“The only real valuable thing is intuition.” — Albert Einstein
It’s been said over 50% of Wall Street managers with over $100 million in their portfolio have $0 invested in the fund they’re managing.
Wall Street is full of misaligned interests.
Your stocks can go down by 50%, but they will still make their money.
Wall Street is great at misaligning interests and making sure they get paid.
When it comes to real estate and doing passive deals, alignment of interest is so important.
We’re gonna get into what that means and what to watch out for in a deal.
1. Why Alignment is Important
If I have no money invested as a operating partner, then I’m not aligned with investors in a deal, I have no skin in the game.
My partners and I typically invest about 5% to 10% of the total money raised in the deal.
If we’re raising $10 million, our general partner team will typically put in around $500,000 to $1 million.
I try to put in anywhere from $25,000 to $75,000.
The bottom line is that it can’t be an insignificant amount.
If it’s a $10 million raise and the whole team is putting in $10,000, that’s not okay.
A sponsor team shouldn’t be putting in 0.1%.
Sometimes liquidity is needed for deals.
Most of my money is tied up in deals.
A lot of high-net-worth people I know have very little liquidity available.
We’ve gotta have liquidity for loans to show the bank and operate the business.
Sometimes I get questions from investors that ask:
Why are you even syndicating deals?
Why don’t you just fund it all yourself?
Unfortunately, we don’t have all the money.
We need investors that can help us on the journey.
It creates a great long term partnership with our investors.
2. Net Worth Also Matters
One of my partners is a high-net-worth guy who has 28 years of experience in 13,000 units.
He’s a great rate operator, but he’s also somebody who’s putting a lot of money in deals.
If you have a bunch of partners operating a deal and no one has a high net worth, then there’s no ability to help investors if something goes wrong.
If there’s a loss or something similar, there’s no way to bail out the property.
Let’s go over an example.
A Multifamily seller we have worked with previously was selling a large multifamily property for tens of millions of dollars.
They liked our group and wanted to put in $6 million from their sale proceeds as a passive investor.
Sounds like a great deal, right?
We eventually had an issue with the title company.
They asked about a missing $6 million.
We told them we would have it from the sale.
They said we needed to have the $6 million at closing.
The title company couldn’t see it any other way.
It was a really bizarre situation.
Long story short, we had to put $6 million into the account and then it would be returned the next day.
Thankfully, we had partners who were able to do that.
That was huge!
Reputation is so important when it comes to closing a deal.
Because of our reputation and ability to get high-net-worth investors, we were able to close that great deal.
If there is a loss or another issue, the general partners have the ability to prevent loss.
They have resources.
This relationship is another thing that shows alignment of interest.
3. The Closer You Can Align the Better
The closer you can align your interests as an operator or an investor, the better.
There are some amazing deals out there.
But, not everyone is super high net worth.
Sometimes operating partners can bring half the equity while the limited partners put in a little less.
When people work together, that’s a good sign.
It really comes down to the team’s values and track record.
If the team has values that treat investors well and align interests as much as they can, that can be a huge green flag.
But you should also think about how they will make those interests a reality.
I did a video recently about preferred returns.
I’m actually not a big fan of them.
They change the alignment of interest between investors.
You can say as a limited partner that you want to get paid back first.
There is certainly value to that.
However, when you have a straight split, there’s a way you can share along the way.
As a concept, I think that’s a great way to work both as general and limited partners.
We do both.
I passively invest and we also have the Bronson Equity investment club that has raised $30 over million.
But I prefer when we have as much alignment of interest as we can.
In summary, alignment of interest is very important.
It’s usually seen in how operators are putting money in.
In general, 2% to 5% investment as partners, is my minimum for operating teams.
If the operating team is putting in very little or nothing – or they have inexperienced, lower net worth investors – I would say that’s a red flag.
Now I want to hear from you!
How much should sponsors be putting in with investors?
What amount makes you feel comfortable?
I’d love to see your answers in the comments below.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
