How to Passively Invest in Real Estate as an LP Investor
Investing in real estate without the headaches of being a landlord
Hey Real Estate Investors!
Today’s newsletter is a complete guide to passively investing in commercial real estate as a Limited Partner (LP) investor.
Passive vs Active Investing
Who is eligible to be an LP
Finding a great GP sponsor
How to research LP deals
10 questions before investing
This guide will walk you through everything you need to know to get started, from understanding your role as an LP to finding the right General Partner (GP) sponsor.
If you’re interested in passively investing in luxury storage alongside me — join our investor list here.
1. Passively Investing vs Being a Landlord
What is an LP Investor?
As a limited partner “LP” investor, you can invest in commercial real estate that is 100% managed by a general partner “GP” sponsor.
Your role as an LP is entirely passive—you don’t manage the property, deal with tenants, or handle day-to-day operations. In return, you receive a share of the profits from rental income and property appreciation.
Why Invest as an LP?
Passive Income: Earn regular distributions without active involvement.
Diversification: Add real estate to your portfolio without being a landlord.
Expert Management: Benefit from the expertise of experienced GPs.
2. Who is Eligible to Become a Passive LP Investor?
Accredited Investors
In most cases, LP investments in commercial real estate are available only to accredited investors. To qualify as an accredited investor, you must meet one of the following criteria:
Income: Earn an annual income of $200,000 (or $300,000 combined with a spouse) for the last two years, with an expectation of earning the same or higher income in the current year.
Net Worth: Have a net worth exceeding $1 million, either individually or jointly with a spouse, excluding the value of your primary residence.
Sophisticated Investors
In some cases, non-accredited but sophisticated investors may be allowed to invest. A sophisticated investor is someone who has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.
3. Choosing the Right GP Sponsor
Finding the right GP sponsor is crucial to your investment's success. Here’s how to evaluate potential sponsors:
Track Record
Look for sponsors with a proven history of successful projects. Check their past performance, including returns delivered to LPs, project timelines, and their ability to manage risks.
Experience
A seasoned sponsor understands market cycles, has strong industry connections, and can navigate challenges effectively. Prioritize sponsors with experience in the specific type of commercial real estate you’re interested in (e.g., office buildings, multifamily units, retail spaces).
Transparency
A good GP will be transparent about their operations, fees, and performance metrics. They should provide regular updates and detailed reports on the investment’s progress.
Alignment of Interests
Ensure that the GP’s interests align with yours. This often means they invest their own money into the project, showing confidence in its success.
Reputation
Research the sponsor’s reputation within the industry. Look for reviews, testimonials, and any potential red flags, such as legal issues or past conflicts with investors.
4. Researching Before You Invest
Financials
Review the financial projections and assumptions for the investment. Look at the expected cash flow, return on investment (ROI), and exit strategy. Make sure the numbers are realistic and backed by solid market research.
Market Analysis
Understand the local market where the property is located. Key factors include:
Economic Indicators: Employment rates, population growth, and business activity.
Supply and Demand: Vacancy rates, rental rates, and new developments.
Location: Proximity to amenities, transportation, and overall neighborhood quality.
Property Inspection
If possible, visit the property to assess its condition and potential. Pay attention to:
Physical Condition: Structural integrity, maintenance needs, and any required repairs.
Occupancy: Current tenants, lease terms, and turnover rates.
Value-Add Potential: Opportunities to increase property value through renovations or better management.
Legal Review
Have a real estate attorney review all legal documents, including the operating agreement, subscription agreement, and private placement memorandum (PPM). Ensure you understand the terms, rights, and obligations involved.
5. Making an LP Investment
Understand the Terms
Know the minimum investment amount, projected hold period, and expected returns. Understand the fee structure, including acquisition fees, management fees, and performance fees.
Evaluate the Risk
Assess your risk tolerance and how this investment fits into your financial plan. Real estate investments can be illiquid, and there’s always a risk of market downturns or property-specific issues.
Funding the Investment
Once you decide to proceed, transfer your investment funds as instructed by the GP. Ensure you keep copies of all transaction records and agreements.
6. Managing Your Investment
Regular Updates
Stay informed by reviewing the regular updates provided by the GP. These should include financial performance, occupancy rates, and any significant developments or issues.
Distributions
Monitor the distributions you receive from rental income. Keep track of your returns and compare them to the projected figures.
Exit Strategy
Understand the planned exit strategy for the investment. This could involve selling the property, refinancing, or another form of liquidity event. Be prepared for potential changes in the timeline based on market conditions.
10 Questions Every LP Should Ask the GP Sponsor Before Investing
What is your track record with similar investments? Understand the GP’s history of managing investments similar to the one you’re considering.
How much of your own money are you investing in this project? This ensures that the GP has a financial stake in the project’s success.
Can you provide references from past LP investors? Talking to previous investors can provide insight into the GP’s reliability and performance.
What are the projected returns, and what assumptions are they based on? Make sure the projections are realistic and based on sound assumptions.
What are the fees and how are they structured? Understand all the fees involved, including acquisition, management, and performance fees.
What is the expected hold period and exit strategy? Know the timeline for the investment and how the GP plans to exit.
How often will I receive updates and distributions? Ensure there is a clear plan for regular communication and distributions.
What are the biggest risks associated with this investment, and how are you mitigating them? Understanding the risks and the GP’s risk management strategies is crucial.
What is your plan for value creation or improvements to the property? Know how the GP intends to enhance the property’s value and generate returns.
Can you explain the legal structure and my rights as an LP? Make sure you understand the legal setup of the investment and your rights and protections as an LP.
Conclusion
Investing as an LP in real estate is a way to participate in real estate deals without having to find and manage the deal.
By carefully selecting the right GP sponsor, conducting thorough research, and understanding your investment terms — you can enjoy the benefits of passive income and long-term appreciation.
📈 Tools & Resources for Real Estate Investors
Real Estate Investor OS: Learn the exact strategies that helped me build a $20M real estate portfolio. This 2-hour course equips you with the tools you need to build financial freedom through real estate investing
Invest with Me at MAK Capital: learn how you can passively invest with me in commercial real estate. I find the deals, you collect a rent check. Schedule a call with my team
Subscribe to the MAK Podcast: each week I share actionable real estate, business, and personal finance tips on the MAK Podcast
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See you next week,
Marc Kuhn
Hi Marc. Trying to find a good email/phone for you but haven't had any luck. I have a 325 unit storage portfolio listed for a client in Northern ND that I think might be a good fit for you. Email me at nick@lindseyselfstoragegroup.com if you have any interest! - Nick Anderson