12 Pitfalls to Avoid When Investing in Real Estate as a Limited Partner

Investing as a limited partner in real estate deals requires careful consideration and due diligence. To protect your hard-earned money and make informed investment decisions, here are 12 crucial pitfalls to avoid:

1. LP Share and Preferred Return: Aim for deals that offer at least a 50% split to LPs and a preferred return of 6% or higher. 
2. Returns Timing: Evaluate the frequency and timing of returns, as well as when you can expect your first distribution. 
3. Caution with “Guaranteed Returns”: Be wary of any “guaranteed returns,” as no investment is truly risk-free. Preferred returns are not guaranteed either. 
4. Alignment of Goals: Ensure your investment goals align with the deal’s timeline and expectations. Also, confirm that your goals match those of the general partner (GP). 
5. GP Track Record and Experience: Thoroughly evaluate the GP’s investment track record and experience in both investing and operating real estate. 
6. Transparency of Fees and Structures: Verify that fees, return structures, and sources of funds are clearly outlined and transparent. 
7. Assessment of Acquisition Fees: Be mindful of high acquisition fees (exceeding 2%) and compare them to market standards. 
8. Evaluation of GP Experience: Assess the GP’s experience and track record in both investing and operating real estate, especially in relation to the specific deal. 
9. Co-Investment from GP: “Skin in the game” is crucial. Ensure the GP has adequate co-investment in the deal. 
10. Assessment of Debt Assumptions: Evaluate debt assumptions and potential risks, including the impact of floating interest rates and unclear refinance assumptions. 
11. Scrutiny of Rent and Price Assumptions: Analyze rent and price assumptions, taking into account market conditions and political factors. Verify the support for assumptions regarding rent increases and property renovations.

Verification of Comparables and Assumptions: Scrutinize sales and rent comparables, and verify financial assumptions. Ensure year 1 assumptions align with existing operator financials and consider potential changes in property taxes and insurance.