Why You Should Invest as a Limited Partner First

When people ask us how they can get started in syndications, our #1 piece of advice is this:  Invest as a Limited Partner (LP) first.

Syndicating a real estate deal can be very complex. There are many different responsibilities, legalities and variables involved and the learning curve is steep.  Most importantly, syndicators have a fiduciary responsibility to protect their investors’ interests so proper training and education is essential! 

By investing passively first, you are in a perfect position to observe the process and learn from various GP teams. Every deal is structured and approached differently by various teams and as an LP,  you can make note of each group’s management style.

Here are some areas to make note of when transitioning from a passive investor to a General Partner:

  • How can I best educate and support passive investors? Think about the information that was most helpful to you as a passive investor.  As a first time investor to syndications, draw on your own personal experience and make a note of what education was most helpful to you so that you can be sure to provide this knowledge when you transition to a GP role.
  • How do I best nurture them in achieving their goals?  First and foremost, it’s important to understand the goals of your LPs and that requires ongoing conversation.  Why are your LPs investing and what are their financial goals?
  • How do I best communicate with LPs? Everyone’s preference for communication differs so make sure to offer multiple channels through which you convey key info.  Emails, investors and webinars are all great methods to stay in touch with your investors.
  • How often do I need to communicate? Again, draw on your personal experience.  Most investors like to be kept up to date on what is being done with their money so monthly or quarterly updates are a great way to share how the business plan is progressing.
  • What kinds of information needs to be disclosed to LPs? Limited partners don’t need to see granular details like work orders and invoices but sharing details like occupancy rates and before and after photos  of renovations help them feel part of the process.  In addition, it’s important to keep LPs apprised of any challenges that may occur such as unexpected expenses or damage from weather events.
  • What kinds of questions would an LP ask?  Most LPs just want to understand the business plan as well as any contingencies so anything unexpected occur.  If you find you are getting the same question from multiple people, you can create a blog post or a have an investor call to cover the question.
  • What do LP’s prioritize?  Every LP is different – some are focused on regular cash flow while others are more focused on the equity multiple once the project has gone full cycle.  Taking the time to speak with each investor will help you understand their personal priorities.
  • What things might be overlooked? This is where your personal experience can really be helpful.  Most syndicators very experienced and have done multiple projects; however, even the most experienced syndicators may not anticipate every investor question.  As an LP, if you saw an area that may have been overlooked, make sure to include that when you become a general partner.

The main takeaway is this:   Be the guinea pig with your own money before you take on the responsibility for someone else’s.

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