Windermere, FL · Member since 2017 · 12 posts · 4 votes
Has anyone here ever become a limited partner in a multi-family opportunity fund? (basically a real estate investment where a private equity firm raises capital to fund the purchase of huge apartment complexes and then sells them a few years later?) If you have, I would love to hear your experience. I was invited to become a limited partner. Buy in is $30,000 per fund. I literally have never done this and I need to understand everything I should know about it. What kinds of things do I need to look for from this private equity group when doing my research? I just want to make sure I am educated on the subject matter.
Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
9y
HI Jill,
I put together a top 10 things to vet a deal sponsor syndication. It might be a good starting point. As a limited partner, your risk is limited to your investment only. Yes, very common and are good strategy for passive participation, especially if you are looking for geographic diversification and experts that do this for a living. Bonus blog, why I like investing in large apartments, something very difficult to do as a small investor.
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
9y
First off you need to be accredited (not assuming you aren't). If you are accredited then you will want to be sure you trust the owners and the company. Hopefully you have a relationship of sorts with them or have a good understanding of their track record and business practices and have called references. You will also want to analyze the deal and run it by other educated people (possibly brokers, appraisers or other investors) to make sure it works. I would be sure they are offering you a security in the property/LLC and that you are getting a preferred return. I would also run all the partnership paperwork by your own real estate/securities attorney.
Windermere, FL · Member since 2017 · 12 posts · 4 votes
9y
What kind of return would you want from something like this? I wonder if it is easy to find the expense ratio too. For example - if they are promising me a return of 25% of my investment but the expenses are eating away at 5% then I need to see the whole picture.
Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
9y
HI Jill,
I put together a top 10 things to vet a deal sponsor syndication. It might be a good starting point. As a limited partner, your risk is limited to your investment only. Yes, very common and are good strategy for passive participation, especially if you are looking for geographic diversification and experts that do this for a living. Bonus blog, why I like investing in large apartments, something very difficult to do as a small investor.
Windermere, FL · Member since 2017 · 12 posts · 4 votes
9y
David - one more question. For your personally, what kind of returns at this current time would you like to see for this particular type of investment? (I also need to make sure I understand the expense ratios so that I understand the true return as well. (I am so used to stock market investing that this is new territory to me)
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Jill Davis What I would be doing in your situation is looking at 1.) the returns of the PE companies last fund, 2.) how they fared (if they were around during 2008, and 3.) the quality of the other investors. I'm an LP in a venture fund (different timeline, more ambiguity, higher buy-in) but it's the same general theory.
Most PE companies make their money on fees and carried interest. It sounds like you know the fee structure (5%) and that you *should* make 25%. What you haven't said it how you get to that 25%, I can't imagine it's all through a preferred return but maybe it is.
And, for what it's worth, you might want to tell people here *how* you got invited to join the fund. I don't about LPs in private equity funds but if I was looking to raise $1M it's easier to deal with 10 people contributing $100K than 33 people contributing $30K.
MHP investor from Johns Creek, GA · Member since 2014 · 123 posts · 31 votes
9y
Hi Jill. Do you know the sponsor or were you referred to the investment by a friend? You don't necessarily need to be an accredited investor. It depends on the syndication type.
Most experienced passive investors' number one criteria for deciding whether to invest or not is the sponsor's track record. Research the sponsor's prior investments and see if the projections have lived up to the reality.
Also ask the sponsor if they are investing any of their own money in the deal. once you are comfortable with the sponsor you can look at the numbers in the deal.
Can you give us an idea of the deal structure? Is there a preferred return? Is there a straight split between sponsor and investors?
Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
9y
Hi @Jill Davis, I'm an investment advisor who specializes in syndicated real estate, if you need any assistance, I am here to help. We are very, very discriminating regarding what sponsors and offerings we will recommend, and I personally inspect all multifamily and student housing myself.
Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
9y
Jill
In the strongest markets for value add aparyment syndication deals, cash on cash returns in 8-10% range and 18-20% IRR over 5yr hold are what we are seeing. These are projections. What attracts investors is that you can participate and buildup passive income streams without being active which fits a lot of people's busy lives. A general partner manages the pooled investment. Typically payouts are monthly or quarterly. We like to see preferred returns in the 8% range which means you, the Limited Partner in the deal gets paid first up to 8% before the general partner is paid and then there is typically an equity split / sharing after that. Read the two blog links to help get a better understanding.
Attorney · Los Angeles, CA · Member since 2016 · 284 posts · 314 votes
9y
Agreed with the above that you should look at the sponsor's track record, first and foremost. It's less so about becoming an LP, and moreso about becoming a passive investor in the fund. You'll want to underwrite both the sponsor and the property (or properties) they're pushing, make sure the terms seem fair, make sure the IRR/cap rates/financials make sense. I recommend looking through a few deals to get practice on what looks good or bad before making your first investment (and dont worry, there will ALWAYS be more opportunities).