How to do a partnership safely

Question

Hello everyone I have a question but first I have to give you a little bit of background.

For the last 10 + years I've been buying single family rentals. This translate into me going to look at the property and put in earnest money into escrow with the title company and no money exchange in hands with seller until the title company obviously clears the title on the property and we go to closing.  I'm looking to scale but in a more passive way.

How do I safely partner with someone on a large multimillion-dollar apartment acquisition as a passive investor?  What tips do you have for mean.  I already know about the due diligence process and how to look at the numbers and everything so I got that part covered.  I am talking about about tips that has to do with ensuring that I'm not potentially dealing with someone that could take off with my money.  Making sure thus is real.

Spencer Gray · Answer

Hi Marcus,

My company partners with experienced operators/syndicators to invest alongside with and it can definitely be nerve racking the first time you wire over your hard earned money to Joe Schmoe syndicator. I've been there!

When investing with a sponsor the underwriting initially is much more about evaluating the qualifications and experience of the operator themselves, not as much about their deal. First start with their resume, how did they start? How long have they been doing what they're doing. Is this their full time job or a side gig? All the standard questions you would ask if you were interviewing a candidate for a job. That includes asking for several references - current investors are good but also brokers, lenders, and other third parties. They will be able to tell you how they have performed, or if they've never heard of them..

Then I would get into what exactly is their business thesis is and how they execute on that strategy. You then need to weigh if their goals align with yours. They may be doing long term holds where you want more liquidity and shorter term flips, or visa-versa. What is their exact target criteria and why? If they can't list off their acquisition criteria, or if it's all over the place, I would be concerned. What kind of debt are they using? Who is guaranteeing the debt? Not that some operators can't do multiple things at once, but they better have a proven track record and the infrastructure behind them to execute. Ask them about their worst deals, and what they did. If they don't have any "bad deals" that's not necessarily a good thing.

Who comprises their team and what systems do they have in place? Are they a solo operator? If so what happens if they get sick or get hit by a truck? Are they going to be managing the deal, or is it a third party? It's not that someone smart starting out on their own can't be a good operator, but they need to have systems in place to handle everything and contingencies if something happens and the One Man Band can't do it all.

I would ask for a very specific track record: how many deals like this have you done in terms of size, market, asset type/class, etc. They may have a long track record of flipping SFH but repositioning a large apartment is totally different - you may not want to pay for their education while they figure it out (maybe you do want to take the risk but you should be compensated for it).

It's often how they answer the questions, not exactly what they say. You can usually tell if someone is giving you the whole story and are open or if they are guarded or making it up as they go.

I'll end this post with a tired old saying that may have been posted while I've been writing - "a bad operator can screw up a good deal but a good operator can turn a bad deal into a good one" (or something like that).

We've invested with 8 different operators in nearly 40 different deals and have been able to scale a diversified portfolio of cash-flowing assets in a way we could never have if we started from scratch. I personally believe if you have the means and the discipline it's the best way to invest in commercial real estate.

Hope this helps.

Marcus House · Answer

Thank you Spencer.  The more I think about it the more I believe this approach is going to be better than continuing to pick up cash flowing assets on my own with my resources.