By Coleman Cox

July 31, 2024

Any aspiring real estate GP has grappled with the question, “should I first focus on finding a great deal, or on finding LP equity partners to do business alongside?” While I have a strong point of view on the topic, the answer is subjective and I have seen GP’s effectively capitalize deals in both scenarios.

To even be asking this question, the baseline assumption is that the GP has both (i) the skillset to find and execute on great deals and (ii) the ability to at least get in front of LP equity partners capable of capitalizing said deals. The rest of the post is written under this pretense.

If Deal first or Equity first were my only two options, I would answer Equity first 100% of the time, and I will explain why in more detail later in the post. However, I think there are those that meet the baseline assumption criteria above, but make the mistake of not sufficiently answering a separate question altogether, which is the investment Strategy to focus on. I am a firm believer that in order to attract capital for investment in you or with you from the right people (in the form of time or money), you must be extremely clear, specific, and convicted in what you want. I’ve given this advice endlessly to those seeking career guidance (an investment of time) and it applies equally to those seeking investment capital (an investment of money).

“Multifamily investment” is not adequate. “Value-add multifamily investment in San Diego” is not adequate. “Acquiring value-add multifamily between $3M-$30M total capitalization all-cash for long-term holds in desirable submarkets within San Diego that underwrite to a minimum 6.0%+ un-trended stabilized yield on cost with an all-in basis that is a discount to replacement cost” is an adequate strategy so long as you have conviction in it (and some will choose to get even more specific than this). This level of specificity allows you to define and identify what a great deal looks like, shows potential LP equity investors that there has been sufficient thought put into the strategy, and that the box is narrow enough for you to be a true expert.

One argument against the “Strategy first” model described above is that a GP with this level of specificity will miss out on potential willing LP equity partners that have a different strategy in mind (geography/business plan/risk/return/time horizon/etc.). Why not be a multifamily generalist with many different LP relationships that are interested in value-add, core-plus, and/or development across many different geos and with different risk and return profiles, thus opening up your pipeline for more great deals? I have seen this first-hand and can tell you this is a quick way to a bloated overhead in both your front-office and your back-office. On the front-office side: equity relationships, broker relationships, lender relationships, and market expertise take a significant amount of time to develop and grow; multiply each of these by the different strategies you’re pursuing and it will require significant manpower to appropriately handle or you can find yourself in a “master-of-none” situation. On the back-office side: property manager relationships, general contractor relationships, reporting standards, accounting standards….you get the picture. My opinion is this is a recipe for a cash-flow negative GP business, reliant on transaction activity and large promotes to survive, which is not a sustainable model in an inherently cyclical industry.

With the Strategy first question sufficiently answered, it is now more appropriate to address the “Deal first or Equity first” dilemma. I answer this question through the same lens I analyze all of our business decisions: How can I best build a sustainable business for the long-term?

A long-term sustainable GP business ultimately needs (i) the ability to scale a portfolio, and (ii) to minimize cash-flow risk. Below are some of the key traits of these critical components, and why I believe having an aligned and reliable LP equity partner in tow is the best way to achieve success in each.

(i) Ability to scale a portfolio

• Have a compelling enough offer to be awarded deals by Brokers and Sellers – This is a combination of price, terms, and reputation; of which the latter two become significantly easier with a reliable and a well-capitalized LP equity partner by your side, and the first (price) being the last place you want to compensate.
• Ability to stand behind your offer with confidence – There is reputation risk to tying up deals without your LP equity figured out and subsequently not being able to close that can impact the long-term viability of your business.
• Have a clear line-of-sight into the viability of capitalizing opportunities – Finding and analyzing great deals is hard enough. When you layer on a question mark about the source of your equity, you also lose confidence in the financing strategy and your offer terms, making a successful acquisition far less likely.
• Have an LP capital base that is deep enough to build a meaningful portfolio – Having an aligned LP capital partner by your side allows you to understand where you sit. Even if it is not your forever-solution (and I would advise against ever considering a single-partner a forever-solution), the common understanding of capital availability allows you to plan towards long-term sustainability. This is very difficult to assess when relying on various sources or a family and friends network on a deal-by-deal basis, especially when failure means significant financial and reputational loss.

(ii) Minimize cash-flow risk

• Execute JV economics that align with a long-term sustainable business model – These economics can be discussed on the front-end of a relationship to ensure alignment, without the time pressure of a deal that typically gives the LP partner more negotiation leverage.
• Keep overhead low – Doing a lot of business with a small cohort of investors is the goal – do a small number of deals with a lot of different investors and watch your overhead explode in both the front office and back office (see above).
• Be efficient with your time – Understanding the nuances of your LP equity partner’s appetite allows you to only spend time on high probability opportunities. Having an equity partner in tow also allows you to be deal execution focused at all times – raising capital under the gun is time consuming and stressful, and takes away from a GP’s ability to flawlessly execute. Wasted time and bloated overhead go hand-in-hand.
• Avoid the loss of pursuit costs and deposits – An LP partner in tow from inception of the deal will typically share in pursuit costs and deposit risk.

This is the thought process that guided the formation of Vintage, with the impetus being a unique capital partner relationship that gave us the confidence to make the entrepreneurial leap.

Finding that capital partner or partners is not easy. But in my opinion, it is the right first step towards building a long-term sustainable business.