Passive Investing: Tips/Tricks for Success (And Avoiding Surprises)

I get decks on deals every week. I love looking at them. I get to see how other people are looking at deals, how people are finding deals, and people's assumption on how they can operate an asset. 

To date, I have invested in three blind funds and about ten single asset deals. As both an LP investor and syndicator myself, I have learned quite a bit along the way. Here are a couple quick tips:

Tip 1: You need way more than the deck. 

As I mentioned, people love to send over decks. They look pretty and, generally, show enticing IRRs. However, decks are just the start. My follow-up email back is always requesting the excel. The excel is where the assumptions are and where the fluff is hidden is the code. I would never participate in a single asset investment without looking the excel. I also find an error in their coding half the time. 

Tip 2: Alignment is key. 

I received a deck the other day for a $4 mm deal. The structure was something along the lines of 3% Acquisitions Fee ($120,000), 1% Asset Mgmt Fee, and 20% of the waterfall. I will tell you this: I would never take this deal. 

Tip 3: Depreciation Allocation and Nuances

People love to talk about depreciation - and rightfully so! However, ask how depreciation is being allocated. I asked this question on three offering recently and nobody knew the answer. And when they got back with me, I got three different answers. 

In line with this, understand the whole structure. Is there a preferred rate catch up? How is money split in a refinance? Ask questions.

Tip 4: Check their track record. 

After the last crash, everyone and their mother got into real estate and syndication. I managed the purchase of 400 homes and their rehab for a family office with no REI experience. Real estate is an operational business, especially at scale. People are selling courses on buying real estate and bitcoin left and right. The truth is that everyone who purchased in the last decade looks like a genius; they didn't do anything right besides have good/lucky timing (and at some point, someone is going to get caught with their pants down). You could have completely botched a project and given your investors a good return. However, you don't want to invest in those people. 

My advice here is to ask what other assets they own. Ask for trailing profit and loss statements. If you are skeptical on their pro forma, ask and push them on it. 

Invest with good operators. Bad ops have ruined many good deals. 

Tip 5: Understand the GP setup

Once people knew I had access to capital, they started trying to connect me to all types of syndicators. Obviously, they were looking to get cuts of GPs for raising funds. While debatably legal, I don't have an inherit issue with this. On the flip side, at times, I have seen GPs give too much away or have too many people involved. In general, I was a smaller GP group with access to their own funds. It shows they have done volume, had success, and they have a real business (vs "deal guys" - and don't get me wrong, I am not always anti-"deal guys").