A deal structure can be considered the bread and butter of investors. You may lose a deal if terms are not tailored professionally. Danny Randazzo of Randazzo Capital is a pro in structuring deals. An author, entrepreneur, and a host of a real estate mastermind, Danny imparts his 30-second spiel with brokers and the number of deals he aims to close monthly. Danny breaks down the four areas that one needs to point out in an agreement. He reveals the secret sauce that helps his team in going through deals and the things that kill deals in their underwriting. Additionally, Danny shares his dedication to financial freedom and syndication opportunities on PassiveInvesting.com and talks a little bit about the book he wrote for kids out of his passion.
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Structuring Deals And Tackling Deal Breakers with Danny Randazzo
Our guest owns over $130 million of real estate and crushing it in the syndication business. His name is Danny Randazzo. Thanks for being on the show, Danny.
Whitney, thank you so much for having me on. I’m excited to be here.
Danny, it’s a pleasure to have you. It was a pleasure to know you, another guy in the business that’s working hard and making things happen. Danny is an author, entrepreneur and a host of a real estate mastermind. He’s a national speaker and a volunteer with The First Tee. He has over half a decade of professional experience working as a financial consultant. He advised multibillion-dollar companies and helped them achieve results in areas that include improved revenue performance, increase profit margin and enhanced technology utilization. His passion for financial freedom started when he was five years old, running small businesses to make extra money.
In high school, he read real estate books and studied finance to understand the power of owning assets. His commercial real estate knowledge from books gave him and Caitlin the courage to buy their first investment property, which was $1 million building. Within the company, Danny is focused on building relationships, investment analysis, and planning. Danny and his partners invest in 150-unit plus multifamily properties valued between $10 million to $50 million that generate positive cashflow and have value-add opportunities to achieve investor returns. Why don’t you give us a little more about your company and what you’re focused on? Get us up to date.
My partners and I run a company called PassiveInvesting.com. If you want information about us, you can go to PassiveInvesting.com. We do multifamily syndication. We look for value-add apartment communities that are around 150 units or more that are between about $10 million to $50 million in acquisition price. What we found is that these specific types of opportunities that we pursue have very good opportunities to generate returns and for our ability as operators to control some of those day-to-day functions. How much income is generated and how our expenses are doing where we can fine tune the value of that asset and also add in extra money to increase the value of the units to ultimately rent the units at a higher price. We target cashflowing, value-add multifamily opportunities. That’s what we focus on. I know from my bio we stretch all the way back to being five years old and learning about businesses, learning about money and things like that. That’s definitely been something that shaped who I am and how we operate as a business.
[bctt tweet=”It is not always about getting things provided to you, but how you can go and do things for yourself.” username=””]
We’d like to ask you about what triggered that at five years old. Was there something else that got you thinking about having a business or trying to make money at that age? What was that?
When I grew up, I grew up in a middle class, average family in Michigan. I had excellent parents who always gave me the opportunity to do my own things. All of my needs were met. Some of my wants forced me to work for. Whenever some scenario like that came up, it was always not about getting things provided to you, but how can you go and do things for yourself? I greatly appreciate what my parents did, instilling that work ethic and that mindset of anything is possible. You need to work hard to figure out how to get from Point A to Point B. That was very instrumental to my youth in growing up and running some of those businesses.
One important lesson that I learned at the age of five years old when my net worth was completely demolished to zero. It was a very emotional event for me. I wrote a children’s book about it called The Boy Who Lost His Wallet. It talks through the real-life story of Danny, how this young boy loses his wallet and his net worth goes to zero. He is dramatically affected by this event. He learns a valuable lesson about wealth. I came up with a five-part book series called The Wealth Lessons for Kids. The Boy Who Lost His Wallet is the first book in this series, which focuses and helps parents or adults talk to kids and children about how to protect their money. What I want to do is break down this barrier that money is some taboo conversation that we don’t have at the dinner table, which is absolutely wrong.
We should have conversations every day about how to take control of this tool. That’s all that money is. It’s some tool. It’s not the end-all, be-all. It’s not what we should be thinking about day in and day out. It’s a tool that if we can take control over it and control our money rather than controlling us. It can shape your future and your financial destiny for the better. I had to write this book. I had to get it out there and share this story because when I do that, people always say, “I wish I would have learned that at a younger age so I could be in a better position.” I had to get the story out there and share it. It’s going to add a tremendous amount of value and hopefully, we can continue to break down this barrier about having money conversations with the young people around us.
It’s on Amazon you can buy that book. I would encourage the readers to give Danny a writing review also on Amazon when you see that book. You’re going to be impressed by that and by the quality. I struggle with that. How do I raise my boys to understand money even when they’re four and five? Some understanding, basic knowledge because I wasn’t taught that in school. They didn’t even teach you how to balance a checkbook for some reason. You’ll be able to do that, but it’s not taught. What I think is neat that at five years old, you lost your wallet. Your net worth was demolished. We’ve read some books, my wife and I, about training our children, trying to anyway in money. It’s giving them some jobs so they can earn some money so they can make big mistakes with $5, $10, lose it all and experience that with $5, $10, $20 or whatever before you hand them a credit card when they’re eighteen or nineteen. They’ve never handled money before and have no idea.
One of the things I have done with this first book and will continue to do is I give practical lessons in ways to practice after you finish the book. It’s a way to continue to interact with your kids on a regular basis and talk about the lesson from the book but also about money and finance so you can do some of the things that I found that worked well for me growing up and how I practiced. It’s incredibly important that people know how to balance a checkbook but know what money can be used for. Make those $5 and $10 mistakes now versus getting down the road at eighteen and making way larger or more expensive mistakes.
It’s going to be difficult to overcome or may negatively impact their credit score, which would prevent them from buying real estate, which is something we all can agree that we want our children or the people around us to do and invest in real estate. That’s incredibly important. I wanted to say one more thing about the $5 and $10 mistakes. About what they’re going to use the money for, it would be great if they waste their money on a frivolous purchase with $10 versus when they have $10,000. How do we put the money to higher, better use and learn that consumer products are not going to fulfill you like an investment property may fulfill you? You’re going to continue to generate income from that property and learn that at a young age is very important.
It’s learning a little patience. It’s not blowing that $5, $1,000 once you get a little older or seeing that new shiny car and you’ve got to have it. I appreciate that Danny. I’ll look forward to getting that book and going through that with my boys. I encourage readers to go to Amazon and look at that book. Danny, I’d like to jump right into your company. Why don’t you give us more details on your buying criteria? What are you telling a broker? “This is our guidelines. This is what we are looking for or I’m not wasting my time on it.” Right off to the deal flow down.
My 30-second spiel with a broker is, “We look for value-add multifamily properties that are 150 units or greater built from 1980 to about 2005 or 2010. Ideally, we look for C-Class or B-Class properties that we can add value to through unit renovations and exterior improvements to increase the rental income per unit, to increase it to market or below competitive market value.” That’s the initial conversation, the initial criteria with a broker. We weed through those deals. Typically, I also give the broker that purchase price range of $10 million to $50 million, because the properties that we may look for that are 150 units that may trade for like $3 million or $5 million may not be in the areas that we focus in. It’s one way to remove some of that deal flow from getting bogged down and looking at things that you don’t want to look at. What we found is that the price criterion is helpful for us as a team as we go through our deals. We’re not looking at hundreds of deals in a given month. We’re looking at a quality volume of 50 deals in the month. It’s very specific to what we want, where we want and markets that we know.
That raises another question or a few questions. How many deals are you trying to look at per month? How many deals are you underwriting heavily like getting into the weeds with on a monthly basis?
[bctt tweet=”Money is a tool. It’s not the end-all, be-all. It’s not what we should be thinking about day in and day out.” username=””]
I would say about twenty deals. We’ll get to maybe fifteen to twenty in a given month. We’re not doing deep dive underwriting on every deal that hits our email. We’re qualifying the deal first on location criteria and high-level financial indicators. I’ll take a look at what the rent role currently is, what we think we could get it up to and do the high-level gross income expenses and net operating income, make sense for what it is and where we think we could get it in one to five years. If it qualifies and we think it’s a return that is achievable, conservative and will fulfill the requirements of us and our investors, then we’ll pursue it. A lot of the deals that we get, we don’t pursue in that full underwriting detail because they don’t qualify from a high level.
You learn over time of what qualifies. If you are new to syndication, you should underwrite fully every deal that comes in to learn the process, learn what levers you need to identify and where you have the capability as an operator to make an impact on the valuation of that property. When I say valuation, doing whatever it takes to increase the NOI, the Net Operating Income, at that property generates. Once you hone that skill and you’ve underwritten a lot of deals, you can quickly see where a deal won’t make sense, you pass on it pretty quickly and you move onto the next one.
Underwriting many deals, especially if it’s in the same market as well, you’re educating yourself about that market more, about underwriting and about the market. What are the deals trading for? There are specific problems in certain markets that you won’t have in other markets. What few examples of killing the deal for you all maybe at a high level? We’ll get into the weeds a little bit. Maybe it’s one that you said, “I should underwrite this deal a little further.” What are some things that are going to kill it for you all?
Some things that will kill the deal when we get into our full underwriting and assuming that it qualifies for our range of construction year-built criteria. It’s in the right location, the high-level numbers look good. In the details, what will kill a deal for us, number one is if our rent premiums are not achievable in that market. What I mean by that is if we are projecting the highest rent of all of the competition around us, given our interior and exterior quality is about the same. That will kill a deal because we don’t want to be the market leader in rents. We don’t want to be the ones giving concessions away. It is hard to believe that someone who wants to pay $1,000 to $1,500 to rent an apartment is going to pay extra because you have a little bit fancier of a unit. Being the market leader in terms of rent per unit or rent per square foot is something that we will not do and that will kill a deal for us.
If we need to project such a premium in rent to make our numbers work, that will kill a deal. Another thing in our underwriting that will kill a deal is if we can’t control a lot of our expenses. If the current property has exorbitant expenses, we can’t seem to understand why there’s so much or what has been going on. Usually, those are detailed conversations with the broker or the seller about, “Why are these specific line items so high? Is there something that we don’t know?” That’s probably the case. We’ll ask 500 questions to understand and give us the lay of the land and the details of why the property is operating like that. If we can’t understand and control the expenses, that will kill a deal for us.
You’re going to understand that better by underwriting all those deals in that market as well. You’re going to see whatever the expense may be is twice as high or a third higher than the last ten properties I’ve underwritten in this market or close by. Is there an example of a deal where you all thought you’ve underwritten it, “This is looking good. We’re moving forward?” I’ll say you’re close to that LOI or you’re thinking, “We’re going to pursue this opportunity,” but then something killed it. Any examples like that you all have experienced?
I can’t say we get to that process of being ready to write an LOI and in a deal has killed for us. If there’s something odd that pops up in due diligence, maybe you learn after the fact of some operational or maybe there was a recent insurance incident at the property that you don’t have control over that could kill a deal. Typically, by the time we’ve spent a lot of hours going through our initial criteria, going through our full detailed underwriting, we are very confident in writing an LOI and submitting for that property. At that point, there should be no surprises for us. Obviously, we look for them and ask about if there’s anything and continue to have our eyes and ears to the ground about that property.
We fully set prior to writing an LOI. That’s one way The Real Estate Syndication Show audience can benefit if you can have those conversations with a broker that says, “When we write an LOI and were awarded a deal, we close no matter what because we’ve done our thorough due diligence. We’re not going to be surprised by any major issue that comes up.” You may have a random thing here or there that maybe a few thousand dollars, but it shouldn’t impact your numbers to the point where you’re surprised or shocked by it to change that. By the time we submit an LOI, we are prepared to close on that unless a surprise comes up that we don’t know about.
It is a lot about your due diligence. Learning as much as you possibly can about this before you ever get to that point. It’s not being afraid to walk away if something comes up as well. I get this question a lot about if people that are learning about syndication or like structuring a deal, “What does that mean? What does that look like?” Somebody is talking about structuring a deal. What are they talking about, explain that a little bit? Let’s get in a little bit maybe about a deal that you’ve worked on. How it was structured and why?
From a structure perspective, there are a few things that you need to get right from a structuring perspective. Number one is the loan or the debt structure that you’re going to use. You need to find a couple of lenders to quote debt options for the deal. They’re going to be your largest partner, so they have a material impact on the success or detriment to your project. Find a good lender to work with. The other piece inside of that lender, that area that you need to resolve is do you have any experience owning multifamily properties? Most lenders will require a certain resume, meaning you have experience for them to feel comfortable giving you a multimillion-dollar loan for a 150-unit apartment community. If you don’t have any experience, you need to bring on a loan guarantor or a key principle as part of your general partnership team.
[bctt tweet=”Determination is having a laser-focused vision and achieving what we set out as our goals without having any excuses.” username=””]
This is where the structure comes in to help you with that area. Item one is your loan in that configuration and can you do that yourself? Do you need to bring in a loan guarantor or a key principle to help with the experience, the net worth and the liquidity to qualify for the loan? We’ve got the first one figured out, the loan piece. The second piece to it is your equity portion. Now that you’re large, that partner is resolved. The second item is your equity portion. The equity portion is your investors. Either you are going to pay for the remaining equity out of your own pocket, or you’re going to syndicate it, which we’re reading to The Syndication Show. I’m expecting you’ve got high-net-worth investors or friends and family that are ready, willing and able to invest in your deal.
They would come in on the equity side of things. If you’ve never raised for a syndication deal before, raising money is a lot harder than you may think. You may want to bring in a couple of partners to help raise money who have done it before. For that, they would become part of the general partnership structure as well. You’ve got your second component, your equity portion of your general partnership structure. The third portion is the ongoing and day-to-day asset manager who oversees the deal and ensures that the business plan and that property value add strategy is being carried out. You work with the management company on a regular basis to ensure that numbers are being hit and the property is moving in the right direction. The fourth component, I’m going to say other for anyone else that falls into that other GP part of the team.
Maybe you work with a partner, you guys and gals run your opportunities as a team. They would fit into that general partnership structure as well. Maybe you need an expert to come into that other category who knows the ins and outs of multifamily value-add strategy, if you’re doing a deep unit renovation. What I mean by deep unit renovation is it’s more than like floor paint and appliances. Maybe you’re doing major construction. You need a general contractor or a construction expert to fill that knowledge void to make sure you’re getting the best pricing and everything is being carried out accurately. To recap, four areas that you need to figure out for your GP structure. Number one is your loan structure. Number two is your equity structure. Number three is your asset management. Number four is your other general bucket.
Thank you for laying that out. A lot of people ask about what does that mean when they’re getting started because you hear that term a lot structuring of the deal. I appreciate you laying out those things that we have to have or that we need in place. Most people don’t think about the loan structure, what that looks like, creating that relationship with that bank or that lending institute. However, you’re finding your debt, you’ve got to find it. It’s so important.
It’s a misconception that you can go out and syndicate a deal. It takes a lot of work to do it at a high level where you’re buying 150 unit, a $10 million-plus deal. You need to go through the steps and get there. If you’re new and you want to do large apartment deals, the best way to start out is to invest as a limited partner to learn the ins and outs, gain some of that resume building experience, to say that you’re an owner of a property. You have experienced owning multifamily and then that builds the story that you can work with the lenders on to qualify for the deals. Know the ins and outs of investor relations, everything it takes to be a professional and after the very top of the syndication game.
[bctt tweet=”If you are new to syndication, you should fully underwrite every deal that comes in.” username=””]
What’s the one thing that’s contributed to your success?
Determination, what I mean by determination is having a laser-focused vision and being determined to achieve what we set out as our goals without having any excuses for not achieving them. Ultimately, it’s my responsibility to make sure that anything I put my mind to works. Plan A may not work but I’m flexible and I’m willing to go to Plan B, Plan C, Plan D, whatever it takes to get to that goal and achieve that vision so determination.
Getting started, if I hear somebody else talk about mindset or if I hear somebody else talk about their why or whatever. Initially, my thought is like, “Let’s get to the meat and potatoes.” Stop telling me about it. The longer I’m in this, it’s key, your determination, your mindset and it’s so important. It’s important than the next book you’re going to read that you’re determined before you get to that book. Get through the book even or create the goals and what are the next steps because it’s not walking on rose petals.
Within real estate and within syndication, you’re going to learn something new every day. You’re going to come up against obstacles that you don’t know about. You better be determined to learn how to adapt and be flexible to overcome those obstacles. Going back to determination, why it’s so important to have that mindset right before you get started because you will encounter an obstacle. Being determined and being willing to learn is going to get you to where you want to go.
Danny, tell the audience, is there some way you’d like to give back?
I give back by helping volunteer through The First Tee. It is a wonderful program to teach kids about life through the game of golf.
I’ve never heard of that one. That’s a new one on me. Thanks for sharing about that and for giving back in that way. How can the readers learn more about you?
You can go to Randazzo Capital to learn more about what we have going on with our books, with our blog and what we do on a daily basis. If you’re interested in being a limited partner with us on our syndication opportunities, go to the PassiveInvesting.com.
Thanks, Danny. I always appreciate your time and sharing your knowledge on the show. Danny was on a previous show way back when we got started. Thanks again, Danny. I hope the audience will buy your book, go to Amazon and pick up this book. Also, go to LifeBridge Capital and connect with me and go to our Facebook group, The Real Estate Syndication Show, we can all connect with experts like Danny and grow our businesses together.
Thank you, Whitney.
- Danny Randazzo
- The First Tee
- The Boy Who Lost His Wallet
- Randazzo Capital
- Blog – Randazzo Capital
- The Real Estate Syndication Show Facebook Group
About Danny Randazzo
Danny and his wife sold everything they owned in the summer of 2016 and relocated to Charleston, South Carolina to build a real estate portfolio. Randazzo Capital made its first investment purchase in the winter of 2016, buying 2 commercial buildings for $1,000,000. Since then, Randazzo Capital has utilized strong investor and lender relationships to purchase another $1,000,000 commercial building, a short sale renovation project, a 4 unit residential rental, a 2 unit residential rental, and 2 beachfront foreclosures. The company controls over $8,000,000 in commercial and residential real estate.
Danny has been a speaker at The Best Ever Real Estate Conference in Denver, CO and a guest on many real estate podcasts released worldwide. Danny is the host of a local real estate meet up in Charleston to help local investors build networks and improve their business. Danny volunteers with The First Tee of Greater Charleston that is a golf academy to teach kids about honesty, integrity, respect, and life on and off the golf course.
Danny has worked for Deloitte Consulting LLP for over 5 years. He focuses on helping Fortune 500 companies monitor revenue, expense, and accounts receivable performance to improve operations and profit margin. In addition, he helps companies select, implement, and optimize new technologies and software systems to improve overall operations.