Real Estate Investing 101
The basics made easy
Quite often when I speak to first time investors interested in moving away from mainstream investments and into the world of real estate, we're asked: Where do I start?
So in today’s newsletter, we're providing a roadmap to passive investing in commercial real estate as a Limited Partner (LP).
I’ll guide you through the distinctions between passive and active investing, who qualifies as an LP, and how to find a trustworthy General Partner (GP). Our simple guide is essential for anyone looking to diversify their investment portfolio and enter the real estate investing space.
Many investors fail due to a lack of proper research, choosing unreliable GP sponsors, or not fully understanding investment terms.
I’ve made 7 passive investments in the past 5 years and, I unfortunately lost money on one of my early investments for some of these very reasons. I’m determined to make sure it won’t happen to you.
Ready to get started?
Your Roadmap to Passive Real Estate Investing
A guide to empower you with the knowledge to make informed decisions and secure passive income for your financial future.
Passive vs. Active Investing
Who Can Become an LP Investor?
Researching Investment Opportunities
Choosing the Right GP Sponsor
10 Questions to Ask Before Investing
1. Passive vs. Active
Do you want to be a landlord or an equity holder?
As a Limited Partner (LP), you can invest in commercial real estate managed by a General Partner (GP). Your role is entirely hands-off—no property management, no tenant issues (I've experienced cockroach infestations, fires, and a shooting at a property to name a few). You simply reap the rewards from rental income and property appreciation.
General Partners, commonly referred to as Operators or Managers, take on the responsibility to execute and manage the investment and operate the business (yes, buying commercial real estate, is buying a business).
Why Invest as an LP?
Passive Income: Earn consistent returns without being involved daily.
Diversification: Add real estate to your portfolio without the hassle of being a landlord.
Expert Management: Leverage the expertise of seasoned professionals.
Reduced Risk: As an LP your risk is limited to your investment amount. Whereas a GP is responsible for guarantee on loans, can be sued and more.
Being an LP allows you to enjoy the perks of real estate without the time-consuming responsibilities, making it ideal for those seeking diversification with minimal involvement.
Now, if you want to get calls about leaks, clogged toilets, shootings and dog poop in the yard, then being a GP is for you.
2. Who is Eligible to Become a Passive LP Investor?
Most LP investments are reserved for accredited investors. To qualify:
Income: You must have an annual income of $200,000 ($300,000 with a spouse) for the last two years and expect the same this year.
Net Worth: Alternatively, you need a net worth exceeding $1 million, excluding your primary residence.
See the full definition from the SEC here.
In some instances, non-accredited but sophisticated investors can participate. This requires sufficient financial knowledge and experience to assess investment risks.
Understanding this criteria positions investors to be financially capable and informed, protecting both the individual and the investment group.
For those that are non-accredited, do not fear there are still many options available to you. The issue is that these types of offerings can not legally be advertised, so you will only hear from them if you build relationships with GP’s in order for opportunities to be shared with you.
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3. Choosing the Right GP Sponsor
The success of your investment heavily relies on choosing the right GP sponsor. Here’s what to consider:
★ Track Record & Experience
Select sponsors with a proven history of success in the industry and even more important, the business plan. Review past returns, project timelines, risk management and feasibility to execute the business plan. Experienced sponsors navigate market cycles, leverage industry connections, and manage challenges effectively. The ability to face challenges and find solutions is a crucial skill.
At Blue Eyed Capital, our experience extends over 20 years in commercial real estate having completed hundreds of real estate development projects around the world. We don’t stop there though. We partner with other experienced managers that compliment our building expertise with investment mastery to form powerhouse teams.
★ Alignment of Interests
Ensure the GP has skin in the game by investing their own money. This aligns their success with yours. Fee’s charged are necessary for GP’s to cover the cost of work, yet some charge high fee’s that give them big upfront pay days. We believe this creates a misalignment of interest. An Acquisition fee as they are called, should be less than 2.5%.
One of my early investments had an acquisition fee of 5% and the experience with the GP has been horrendous. At the same time, I have an investment with a 1.5% fee and receive timely, consistent communication and above average performance.
Investments are long term partnerships. Look at the GP’s values and ensure they align with yours. Perhaps even more important is that the GP has a track record reflecting those values. This will be important if the investment hits challenges.
★ Transparency & Reputation
A trustworthy GP is open about operations, fees, and performance and provides regular updates and detailed reports. Any GP who will not freely share details and backup related to their due diligence or current operations on the investment is NOT someone you want to invest with, period.
You want a GP that holds accountability at the top of their list. A great way to get the truth can be to seek testimonials from past/current investors.
I speak from personal experience that when times get tough, many GP’s hide, stop communicating and it can be beyond frustrating. The number of GP’s doing this in today’s market place is staggering.
A reliable, experienced, and transparent GP sponsor significantly increases the likelihood of successful outcomes.
4. Researching LP Deals
Financials
Examine financial projections and assumptions. Assess cash flow, ROI, and exit strategies. Ensure the figures are realistic and grounded in research and data. Assess projections against the business plan for feasibility. The opportunity should have the potential to under promise and overdeliver.
Market Analysis
Analyze the local market, focusing on:
Economic Indicators: Employment, population growth, business activity.
Supply and Demand: Vacancy rates, rental rates, new developments.
Location: Accessibility, amenities, neighborhood quality.
Feasibility: DO NOT be fooled by high returns. While there are great deals out there that can net high above average returns, these can also be warning flags that a business plan is too aggressive.
Property Inspection
You should visit the property if possible to see the investment for yourself, but if you can’t make sure the GP has:
Inspector: It is crucial that experienced individuals that understand the asset are performing inspections. I’ve seen many GP’s outsource this work, and that is a great option, but who interprets the results??
Physical Condition: Structural integrity, maintenance needs, repair requirements. Seek photos, ask questions like “Are there any existing code violations?” or “Can I see the inspection report?”
Occupancy: Current tenants, lease terms, turnover rates. Demographic change is very difficult and can take time. Has the GP given themselves the right runway to accomplish the plan?
Value-Add Potential: Opportunities to enhance value through improvements. Does the GP’s plan have real budgets, real timelines, material procurement, and contingency for time and costs. Have they done the proposed scope before? Personally, we believe that best value is in expense control that is complemented by income increases.
Legal Review
Have a real estate attorney review all documents. Understand the terms, rights, and obligations involved. This may not be necessary for everyone, but can help provide additional protection and peace of mind.
At Blue Eyed Capital, we support our investors by providing dedicated personal sessions to review all documents in detail, line by line. This is the very minimum you should expect.
Thorough research ensures you’re making informed decisions and protecting your investment from unnecessary risks. Take your time and never rush or be rushed. There will always be another opportunity. Trust me, rushing was one of the biggest mistake I personally made.
5. Top 11 Questions Every LP Should Ask the GP Sponsor Before Investing
What’s your track record with similar investments? Understand the GP’s history with comparable projects.
How much are you investing personally? This ensures the GP has a stake in the project’s success.
Can you provide references from past LPs? Learn from the experiences of previous investors.
What are the projected returns based on? Ensure the projections are realistic and sound.
What are the fees, and how are they structured? Understand all associated costs.
What’s the expected hold period and exit strategy? Know the investment timeline and exit plan.
How often will I receive updates and distributions? Clarify communication and distribution schedules.
What are the major risks, and how are you mitigating them? Understand the risks and mitigation strategies.
What’s the plan for value creation or property improvements? Learn how the GP intends to boost property value.
Can you explain the legal structure and my rights as an LP? Understand your legal rights and protections.
Have you lost investor money before? Have you had to issue a capital call in the past?
Investing as an LP in real estate allows you to participate in alternative investments outside of stocks and bonds and be part of ownership in real tangible assets without the burden of being a landlord. But you need to be diligent upfront to protect yourself and optimize your success.
Next issue we’ll get into the details of how cash flowing properties create wealth.
Until next time,
Jon
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