How has your experience been as an LP investing deals?
Member since 2022 · 54 posts · 47 votes
I'm looking to invest in my first deal as an LP and upon interviewing GP's each makes their deal sound as if it's the best deal ever. What do you look for when investing as an LP and are there any red flags to watch out for?
As @Taylor L. mentioned, it is critical to vet the sponsor before you evaluate the deal. You are effectively hiring an asset manager to manage the property you are investing in. If you hire a poor asset manager, your investment will suffer regardless of how good the deal is or how good the sponsor makes the deal look. It is very difficult to vet sponsors - these are long term, illiquid investments that are completely out of your control. Once you send the wire, there is nothing you can do except receive reports and hopefully distributions. Finding an operator who can effectively manage the asset and maximize returns is great - but they also need to be able to serve their investors. Communication with LP's is critical - if they don't respond to emails and phone calls before you have wired them money there is little chance they will do so after you send the money. The communication from the GP is the only way you will know how your investment is performing so this is a critical component of the evaluation.
When I started as an LP investor I did not have a strategy at all - I went to a conference and met syndicators and invested with them - I did no due diligence or evaluation. As you can imagine, the deals I invested in are a mixed bag - some are OK and some are not and none are great! Then I decided I needed a better way so I started listening to podcasts and reading books. This was much more effective, but still I couldn't be sure if I was talking to operators who were great marketers/podcasters or if they were great operators - some were both and some were neither. My results with this approach was much improved but I was still not confident I was finding amazing operators. Then I changed my approach again - now I only invest with new operators who are introduced to me by someone I know, like and trust from my Community who has already invested with the operator. I still do all the same due diligence, but trust transfers - so I am starting from a much better place.
This is one of the many reasons, I believe the most important thing you can do to become a better syndication investor is to join a Community. If you walk out your front door and talk finance to your friends and neighbors, they will talk 401k, IRA, mortgage rates and the stock market. If you mention real estate or alternative assets they will think it's risky and if you mention syndications they will go mow their lawn. That is why it is important to find like-minded people who are looking into investing in the same type of assets you are. This is why we all joined BP and why many of us also join Communities that focus on the niche we are most interested in. For me, that is creating financial freedom through investing mostly in real estate syndications. The specialized Communities I participate in have been a huge benefit to me and have made me a much better investor in a much quicker way than I could have done on my own.
First step is to vet the sponsor first, evaluate the deal second. For example, new sponsors doing their first deal - that's a no for me.
Googling real estate syndication red flags can turn up quite a few good options for you, I'd recommend digging in that way. Unfortunately there isn't just 1 answer to the question of finding a good deal to invest in, there's a lot to look for.
First step is to vet the sponsor first, evaluate the deal second. For example, new sponsors doing their first deal - that's a no for me.
Googling real estate syndication red flags can turn up quite a few good options for you, I'd recommend digging in that way. Unfortunately there isn't just 1 answer to the question of finding a good deal to invest in, there's a lot to look for.
Thanks for sharing Taylor!
@Trevor Oldham I may be biased as a numbers guy but I would ask about their underwriting inputs to understand how they arrived at their estimated investment returns.
What is the cap rate you used for the purchase price?
What is the exit cape rate you used in your underwriting? (Red flag if they assume the cap rate will decrease)
What is the LTV % of the mortgage? (Red flag if they are assume unrealistically high leverage)
What is the mortgage rate?
What % of the revenue did you use for expenses? (For conservative underwriting this should be no less than 50%)
Hope this helps!
As @Taylor L. mentioned, it is critical to vet the sponsor before you evaluate the deal. You are effectively hiring an asset manager to manage the property you are investing in. If you hire a poor asset manager, your investment will suffer regardless of how good the deal is or how good the sponsor makes the deal look. It is very difficult to vet sponsors - these are long term, illiquid investments that are completely out of your control. Once you send the wire, there is nothing you can do except receive reports and hopefully distributions. Finding an operator who can effectively manage the asset and maximize returns is great - but they also need to be able to serve their investors. Communication with LP's is critical - if they don't respond to emails and phone calls before you have wired them money there is little chance they will do so after you send the money. The communication from the GP is the only way you will know how your investment is performing so this is a critical component of the evaluation.
When I started as an LP investor I did not have a strategy at all - I went to a conference and met syndicators and invested with them - I did no due diligence or evaluation. As you can imagine, the deals I invested in are a mixed bag - some are OK and some are not and none are great! Then I decided I needed a better way so I started listening to podcasts and reading books. This was much more effective, but still I couldn't be sure if I was talking to operators who were great marketers/podcasters or if they were great operators - some were both and some were neither. My results with this approach was much improved but I was still not confident I was finding amazing operators. Then I changed my approach again - now I only invest with new operators who are introduced to me by someone I know, like and trust from my Community who has already invested with the operator. I still do all the same due diligence, but trust transfers - so I am starting from a much better place.
This is one of the many reasons, I believe the most important thing you can do to become a better syndication investor is to join a Community. If you walk out your front door and talk finance to your friends and neighbors, they will talk 401k, IRA, mortgage rates and the stock market. If you mention real estate or alternative assets they will think it's risky and if you mention syndications they will go mow their lawn. That is why it is important to find like-minded people who are looking into investing in the same type of assets you are. This is why we all joined BP and why many of us also join Communities that focus on the niche we are most interested in. For me, that is creating financial freedom through investing mostly in real estate syndications. The specialized Communities I participate in have been a huge benefit to me and have made me a much better investor in a much quicker way than I could have done on my own.
if you don't mind me asking, as I'm just curious, what's your reason(s) for looking to get into syndications? and do you own investment properties directly or is this the strategy you chose?
I'm looking to invest in my first deal as an LP and upon interviewing GP's each makes their deal sound as if it's the best deal ever. What do you look for when investing as an LP and are there any red flags to watch out for?
As others have said doing due diligence on the syndicator is my priority. I personally don't get into the numbers that much because the reality is I do not know 1/10th of what any syndicator I invest with knows (hopefully). I prefer when the syndicator has more of their own money involved but even then they might have borrowed that so who really knows! Track record and years in business are important to me. The longer the better.
@Trevor Oldham I may be biased as a numbers guy but I would ask about their underwriting inputs to understand how they arrived at their estimated investment returns.
What is the cap rate you used for the purchase price?
What is the exit cape rate you used in your underwriting? (Red flag if they assume the cap rate will decrease)
What is the LTV % of the mortgage? (Red flag if they are assume unrealistically high leverage)
What is the mortgage rate?
What % of the revenue did you use for expenses? (For conservative underwriting this should be no less than 50%)
Hope this helps!
Thanks John this is super helpful!
As @Taylor L. mentioned, it is critical to vet the sponsor before you evaluate the deal. You are effectively hiring an asset manager to manage the property you are investing in. If you hire a poor asset manager, your investment will suffer regardless of how good the deal is or how good the sponsor makes the deal look. It is very difficult to vet sponsors - these are long term, illiquid investments that are completely out of your control. Once you send the wire, there is nothing you can do except receive reports and hopefully distributions. Finding an operator who can effectively manage the asset and maximize returns is great - but they also need to be able to serve their investors. Communication with LP's is critical - if they don't respond to emails and phone calls before you have wired them money there is little chance they will do so after you send the money. The communication from the GP is the only way you will know how your investment is performing so this is a critical component of the evaluation.
When I started as an LP investor I did not have a strategy at all - I went to a conference and met syndicators and invested with them - I did no due diligence or evaluation. As you can imagine, the deals I invested in are a mixed bag - some are OK and some are not and none are great! Then I decided I needed a better way so I started listening to podcasts and reading books. This was much more effective, but still I couldn't be sure if I was talking to operators who were great marketers/podcasters or if they were great operators - some were both and some were neither. My results with this approach was much improved but I was still not confident I was finding amazing operators. Then I changed my approach again - now I only invest with new operators who are introduced to me by someone I know, like and trust from my Community who has already invested with the operator. I still do all the same due diligence, but trust transfers - so I am starting from a much better place.
This is one of the many reasons, I believe the most important thing you can do to become a better syndication investor is to join a Community. If you walk out your front door and talk finance to your friends and neighbors, they will talk 401k, IRA, mortgage rates and the stock market. If you mention real estate or alternative assets they will think it's risky and if you mention syndications they will go mow their lawn. That is why it is important to find like-minded people who are looking into investing in the same type of assets you are. This is why we all joined BP and why many of us also join Communities that focus on the niche we are most interested in. For me, that is creating financial freedom through investing mostly in real estate syndications. The specialized Communities I participate in have been a huge benefit to me and have made me a much better investor in a much quicker way than I could have done on my own.
This is great advice Jim! I was poking around Left Field Investors the other day and loved the site! I also was listening to your interview with Peter Kim this week - thoroughly enjoyed it!
@Trevor Oldham, in the current market, as an LP, I look for people with experience. I don't mean the "we sold 10 properties and have averaged an 80% IRR" type of experience. I look for the "I have been working on large scale multifamily properties as an asset manager for 20 years".
There are a lot of other things I look for, but experience is very high on my list along with communication. I also like focused operators with vertical integration. I look for deals in areas I trust longer term, i.e. Phoenix and Vegas are a no-go for me, since I think there will be a severe drop in population in the next several years as water runs out.
@Trevor Oldham
Vetting a GP is not easy but if you go through a trusted capital raise person then that helps. The person raising the capital will do his/her due diligence. One bad raise and they will not raise anything significant in the future.
Message me if you want more info
@Trevor Oldham - Congrats and what an exciting accomplishment to become a passive investor. I invested in my first syndication in June. I am not an expert but I listened to all the podcasts, I read the books, but I am also lucky to work in the apartment industry in a position where I can learn various investor strategies - most are winners, but some fail and fail big. I strongly believe in investing with people you know and trust because they have experience, intelligence, and integrity, with demonstrated sound judgment. All of the advice and comments thus far are spot on. Do not go into this lightly. DM me, and I am happy to share more about how I arrived at my decision, which took nearly 12 months. Again, I am not an expert. There are others on this thread more experienced, so keep making those connections and learn all you can.
I've done three LP deals and two of them have been with the same team. One of the things I learned quickly was to not only vet the operators, but also vet the deal. You should also do your own research on the market data that the operators are provding you and make sure it's not fluffed up.
I am talking with an investor buddy of mine about a deal he went in to that he didn't really research too much and was very surprised when he got hit with a capital call...
Build a relationship with the GPs you go in with. There is a reason why the P in GP and LP stands for Partner.
I'm looking to invest in my first deal as an LP and upon interviewing GP's each makes their deal sound as if it's the best deal ever. What do you look for when investing as an LP and are there any red flags to watch out for?
Obviously, when starting out investing in something new, you need to educate yourself. A good start is to read some books on passive syndication investing like Brian Burke's The Hands Off Investor or James Kandasamy's Passive Investing in Commercial Real Estate. There are also multiple podcasts that cater to this type of investor like Passive Wealth Strategies for Busy Professionals, The Real Estate Syndication Show, and Passive Investing from Left Field.
Also, get involved with a passive investing community where you can network with other like-minded investors. This will help you compress time frames and ramp up your knowledge.
First and foremost you want to trust and believe in the sponsors group ability to execute. Also want to make sure their proforma is conservative. A key metric to look at is what exit cap rate are they using compared to the cap rate they are buying at. The exit cap should be higher then entry cap. That usually will show you how conservative they are being in the rest of their underwriting..
I agree with those who have said that finding a trusted syndicator is first and foremost above any particular deal. I have actually documented my own 7 year investment journey with one particular syndicator platform in a 4 part BP blog series, starting with
Have I Found the Holy Grail of Passive Real Estate Investing?
I update (Part 4) quarterly after receiving updates & distributions. Dive in and read at your leisure. It has been quite a journey.
1 red flag is if they make their deal sound as if it is the best deal ever.
Another is not having enough capital reserves. Depending on the risk of the deal, they should have 8-18 months or principal and interest in reserves as well as a renovation reserve of at least 10% above the anticipated project cost.
Also, little to no experience, a large group of "general partners," and big growth assumptions.
Here are some things to think about: https://www.biggerpockets.com/...
Hi @Trevor Oldham! Great question.
I always recommend investors get Brian Burke's excellent book The Hands-Off Investor. This will help you strategically vet syndicators and fund managers.
I also recommend joining a community. Jim Pfeifer's Left Field Investors will be a great place to start. They have a lot of conversations on there about vetting syndications and funds.
You may also want to check out Ian Ippolito's Private Investor Club. They share honest reviews of syndications, funds and more. Good luck and happy investing!