Time for some proper due diligence/ independent auditing in our communities

[Mordyk]

I actually just figured out that I know this person pretty well.  And I have spent some time with him.  He always seemed honest.  I don't think this was ever a ponzi.  From what I heard now it was misallocation of funds for other side projects. Not that he splurged on his life.  I don't condone it. But many business owners tend to do this with hopes of paying back and figuring things out.

But when you have other people's money, you have a responsibility to them... 

[Yehudaa]

I am hearing now that an investor's audit found him skimming off for himself.

Do these LPs not require regular annual audits?

But many business owners tend to do this with hopes of paying back and figuring things out.

Really? When they have investors in deals? That's surprising.

[yelped]

I actually just figured out that I know this person pretty well.  And I have spent some time with him.  He always seemed honest.  I don't think this was ever a ponzi.  From what I heard now it was misallocation of funds for other side projects. Not that he splurged on his life.  I don't condone it. But many business owners tend to do this with hopes of paying back and figuring things out.

But when you have other people's money, you have a responsibility to them...

First HG, then this anonymous guy... Maybe you should hang out more on DDF and less around these people? 

[yuneeq]

I actually just figured out that I know this person pretty well.  And I have spent some time with him.  He always seemed honest.  I don't think this was ever a ponzi.  From what I heard now it was misallocation of funds for other side projects. Not that he splurged on his life.  I don't condone it. But many business owners tend to do this with hopes of paying back and figuring things out.

But when you have other people's money, you have a responsibility to them...

Embezzlement is more than a "fiduciary responsibility" issue.

[Mordyk]

First HG, then this anonymous guy... Maybe you should hang out more on DDF and less around these people? 

Maybe they both don't live far from each other

Embezzlement is more than a "fiduciary responsibility" issue.

I don't condone his actions in any way

Really? When they have investors in deals? That's surprising.

Suprising that owners or operating partners "borrowed" for themselves?

I had a client get bothered by me for bringing this to the attention of a partner.

[ari3]

Always has been a quick way to grow wealth, even if ignoring the last few years.

If the property appreciation is pacing inflation, but your leveraged 5x, if property goes up 20% over 5 years and gets sold, you just doubled your money. Obviously any leveraged investment will be a faster - yet riskier - method of building wealth than an unleveraged investment.

If the building went up 20% you would nowhere near double your money and in reality you would be making a negligible amount. Assuming a $10m purchase price, assuming 75% ltv financing, you probably are going to have an appx 3.5-4 m capital raise. Acquisition fee and closing costs say 5%, capitol reserves, money for improvements etc another 5% escrows etc. Now assuming you sell in 5 years for a 20% appreciation you are getting $12m minus 7.5M to pay off the loan, minus closing costs, add back the reserves, you are left with probably a 25% increase. Take out 30% for the gp's part and you have about a 15% profit plus any cashflow generated. Not that great.

The problem is after all the fees (acquisition, asset management, the gp's portion of profits) and the transaction expenses you are starting well behind. If a building increases 50% or 100% you would make a killing, that has happened the last few years but it isn't happening now and historically that hasn't been the case.

[chevron]

If the building went up 20% you would nowhere near double your money and in reality you would be making a negligible amount. Assuming a $10m purchase price, assuming 75% ltv financing, you probably are going to have an appx 3.5-4 m capital raise. Acquisition fee and closing costs say 5%, capitol reserves, money for improvements etc another 5% escrows etc. Now assuming you sell in 5 years for a 20% appreciation you are getting $12m minus 7.5M to pay off the loan, minus closing costs, add back the reserves, you are left with probably a 25% increase. Take out 30% for the gp's part and you have about a 15% profit plus any cashflow generated. Not that great.

The problem is after all the fees (acquisition, asset management, the gp's portion of profits) and the transaction expenses you are starting well behind. If a building increases 50% or 100% you would make a killing, that has happened the last few years but it isn't happening now and historically that hasn't been the case.

I'm not an expert so maybe I missed something but what happened to all the rent or leasing $ of 2 years ?

[jye]

I'm not an expert so maybe I missed something but what happened to all the rent or leasing $ of 2 years ?

I’m assuming it went to debt service?

[jye]

If the building went up 20% you would nowhere near double your money and in reality you would be making a negligible amount. Assuming a $10m purchase price, assuming 75% ltv financing, you probably are going to have an appx 3.5-4 m capital raise. Acquisition fee and closing costs say 5%, capitol reserves, money for improvements etc another 5% escrows etc. Now assuming you sell in 5 years for a 20% appreciation you are getting $12m minus 7.5M to pay off the loan, minus closing costs, add back the reserves, you are left with probably a 25% increase. Take out 30% for the gp's part and you have about a 15% profit plus any cashflow generated. Not that great.

The problem is after all the fees (acquisition, asset management, the gp's portion of profits) and the transaction expenses you are starting well behind. If a building increases 50% or 100% you would make a killing, that has happened the last few years but it isn't happening now and historically that hasn't been the case.

Wow! So many apparently savvy guys on this forum just assumed that 20% appreciation would equal 100% return on the investment since it’s leveraged 5x without considering the points above. Imagine investors who aren’t savvy and well versed in finance.
If this is true then what is really needed is a prospectus in plain English mapping out examples of various scenarios.
For example:

This investment is not guaranteed. You may lose your entire principal if this investment does not perform as anticipated.

If this property were to sell in 5 years at the 10M purchase price the syndicator will make $200,000 in acquisitions fees. Investors will lose approximately 15% of their invested capital.

If this property sells for 12 million in 5 years the syndicator will make approximately $700,000. Investors will earn a total return of approximately 15% on their invested capital, or approximately 3% annually.

If this property were to sell for 15 million in 5 years the syndicator will make approximations 3 million and investors will earn a total return of 35% or 7% annually.

If the property doubles and sells for 20 million after 5 years the syndicator will make approximately 4.5 million and investors will earn approximately 120% on their investment or 24% annually.

Etc.
(These numbers are extrapolated from the above post.) These numbers would give potential investors a dose of reality of what to expect under various scenarios.

[yuneeq]

If the building went up 20% you would nowhere near double your money and in reality you would be making a negligible amount. Assuming a $10m purchase price, assuming 75% ltv financing, you probably are going to have an appx 3.5-4 m capital raise. Acquisition fee and closing costs say 5%, capitol reserves, money for improvements etc another 5% escrows etc. Now assuming you sell in 5 years for a 20% appreciation you are getting $12m minus 7.5M to pay off the loan, minus closing costs, add back the reserves, you are left with probably a 25% increase. Take out 30% for the gp's part and you have about a 15% profit plus any cashflow generated. Not that great.

The problem is after all the fees (acquisition, asset management, the gp's portion of profits) and the transaction expenses you are starting well behind. If a building increases 50% or 100% you would make a killing, that has happened the last few years but it isn't happening now and historically that hasn't been the case.

Why stop there? The building may go down in value 25% and you lose the property. Real estate must be terrible!

I wasn’t talking about investing as an LP, rather that real estate investing (or really any investment) at 5x leverage is a fast way to build wealth. Fast doesn’t mean you build wealth in 2 years, and wealth doesn’t mean you have a $2m net worth. In a traditional business investment, even a successful one it’s very hard to get decent leverage (nothing close to 5x), and if the business makes profit, a large chunk goes straight to Uncle Sam instead of getting cycled into the next high leverage property investment.

[jye]

Why stop there? The building may go down in value 25% and you lose the property. Real estate must be terrible!

I wasn’t talking about investing as an LP, rather that real estate investing (or really any investment) at 5x leverage is a fast way to build wealth. Fast doesn’t mean you build wealth in 2 years, and wealth doesn’t mean you have a $2m net worth. In a traditional business investment, even a successful one it’s very hard to get decent leverage (nothing close to 5x), and if the business makes profit, a large chunk goes straight to Uncle Sam instead of getting cycled into the next high leverage property investment.

Except that pretty much all 11 pages of the thread have been talking about real estate from the limited partner’s point of view. The 70/30 split plus acquisition fees and costs mean a major haircut is taken on any leverage induced profits. Sure in theory a guy could invest in a real estate at five times leverage on his own, but good luck not running it to the ground, let alone pulling a profit on investment without the know how, and sweat of a GP that earns the 70/30 split.

Those comparing real estate to stocks in the thread above are specifically referring to taking a position as an LP. What you are using as a comparison would be apples to oranges.

[avromie7]

If the building went up 20% you would nowhere near double your money and in reality you would be making a negligible amount. Assuming a $10m purchase price, assuming 75% ltv financing, you probably are going to have an appx 3.5-4 m capital raise. Acquisition fee and closing costs say 5%, capitol reserves, money for improvements etc another 5% escrows etc. Now assuming you sell in 5 years for a 20% appreciation you are getting $12m minus 7.5M to pay off the loan, minus closing costs, add back the reserves, you are left with probably a 25% increase. Take out 30% for the gp's part and you have about a 15% profit plus any cashflow generated. Not that great.

The problem is after all the fees (acquisition, asset management, the gp's portion of profits) and the transaction expenses you are starting well behind. If a building increases 50% or 100% you would make a killing, that has happened the last few years but it isn't happening now and historically that hasn't been the case.

Cash-out-refi is the name of the game. As soon as the investor has their cash back, they can reallocate it to another investment effectively doubling their rate of return.

[yuneeq]

Except that pretty much all 11 pages of the thread have been talking about real estate from the limited partner’s point of view.

It’s not my responsibility to ensure you follow the conversations as they unfold. Someone mentioned Eli Fried’s LinkedIn post about building wealth through real estate investment and I commented on that. Further along  I have specifically used general terms for real estate, and compared real estate investments to other investments.

[jye]

It’s not my responsibility to ensure you follow the conversations as they unfold. Someone mentioned Eli Fried’s LinkedIn post about building wealth through real estate investment and I commented on that. Further along  I have specifically used general terms for real estate, and compared real estate investments to other investments.

Well since this thread is focused on the lack of due diligence among investors in our community, how about we focus on that?

Few investors writing 200k checks really understand cap rate decompression, economic occupancy, DSCR, tax reassessments, etc.

Even fewer 25k check writers know what’s really under the hood.

Regarding fees, it’s not just promotes. There’s usually an acq fee of 1-2%, which is really 4-8% of your capital that the sponsor earns regardless of the deal’s performance. Add management fees, refi fees, exit fees, etc.

In a nutshell, if you are invested in the market at 5x leverage you are  5x leveraged on the upside and 5x leveraged on the downside. If the stock/ fund/option goes up 20% you make 100% (minus relatively small costs.) If it drops 20% you lose 100% of your investment. And if it breaks even, so do you pretty much.

When you are invested as an LP in real estate, the GP may be taking none of the downside risk, and 70/30 on the upside, plus acquisition fees. This means you are actually leveraged at 5.5x on the downside (18% loss wipes out all of your equity) but only around 3.4x on the upside. PLUS you are effectively risking an additional massive outlay for property improvements to get to the value add, and closing and other costs on top of everything else. Even if the property sells for break even on the purchase price, you have probably lost most of your investment.

To illustrate the effect of the GPs take, if you were to put down 2 million as an LP on a 10 million dollar property, upgrade the units and sell for well over 20 million so  there is exactly 10 million in cash profit after all expenses, the GP takes 3 million (30%) plus 200k of the original 2 million (2% initial acquisition fee). The LP is making 6.8 million on his 2 million or 3.4x his leveraged investment. Additionally he likely had to be exposed to at least several hundred thousand dollars in additional risk in the form of property improvements and potential closing costs before realizing a dime of profit.

Despite the above numbers, many investors did phenomenally well in the last few years. As we are now seeing, past performance does not guarantee future results and investors need to be aware of the lopsided risk profile they are taking on.

[knowitall]

Few investors realize the past performance of 2020-2022 was mostly due to market conditions. Interest rates falling drive RE values up. And unprecedented rent growth drove prices up as well. Your GP’s ability to manage had a much smaller effect on your return.

See this post- https://www.linkedin.com/posts/yudi-goldfein-299777174_returns-in-re-are-far-less-controllable-than-activity-7056676393559957504-l7d8?utm_source=share&utm_medium=member_ios

[S209]

I don't condone his actions in any waySuprising that owners or operating partners "borrowed" for themselves?

I had a client get bothered by me for bringing this to the attention of a partner.

This is embezzlement, theft, fraud, call it whatever. It’s wrong, illegal, assur, and one who does it will and should sit behind bars.

[Euclid]

A) Not LH? Last name starts with a P

Guess there's more than 1 story

[S209]

Guess there's more than 1 story

I know of 3, but one is huge.

[elimmm]

I know of 3, but one is huge.

can u please give summary of all three. how much $ was involved in each and did they all result in foreclosures of multiple properties?
(names dont matter and i would rather not hear- LH alert)

[UKinNYS]

see whos angry with this post - very telling...
https://www.linkedin.com/posts/activity-7069021402976133120-XuxK?utm_source=share&utm_medium=member_desktop