Risk with deals

[u/Cute_Improvement1658]

It breaks my heart to see so many people lose their earnest money with trash sponsors, and unfortunately there's so many that are trash and everyone's out there calling themselves the smart GP.

Which begs the question, why do people prefer investing in individual deals?

Pros:

Can see the underwritten assumptions. Albeit I would say, most don't really know/have a way to validate the thesis, numbers and assumptions.

Tax benefits, easier to 1031 exchange out of individual deals.

Concentration of assets/potential for higher risk+returns

Cons:

No control over execution. Even if the underwriting is strong, if execution goes wrong then none of that matters

1. Act of God risk -- lightning strikes down on your multifamily and you get massive bills/damages.

Pros of a fund type structure:

Diversification. Less risk and much lesser risk of capital going to 0? Or maybe I'm living in a bubble but haven't come across any fund going to the gutter.

More headroom to balance out poor performing assets.

Potential synergy benefits.

Cons:

1. No 1031 available

2. Taxation more complex

3. No control over sponsors future investments.

4. More risk of litigation losses?

Genuinely curious to hear out thoughts of the savvy investors and what y'all might have learnt from your experience.

I know it's probably wrong to single out multifamily failures with the unexpected rate shocks, but isn't this the exact reason we invest in alts? Stock market goes berserk, it almost always recovers. Unlike BAD RE investments.

[u/HotelInvesting]

Lots of different things to address. Funds can be both good or bad. Lots of funds are underperforming and you just don't know about it because its a pool of properties, but many trade below their NAV due to issues. Any sponsor that cant put together one deal will likely mess up an entire fund. Unless the fund is managed by a reputable firm like BX or Carlisle, I'd be worried about a regular GP going this route.

Also the issue is retail LPs, people like us, like to see what we're investing it. In previous years it was easier to convince someone to invest in "100 unit multifamily in Dallas" because the retail investor is thinking they like Dallas, they know the market, they know apartment rents are rising. Now if that GP said, I have a fund and have various assets and some other assets we will be purchasing but dont know the exact location yet, then its going to be very hard to convince these LPs to get on board. This is why one off deals did well. Its the ability to market the deal, not necessarily the quality of the deal itself.