When I first started seriously exploring real estate investing, I never intended to raise capital and have other investors invest with me. In fact, I thought that raising capital and working with other investors would be the worst part of the whole thing.
At the time, I was purely interested in doing my own solo real estate investment deal, where I could have full control, soup to nuts, over the whole process.
As luck would have it, in part because I became so passionate about (read: obsessed with) real estate investing, it was all I could ever talk about when getting together with friends and family, so they naturally became interested.
At the beginning, I tried to teach them how to invest in deals of their own – everything from finding the right market to working with brokers to underwriting, asset management, and everything in between. But, all I got were sighs and confused looks.
“Oh, I think you misunderstood,” they’d tell me. “I don’t actually want to do any of the work of owning real estate, I just have this pile of money I’d like to invest. Can I put it into your next deal?”
I heard this so many times that I finally decided to do something about it. Through that journey, I discovered the power of real estate syndications, and through Goodegg Investments, we’ve now leveraged a variety of different deal structures to build our business, scale our portfolio, and bring investors the best opportunities.
In this article, I’ll share more about my own personal journey to becoming a co-GP (co-general partner), as well as the evolution of our business from the co-GP model to JV (joint venture) and GP (general partner), why being a co-GP can be a great low-risk way to launch your business, how to co-GP the right way, and how to get started as a co-GP.
My Personal Journey To Becoming A Real Estate Co-GP
At the time when my friends and family were asking to invest in my next deal, I knew nothing about syndications, being a co-GP, creating JV partnerships, or any other options for having them invest alongside me, so I kept my head down and focused on my own deals.
But over time, I had enough of those conversations that I realized I knew several people all with the same problem. And if I could crack that nut for them, I’d be able to genuinely make an impact in their lives.
Through lots of research and digging, I discovered the power of passive investing and real estate group investing through syndications, which completely shifted the paradigm for me.
I realized that, through being part of the GP team and sponsoring a real estate deal, I could give my friends and family, as well as everyday investors who may not have the time to invest in their own real estate deals, the opportunity to build substantial wealth through real estate. Ultimately, that potential for making a difference was what hooked me.
When I first got started in commercial real estate investing, I made the rookie mistake of figuring that I could do it all on my own, so I set out to sponsor my first commercial real estate investment deal as a GP. I thought, how hard could it be, right?
Very quickly, I was handed my hat. I learned that there are a LOT of different moving parts to acquiring and managing commercial real estate assets, and most of them were skill sets I either wasn’t very good at or didn’t have an interest in learning.
The one area that really interested me was helping people like my friends and family to learn about and invest passively in these real estate syndications so they could build wealth for their families.
It was about that time that I discovered the opportunity to become a co-GP, which fit the bill perfectly.
What Is A Co-GP?
In every real estate syndication, you have the lead sponsors or general partners – the person or group who takes the lead in putting the deal together. They are usually the ones working with the broker, sourcing and analyzing the deal, getting the asset under contract, putting in most if not all of the EMD (earnest money deposit), and raising some, most, or all of the capital.
In some cases, because there are so many different roles and responsibilities in acquiring a commercial real estate deal, the lead general partners will bring in one or more co-GPs to help with various aspects of the deal.
A co-GP takes on set responsibilities in the deal and thus shares in the GP fees and equity. A co-GP might come in and do one or more of the following:
Put in their own money for EMD
Participate in due diligence, including visiting the asset
Participate in asset management
By bringing in one or more co-GPs, the lead sponsor can distribute the workload, offset some of the risk, and increase the likelihood of getting the deal to the finish line.
Why Being A Co-GP Can Be A Great Way To Start Your Real Estate Business
Acquiring a 300-unit apartment community is a far cry from acquiring a duplex. While both are completely achievable, they require different skill sets and involve different degrees of risk and planning.
If you’re new to the world of commercial real estate investing and private equity real estate, it can be incredibly difficult and overwhelming to break into the space if you have no commercial real estate track record and an unproven ability to raise capital, secure a commercial loan, and close a large commercial deal.
Real estate is a team sport, and being a co-GP is a great way to get started, by joining a team that’s already been in the game for a while. By bringing your skill sets to the table and helping to raise the capital needed to close the deal, you are able to get your foot in the door with very low risk on your part.
Lead GP Example
Let’s say you wanted to acquire a $20 million multifamily deal. With the typical 25% down payment (in this case, $5 million), plus the additional capital needed for renovations and reserves (say, another $3 million), you’re looking at a capital requirement of $8 million.
And that’s not to mention the EMD (earnest money deposit) that you will be required to shell out through your own capital, which may go hard from day 1 and thus be nonrefundable, if you were unable to close the deal for any reason.
This means that you would be taking on a huge amount of risk and responsibility. If you were unable to close the deal and thus lost your EMD, you might not have the capital to pursue another deal. Not to mention, your reputation in the industry would likely be tarnished, and it might be difficult to find another deal and/or more investors.
By bringing on a co-GP or two, a lead sponsor can offset risk and also benefit from strategic diversification and capital allocation, to ensure they’re able to continue doing more deals.
Let’s take that same $20 million deal and look at it from a co-GP perspective. Let’s say that you’re an engineer and have a natural knack for spreadsheets and underwriting.
If you were to participate as a co-GP, you might bring your analysis skills to the table to help with the underwriting and due diligence. You might also share the deal with your fellow engineer friends and raise $1 million, thus contributing substantially to the $8 million needed to close the deal.
As a co-GP, you may not be required to put any EMD in, and you likely wouldn’t be on the hook for upfront legal fees, nor would you have to put your personal balance sheet on the line and sign on the loan.
But, you could stay in lockstep with the lead sponsor throughout the process and thus learn the ropes while contributing to the deal in a meaningful way. That’s why being a co-GP can be such a win-win proposition.
Things To Consider As A Co-GP
As with anything, being a co-GP in the world of private equity real estate is not for everyone, and there are certainly a lot of things you should take into consideration before agreeing to be a co-GP for someone’s deal.
Pros Of Being A Co-GP
Pro #1: Limited Risk
As a co-GP, you limit your risk, both financially and reputation-wise. You do not need to be the one making sure the underwriting assumptions are pinpoint accurate, walking all the units and conducting all the due diligence, securing the loan, or raising all the capital.
You have the opportunity to participate in some or all of these aspects of the deal, but you are not the be all and end all on any of these items. You are leaning on the proven experience of the lead sponsor in each of these critical areas.
Pro #2: No EMD Or Other Upfront Costs Required
As a co-GP, you likely will not need to put in the EMD (earnest money deposit), which can be a huge way to mitigate risk, particularly on a large commercial deal. All other costs – including legal fees, due diligence reports, and more – will also likely be covered by the lead sponsor.
Thus, you’re putting in very little capital of your own for a potentially huge payoff, both when the deal closes and when it eventually sells.
Pro #3: Opportunity To Learn The Ropes
For LPs (limited partners), you may get very little, if any, access to the backend of the deal and how it operates. This is the beauty of being a co-GP.
As a co-GP, you get a front row seat to the acquisitions and operations of the asset, yet you don’t need to be the lead on everything. You are a sous chef, not the head chef, but you have the opportunity to see everything that goes on in the kitchen.
If you plan to eventually sponsor your own deals, this could be a hugely valuable experience that could catapult you into doing your own deals.
Pro #4: Opportunity To Launch Your Brand And Build Your Business
Being a co-GP gives you a great opportunity to build your own brand and launch your own real estate business, through giving your investors opportunities to participate in great opportunities.
Because the lead sponsor will not be communicating directly with your passive investors, you have the opportunity to build your reputation through leaning on the track record of the lead sponsor.
This is exactly what we did when we started out. At the beginning, we leaned heavily on the experience of our partners, the lead sponsors. Over time, as we built up our own track record, we were able to strengthen our own brand and reputation.
Cons Of Being A Co-GP
Con #1: Limited Control
One of the biggest downsides of being a co-GP is that you will likely have limited control over the deal. This means that the lead sponsor could decide to do a refinance, pause distributions, slow down renovations, increase concessions, or sell early, all without needing your approval.
This is why it’s so important to find a lead sponsor partner whom you trust and who respects you and keeps you in the loop every step of the way. The last thing you want is to get your investors into a deal that goes sideways, with you not being able to do anything about it.
Con #2: No Say In Deal Structure
Most likely, as a co-GP, you’ll join the partnership when there’s already a deal under contract. At that point, the lead sponsor will likely have already done the bulk of the initial underwriting and chosen how they want to structure the deal, including the returns to provide investors, the fees to charge, the capital stack, and the overall splits.
In many cases, this works out just fine. The main consideration here is if your investors are used to a certain deal structure or preferred return, and then you do a deal with a different sponsor who structures it differently, you may not have the ability to change the deal structure.
Con #3: Usually No Ongoing Fees
This can differ depending on the arrangement you work out with your sponsor partner, but in many cases, co-GPs may not participate in the ongoing asset management fees. Most co-GPs participate in the acquisition fees at closing, as well as a portion of the proceeds upon the final sale. So, while you will own equity in the deal, you might not get ongoing fees, depending on how you structure the partnership.
If you’re doing this as a side hustle while keeping your day job, in most cases this is just fine, since you have a steady stream of income. However, if you’re doing this full time, and if doing deals is the only stream of income in your business, it could lead to some financial strain if you go for a period of time without finding new deals.
Con #4: Your Investors May Go Around You
As part of promoting a deal with a sponsor partner, you will need to tell your passive investors about the sponsor group and their track record. As such, your investors may sometimes go around you and invest directly with the sponsor.
This doesn’t happen often, but it’s definitely something you should consider. The best way to combat this is to ensure that you are providing the best possible service to your investors, so they will never want to invest with anyone else.
Legal Considerations For Co-GPs
As a co-GP, there are two main regulations from the SEC (Securities and Exchange Commission) that you should be aware of, to make sure that everything you’re doing remains above-board.
Raising Capital Cannot Be Your Only Role
The first thing to know is that you cannot join a deal purely to bring capital to the table, without having other roles in the deal. The reason the SEC put this guideline in place is to protect investors. They don’t want you to “drop off” your investors and then leave without taking any responsibility.
To ensure you’re staying in compliance here, make sure to work with the lead sponsor to identify multiple areas of the deal that you can contribute to, including due diligence, signing on the loan, or asset management. Make sure to document your participation in your various roles, so you can easily show that you’re doing more than just raising capital.
You Cannot Be Compensated Based On The Amount You Raise
The other main regulation you should be aware of is that your compensation in the deal cannot be dependent on the amount you raise.
For example, let’s say you have an agreement with the lead sponsor that if you raise $500k, you’ll get $15k in acquisition fees, and if you raise $1 million, you’ll get $30k. That’s a no-no.
Instead, you’ll need to work out a flat fee or split, so no matter how much capital you raise, you get compensated the same amount.
Before participating in a deal as a co-GP, we highly recommend that you consult your own legal counsel regarding your unique situation and to make sure that you have an accurate understanding of SEC regulations.
How To Get Started As A Co-GP
To get started as a co-GP in the world of private equity real estate, there are two key areas you need to focus on. One is establishing key partnerships, and the other is building up your investor base.
Establish Key Partnerships
In order to participate as a co-GP in someone else’s deal, you’ll need to first put your feelers out and get to know potential sponsors that you might want to work with.
The best place to connect with potential sponsor partners is through real estate conferences, particularly those focused on commercial syndications. While you can certainly meet people online and schedule Zoom calls, there’s nothing like meeting in person.
Plus, if you’re going to partner with someone on a deal for five years or more, you likely want to take the time to really get to know them, including their body language, what they’re like outside of work, and more.
Our first year in business, we went to roughly 10 different real estate conferences, and many of the partners we continue to work with today are people we met through those events.
Build Up Your Investor Base
As you’re getting to know potential sponsor partners, you should simultaneously be talking to friends, family, and potential limited partners. Let them know what you’re doing, why you’re doing it, and what you hope to help them achieve as far as building their own wealth.
If you haven’t yet found a sponsor partner, put together a sample deal and run that by potential investors to get their feedback. This will also be great info to have as you’re evaluating potential deals to join in on, so you can make sure you’re finding opportunities that your investors would actually invest in.
Take the time to build your brand and educate your investors via blog posts, videos, and other resources, so that they build trust with you and start to see you as a thought leader in the space.
This will not only help to answer their questions and build their confidence, but it will also build up in them the desire to invest, so when you do find that first deal, they’ll be chomping at the bit to invest with you.
Evolving Your Business Model From Co-GP To Lead Sponsor
Over time, as you gain more experience as a co-GP, you will be able to bring more and more capital to the table and to build up your own team and capabilities, which in turn will allow you to take on more of the responsibilities within the acquisitions and operations of the deal.
As part of this evolution, you may get to a tipping point (say, once you’re able to raise a few million dollars in investor capital), where you can shift from being a co-GP to structuring more of a JV (joint venture) partnership.
A JV partnership may give you the opportunity to take on more responsibility in the deal, have more control, sign on the loan, raise more capital, and negotiate a higher split for your role.
Over time, as you evolve further and also build up the reserves in your business, you may be in the position to forgo JV partners altogether and become the lead sponsor of your own deals. Full circle moment!
If you’re considering becoming a co-GP, start by talking to your friends and family to gauge the baseline interest. If you start to see some interest, take the next step in growing your brand and educating your investors.
If you’re already a co-GP and are looking for ways to find more investors and increase your raise capacity, take a look at your existing investor resources and see where there might be gaps and opportunities to provide more education for your investors, to get them more comfortable with and confident in the process.
If the thought of building a brand or writing blog posts sounds intimidating, no worries – we got you. Through our signature Real Estate Accelerator program, we can build your entire brand for you, even if you have no business name or logo.
We’ll take everything in our business that has worked for raising $100M+ in under 5 years to help you launch your business so you can hit the ground running. Learn more and apply today.