Small LP Investments

Written by Tyler Kastelberg

July 31, 2022

Happy Sunday!

My friends love to ask where they can invest in real estate as an LP. The problem? They’re not able to write million-dollar checks, and the “syndication” landscape is the wild west. This newsletter is dedicated to where small LPs can put money.

Pour a glass of that stuff you drink when your kids go to sleep, throw your feet up, and let’s get into it.

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The problem … where to cut small checks

I’m asked no less than once per week where small LPs can invest their money in real estate. The big, reputable firms won’t take their $25,000 checks, and the small syndicators come with major keyman risk – when too much of the investment relies on one or two people.

This problem is a big one for small LPs, so much so that I’ve even noodled on various business ideas to solve it. 

Unfortunately, I don’t have a silver bullet, but I’ve done a lot of research on the different platforms that offer small investors direct investment opportunities in institutional deals. See my findings below.

Note – You should know that I’m not affiliated with any of the below-mentioned companies. Like you, I’m navigating through a lot of noise, trying to find the best place for my capital.

1) Financial Advisor

This is one of the more expensive ways to solve this problem but nonetheless should be considered. Reputable financial advisors typically have access to positions in private real estate funds where they can pool their client’s capital and invest a lump sum into the fund. The downside? These arrangements are typically littered with fees. I’m not going to spend too much time on this, but if you consider yourself unsophisticated and don’t want to get fleeced, this is a great option. One example of this type of financial advisor is Hall Capital.

2) Cadre

I recently signed up for Cadre and am so far impressed with their offering. You can directly invest in their deals, REITS (currently none are open for investment), and past investments via their secondary market. As luck would have it, one of Cadre’s investor relations team members reached out to me this week to answer my question about the platform … see a summary of responses below:

  • Founded in 2014
  • Accredited investors only
  • NOT 1031 eligible
  • Depreciation losses are passed to investors on K1
  • $25,000 minimum investment
  • 13 deals have gone full-cycle. 27% net IRR. Average hold period 4-5 years. No losses to date, but one current hotel investment is distressed

Unlike Crowdstreet, Cadre is not a marketplace. They acquire deals with their balance sheet and have acquisitions and asset management teams that run the due diligence process. Cadre partners with operators like LPC and Glenstar who typically contribute 10% of the equity on each deal. Cadre makes money through acquisition fees (up to 3.5% of equity invested) and asset management fees (2% all-in). They also participate in their operator’s waterfall, which is typically 20% over an 8% hurdle.

I asked about leverage, and they typically won’t go greater than 65% loan to cost on any of their deals.

3) Fundrise

Fundrise has both direct investments and REIT investments, but they call them eFunds and eREITS. The legal structure seems a bit different, and I’d love for someone with more knowledge to reply to this email with the pros/cons of how Fundrise structures investments. While Cadre exclusively buys commercial real estate, Fundrise will also fund single-family developments. I haven’t had a call with their investor relations team, but I was able to dig up the following:

  • Founded in 2010
  • Non-accredited investors can invest
  • NOT 1031 eligible
  • Depreciation losses are passed to eFund investors on K1s
  • $1,000 min for eREITS, $10,000 min for eFunds
  • Past returns are calculated a bit funny, so I’ve linked the return summary here: https://fundrise.com/client-returns

Fundrise’s investment process is a bit murky, but from what I can tell, they partner with sponsors and developers as an LP aggregator. They advertise more than 200 acquisitions worth ~$5.1 billion since its inception. Fundrise charges two different annual fees that add up to 1% of invested capital. I couldn’t find information about the fees they charge sponsors/developers, but I assume they charge some sort of deal fee as well.

4) Crowdstreet

Crowdstreet markets itself as the biggest online private real estate investing network. Unlike Cadre, Crowdstreet leans into the marketplace model – where quantity and diversity of investment options are paramount.

  • Founded in 2012
  • Non-accredited investors can invest
  • NOT 1031 eligible
  • Depreciation passes through to investors
  • $25,000 minimum investment on most opportunities
  • With 124 realized deals… Avg 19.1% IRR, 1.54x Equity Multiple, 2.9 Year Hold Period

Crowdstreet provides great information on past performance and their diligence process. This is the link to their past performance – note that a few deals have gone to $0. Crowdstreet tout’s 656 deals with $3 billion invested. Their deal review page describes their diligence process, which includes a study of both the sponsor and the asset.

For what its worth … I surveyed my LinkedIn followers (yes, only 25 people responded, don’t judge me), and they are pretty split as to which platform is their favorite …

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