Is Your Operator Aligned With Your Longterm Interests?

It happens all the time - a high net worth individual or family partners with an operator who has a great track record.

The operator is a pro in their market. They know how to reposition assets and hit their target IRRs every time.

In short, the operator is great at what they do.

But when it comes to investor relations, sometimes great operators make bad partners.

Here's why...

Operators have a business to run. Most are focused on adding doors and raising more capital.

If they find a great deal that would generate a 30% IRR, they take a bigger piece of the pie and offer it up to investors at an industry-standard 14-16% IRR.

And what's more, these operators seldomly have an investor’s longterm interests in mind.

Here are some questions you can ask an operating partner to see if they are aligned with your longterm investment strategies:

Question #1: "Do my voting rights include determining when to sell the property?"

Most operators can't do this for you. They simply work with too many investors for this to make sense. This can lead to a lot of problems with how your real estate portfolio interacts with your other investments.

Let's say you need to free up cash for a great opportunity. Your RE investment is illiquid.

What if you have a liquidity event and are looking to deploy capital? All of a sudden your operator decides to sell. Now you're stuck with a larger capital gain tax and more cash that is quickly eroding away to inflation.

Question #2: "What happens after my principal is paid back?"

Many operators try to cash their investors out of a deal as soon as possible.

What makes real estate so powerful is the longterm benefits: the cash flow, preservation of capital, and tax advantages. An operator who wants to cash you out of your deal does not have your longterm interests at heart.

If you’re looking for an 8% return with no upside, why not structure it as debt?

Question #3: "If I have a capital event, would you be willing to do a cost segregation study in the same year to help me offset those capital gains?"

Most operators will say no. But the partners who want to see you and your family succeed for the next 10 or even 20 years would gladly do this.

Question #4: "Are you open to leveraging a 1031 Exchange?"

Why pay a large capital gain tax when you don't have to? In a perfect world, all operators would gladly offer a 1031 exchange and help you roll your equity into a bigger and better property. But sadly, the bigger the operator, the less likely they are able to offer a 1031 exchange. It’s simply not possible in larger syndications.

One of the reasons why I started Stellar Investment Group was to take care of our investors - to be the partner they can count on for the next 20-30 years. Our focus is on growing generational wealth for our investors. That means offering all of the advantages that come with investing in real estate.