Co-Invest or Side Deals?
Hi all,
I have two options available to me to gain direct exposure to CRE investments and I was hoping for high-level thoughts from you all.
Option A
I have the opportunity at my current fund (broad mandate across all product types) to co-invest on a deal by deal basis. We are opportunistic capital (mid teens / 2x EM) typically taking LP, pref, or sometimes co-GP stakes in deals. We also are usually investing alongside best in class operators. Nearly all of our dealflow comes from GPs and we do not put deals together ourselves.
Option B
Pursue small deals on the side to put my money to work. More risky as I am working full-time and don’t have nearly the amount of specific knowledge on certain product types that our GPs do.
I’m struggling to decide what option has more upside as usually the net returns for option A are a 1.5 - 2.0x EM whereas the sky’s the limit for doing your own deals as a GP.
Where would you guys allocate all your dollars? Option A or B?
Context: first 3-4 years into my career so relatively young and focused heavily on maximizing returns. My balance sheet certainly limits what I can do on my own - roughly $50-75k to play with, but can easily raise more from friends and family. I plan on staying in my role for a minimum of 5-7 more years before evaluating if I want to go out and do my own thing.
IMHO you don't appear to have enough equity to take down any big time deals, nor the time to be a proper fiduciary if you raise 3rd party money. Co-invest is cool, but i've opted to buy/rent out small single family homes out of state in the short term.
How much capital do you think you could realistically raise and what kind of deals/return do you think you could produce yourself?
50-75k isn't enough to really do anything outside of residential.
How much do you need?
Personally, I would want a first time GP to have at least 30% of the stack to show they had skin in the game + reserves.
50k/.30/.35=475k deal on the high end.
To me, seems like co-investing is the better option to build capital, but the timing is a big question. Obviously don't want to lock up money for 10 years when you need it in 5.
OP here -
Thanks for the response. For the right opportunity, I think I could raise between $250k - $500k for my first deal via my immediate network. I think I could source/execute a small duplex/quadplex reno, >50 pad MHP, single tenant (or small multi tenant) retail pad or strip repositioning, or light/flex industrial. Return wise, over 7-10 years, hit a project EM in the mid 2x range (not including promote) and 8-12+% CoC.
I see a lot of opportunity and inefficiencies in the mom and pop (sub $2.5m) space for the above product types.
In regards to co-investing, we typically target a 5 year hold, so theoretically would recycle every 5 years or so.
"Sky is the limit" has a corollary, namely, that you have an equal amount of downside. Which is to say, treating this like it's just another opportunity cost scenario, in which your goal is maximize your take home pay, is a huge mistake. You freely admit you have neither the time nor the expertise to do a good job on your own side deal... that should tell you everything you need to know, right there.
It's not that I couldn't do it on the side - it's that there might be a better place to park my (limited) balance sheet - which is the question. Yes, I don't have the expertise when comparing myself to seasoned operators executing on a large scale, but I think I know enough to execute small projects (sub $2.5m, ideally around $1m total size) and have a strong enough network to smooth the learning curve.
And I think there is definitely an argument about the experience gained from doing projects on your own should I ever want to spin out on my own later in my career.
Thanks for weighing in though - appreciate your thoughts.
When a pipe breaks at 10am, do you have the ability to basically tell your day job to fuck off while you spend a couple hours dealing with it?
If the answer to that is "no" for any reason, then you don't have time to do this on the side.
No one is going to gainsay that. You'll get great experience, regardless of whether or not it's a success (arguably you'll get more valuable experience from a failure!). The question is whether you have the time to dedicate to this while simultaneously doing another job. If this is something you've done half a dozen times and you've got a contact list of reliable subs and consultants who you can call at a moment's notice and trust them to take care of a job, then sure, you can do it while working full time. But if you want to to do this yourself, spin out now, don't half-ass it. If you're not going to be a fully active partner, then just stick to passive investing until you're ready for that. Trying to sit in both of those seats at the same time is a recipe for disaster.
Lower risk and higher certainty: Investing alongside your current fund, which has a broad mandate and experienced operators, provides a level of security and mitigates some risks.
Access to deal flow: Your current fund likely has a strong network, giving you access to potentially attractive investment opportunities that you might not find on your own.
Learning and building relationships: Co-investing with your current fund allows you to gain valuable experience and build relationships with professionals in the industry.
Diversification: By co-investing in multiple deals, you can achieve a level of diversification even with a smaller investment.
My counter is you're not actually diversified if all your income (salary and co-invest) is tied to the same revenue stream.
“Nah boss, I’m not going to coinvest on this deal, I want to spend my weekends flipping a house instead”
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