Thread by @Levijameshere

So, you have a bit of liquidity and are ready to invest in private real estate deals as an LP (Limited Partner)

This thread is the playbook 👇

1. There are many GPs (General Partners) who are raising capital through a syndicate structure. This means that you can participate in the property alongside them as an LP. Yet there are risks. Keep reading to learn what to look for.

2. Avoid any GP (General Partner) who is doing their first R/E deal: There are countless pitfalls in this business, first time GPs should be using their own cash, and friends & family money on the first few deals. Not yours.

3. Only after the GP has done a few deals, and you feel they are an operator you can trust, invest a small amount to test them out. “Minimum investments” are just a guideline. It is perfectly ok to ask for a smaller allocation.

4. Avoid a GP who does not specialize in a certain asset class and market area. You should diversify your portfolio, but your GP should be laser-focused on only one type of property and market. As #ReTwit likes to say “There are riches in niches”

5. Especially for a newer GP, it is good to see that they are putting skin in the game along with you. A good general guideline is 5-10% or more of the needed equity should come from the GP. Don’t be afraid to ask where they are getting that money from.

6. Fees are important. Too high and deal will get eaten alive, too low and your GP won’t be incentivized to focus on the deal because they need to keep food on the table. A good range to look for are fees in the 1.5% - 3% range of total equity raised. (Not of total deal size)

7. Don’t be afraid to ask your GP for details about their historical performance, strategy, team, pipeline, criminal history, failed deals, etc.… You deserve to know all about who you are investing with, and if your GP won’t share, something is likely wrong. Run.

8. Ask for referrals. A good GP will have a long list of investors who love working with them and who would be happy to take a call to share their experience. Many skip this step, but referrals are a goldmine.

9. There is safety in numbers. Find or create an investment club. Other investors who will put money into deals with you and will be a second set of eyes on potential investments. The more the better.

10. Make sure your GP uses a good investment management software platform. There are many good options out there, excel is not one of them.

11. Financial models lie all the time (intentionally and unintentionally). Take the important numbers and re-create your own simple version of the model to see if it checks out. Pay someone to do this if you don’t know how.

12. Check all major deal assumptions yourself. 98% occupancy in the model? Check the market. Income jumps up in year 2? Check if it’s realistic. GP plans a remodel or new build, call some builders and see if the construction cost estimates check out.

13. Avoid construction deals. I know some won’t agree with me on this, but they often go over time/budget. You don’t have to invest in these projects, there are plenty of other great options. If you must then find someone who has done the same type of project many times.

14. Don’t be afraid to hire a consultant to help you make a decision. There are great analysts whose full-time gig is researching real estate deals for investors. This is money well spent.

15. Be extra careful when investing in deals with high-interest short-term debt. The market will turn eventually, and the deals with high-interest loans are the first to be lost. When a deal is lost due to unpaid interest you will lose your entire investment.

16. Your GP should take all the risk as guarantor on the debt. If they ask you to sign on the debt. RUN. It is not standard practice for LPs to be liable for the loans.

17. Make sure the debt terms line up with the investment strategy. If the deal is a deep value-add, then a lower LTV is wise, if there is a credit tenant in place with a 15-year lease then a higher LTV could be ok.

18. Avoid deals that have higher LTV’s or high-interest loans. Rates are asset-specific, but in general, your GP should be getting debt in the 3%-5% range right now. I know plenty of GPs do not agree, but they are wrong. Less debt is always better, even if it lowers returns.

19. Find a GP who has access to capital. Money buys options, make sure that your GP can access those options for when things go sideways. Things will go wrong.

20. The returns you can expect depend on the risk you are willing to take. Don’t touch a deal with a lot of risk that does not reward you with high returns and don’t put all your money in high-risk deals.

21. Avoid investing in properties that are highly specific to the tenant. Anything can happen in the market or to the tenant. Repurposing is expensive. Even with a long-term lease in place, be cautious. There are some exceptions, but not many.

22. The season of life that your GP is in matters. The more settled and entrenched in their community the better. A GP with kids and a family is better than one who is young and has nothing to lose if the deal goes wrong.

23.There is real $ to be made by doing your research and finding a great GP to get behind. Especially if you can find one who is doing a lot of deal volume and you can invest alongside for many years.

24.Do your homework. Ask lots of questions and be prepared to walk away if something doesn’t feel right.

25. Many GPs (like Harbor Capital) are flooded with investors right now. But that does not mean that opportunities do not exist. Do your homework and find a GP who you trust, then get your name on their list and be ready to jump when an opportunity arises.

26. Real Estate Twitter can be a great resource when looking for GPs to vet. Many on here have become close friends of mine and I would trust them with everything I have.

I’d appreciate a retweet if you found this thread helpful. 🤛