Investing as a limited partner in a multi unit

[Anita Ahuja]

I'd would very appreciative of some solid advice on investing as a limited partner in a multi-million dollar multi-unit property. Investment group is trying to raise the capital to but. Investment group members considered as general partners and outside investors are what's called limited partners. Please excuse any naivety here. Initial investment 75% down payment. High appreciation market. CoC 7.1 % projected in 5 years Purchase cap rate 5.40 5 year projected IRR : 15% Limited Partner cash Flow as % of Initial Equity: 6.5 % year 1 to projected 7.1% in yr 5 Break down of distributions: First 6%, Preferred Return to Limited Partners (LPs) Over 6%, 60 % to LPs and 40% to General Partner (GP) GP fees: 1.5% acquisition fee, 1% asset management fee I would like some advice on down sides of investing this way. What questions should I be asking of the investment group? What should I be weary of and how do I protect my investment? How do I get out of and when I want to? Please let me know if there is additional info needed Thanks in advance. I feel a crucifixion coming on....

[Jonathan Twombly]

@Anita Ahuja

If they are buying the deal at a 5.4% cap rate and the Year 5 cash on cash return is only projected to be 7.1%, how do they propose to get to a 15% IRR? If this is all based on the supposed appreciation, it's basically a bet. And you're making a bet that, at what may well be the top of the market, some how you are going to get even more appreciation.

I would ask them about this.  Where do they think we are in the market cycle?  Why do they think that they are going to get so much appreciation?  What cap rate do they think that they are going to exit the deal at?  Conservative underwriting principles usually require you to assume that the exit will be at 50-100 BPS higher than the purchase price.  I would look into what their exit cap rate is and ask them to explain their assumption.

I'd also focus heavily on their track record.  Ask them how their other deals to date have performed.  

As a syndicator, I will tell you that these deals are not liquid.  It is very difficult to sell your interests if you want to get out, and if you do sell them, you will probably have to sell them at a loss because most buyers of these interests want to buy them at a steep discount to ensure that they make money.

If you are new at this, definitely have the documents reviewed by your CPA and attorney to understand all the risks.