the property?

How many years is the bank giving me to pay that back at one standard [00:22:00] payment every month? And then IO, interest only. So how many years can I get on my loan from the bank for only paying interest payments and not paying interest and principal? I only want to pay interest for a while that gives me time to rehab my property, get it up and running, put a better tenant base in, get the revenue better. So now I can pay principal payments as well.

Points. You’re going to pay points when you get a loan. You’re going to pay a point for the loan. You’re going to pay a point for a loan broker. Points are part of the process. So I also will say that points are negotiable. So you can always talk to the lender about negotiating those points.

And then there’s this thing that’s called DSCR. That’s your Debt Service Coverage Ratio. Your DSCR is what the bank requires your property operates at in order for you to get a loan. So traditionally, your DSCR needs to be at 1. 25 or greater. What that means is that I have the ability to pay one month plus [00:23:00] 25 percent of the next month’s loan on the property.

There are banks that want to see more than that, but 1. 25 is traditional. So again, as we get into underwriting and you start going through the underwriting tool, that’s going to show up for you and you’re going to be able to see exactly what the DSCR is.

Okay. So let’s move on to the business deal structure. So one of the big terms is GP, general partner. This is normally where you are the sponsor, the syndicator, the operator, the owner. Your general partner team, and usually we do this in teams today. I don’t know anybody who’s going to really go and take down a 40, 50, 100 unit complex on their own.

So what you’re doing now is you’re putting together teams. So this goes back to figuring out what you’re really good at. I talked about it earlier, but are you good at underwriting? Are you good at raising capital? And if you figure out, Hey, I’m really good at raising capital, go find somebody who’s a great underwriter and that you can [00:24:00] bring on to your team, put a good team together.

I’ll give you a little example of what mine looks like. So I have an underwriter who underwrites deals, and then he and I tear them apart. Then we figure out what are the best ones. But what he does is he builds broker relationships, he underwrites deals. Once we get a deal, he does most of the heavy lifting on the due diligence side.

And I do more acquisition, property inspections, raising capital. I kind of pull all the moving parts together. And then we have a partner that is kind of the compliance person. And what she does is she takes care of all the LLC agreements, all the documents, investor portal. She takes care of insurance and funding, make sure that we are operating legally and as we should.

All those GP teams, what you do is they get split up in different job functions. I may do some underwriting and some due diligence, but then I’m doing the property inspections and overseeing any construction or capital improvements that we’re doing. My one partner might do a little bit of compliance stuff, but raises some [00:25:00] capital.

So, everybody kind of gets paid for what they do in that GP. A couple of other individuals that get involved is what we call a KP, key principal. The key principal now might be somebody who signs on a loan and they become part of the GP team. And there’s a split that set aside for them. And then there’s somebody who brings in earnest money.

And I’ll get into this a little bit more in a while. You want to create an LLC. A limited liability corporation. And I think that the best information is to go start one sooner than later, but get a company put together for yourself. Do some of those, don’t get lost in just doing just that, but put together an LLC and have a website built and make sure you’re operating as a business.

Now, what’s going to happen is once you buy a property under that property, you’re going to create another LLC, but it’s going to be under the LLC or parent corporation that you already have. And then in these setups for investors, we have share classes. So a typical business deal is typically split [00:26:00] 70/30.

70 percent to the LPs, that’s the limited partner, and that limited partner is typically going to be in an A class position. That means they get the first rights to everything. And the GP is on the 30 percent side, they’re in the B share side. And then there’s things you look at, like project equity.

How much equity do I need for the project? How much money do I have to go raise in order to get this done? And then we base our returns, and a lot of times returns are called waterfalls, because if I promise my investors that they’re going to get a 7 percent preferred return along the way, but anything after 7 percent gets split 70/30.

But if I hit a 8 or a 9 percent return back to my investors, we might change the split. So now that waterfall comes into play. Listen, I come from the school, keep it simple, stupid. And what we need to do is we need to keep all these processes simple. So I generally just say 70/30, a 7 percent preferred return.

And that’s what the investors [00:27:00] get from the net cash flow along the way as 1st position. And then anything above 7 percent gets split 70/30 between the investors and the GP team. And at the end, we settle up on what we call a promote. And the promote is what is the profit from the sale. So as a GP, you want to get promoted. Because that’s where your additional revenue comes from.

Now, when we put these together, you create that LLC, you’re going to create a subscription agreement. That subscription agreement, or maybe referred to as a private placement memorandum is lines out all of the details of the deal. So, if I’m going to raise $2 million dollars, how does that get paid back?

Well, it gets paid back in a 7 percent preferred return. It gets paid back with fit at the back end. And it talks about all those levels of paying that back. We talked about GP. We talked about KP key principle. Participation, participation is who’s doing what? So you get rewarded for your participation.

Hey, you know, funny [00:28:00] thing. We’re in a business that we eat what we kill. So if we get a deal done, we all get to get paid. We all get to eat as a result of it. Proforma is an interesting word. Proforma means what does the deal look like moving forward? So when I structure a deal and I underwrite it, there’s a part in the underwriting tool that’s a proforma a piece. What’s the rent growth going to be? What’s the expense growth going to be? What’s the other income and taxes going to be? So I’m performing the deal to see what those returns can be 3 years, 5 years, 10 years down the road.

Now, there’s fees as a sponsor, as a GP putting one of these together, you get to pay yourself. And there’s several different ways or buckets of money that you get to get paid for. The first is an acquisition fee. Typical acquisition fee, depending on the size of the property you’re buying, could be one to three percent. And that’s one to three percent of the purchase price. So that acquisition fee comes back to you for putting that together.

Then we have what’s called an asset management fee. I manage my properties today at three levels. [00:29:00] We have boots on the ground, maintenance people, office staff, and then we have a 3rd party property management company that watches over them. And then we asset manage the property management company and our boots on the ground team to make sure that we’re watching all the financial numbers that the capex is getting done. Repairs are getting done. And this is, you get paid for that asset management fee.

So you probably are going to have a call once a week with your team, and you’re going to go through occupancies and traffic and applications taken. I’ll offer you this too at this point. If you want a copy of my asset management checklist, there’s about 15 points that we look at every week on a call. Just reach out to me. I’ll make sure that you get a copy of it and take a look and see how it compares to what you may currently be doing or what you’re thinking you need to be doing.

You could take a construction fee as a sponsor. So we typically will add about a 5 percent construction fee or construction management fee. So let’s say I’m doing a million dollars in repairs, that’s $50, 000 that would get paid out back to me for managing the [00:30:00] construction side. And that gets paid out over eight quarters, or however long it takes you to do those repairs. And then there’s a disposition fee at the end. When we sell the property, dispose of the property, we charge the deal a disposition fee. That might be 1%.

Now, other fees along the way that you can put in there, you might be able to put a loan fee in. So when you’re getting the original loan, or if you’re going back to refinance, put 1 percent in there for you, because it’s a lot of work to bundle the information and get it to the lender. So make sure that you’re getting paid for what you do.

And then recently we have started to put in an underwriting or due diligence fee based on door amounts. So we might charge $125 per door, right above the line in the model where we do the underwriting. And this is because we learned that we had underwritten 90 deals before we found a deal.

That’s a lot of work, a lot of hours, a lot of time that you’re not getting paid for. So this just kind of helps offset that time, it’s that success fee, that reward that you get for bringing this [00:31:00] to the finish line. Okay, well that’s all we have in terms. If I missed anything, please feel free to reach out to me.

Let me know what you might have a question on, or if I can give you any additional detailed information on any one of these terms. And here’s my contact information. And if you’re driving, you can find me personally Mike Morawski or just email me at Mike@MikeMorawski.Com.

And I’ll make sure I get those checklists out to you or get any questions answered for you. Thanks everybody. Have a great week and I will look forward to talking to you next time.

Kristen: Thank you, Mike, and thank you for joining us for another great episode of Insider Secrets. As always, Insider Secrets is brought to you by My Core Intentions. Wherever you hang out on social media, you will find Mike and My Core Intentions. Please like and follow us to get the most up to date real estate investing trends.

Visit mycoreintentions.com where you can get expert coaching on all things real estate investing and property [00:32:00] management. If you’re looking to become an expert, Mike’s coaching will help you scale your real estate investment business. We’re looking forward to having you back again next week for more Insider Secrets.