In many real estate investment scenarios, those in charge of managing your investment and the assets associated with it don’t have their own money in the mix. However, when investment professionals place their own money in the same properties as you—a process known as manager co-investment—the game really changes.
Co-investment has been gaining ground in the real estate investment arena in recent years. Managers who co-invest—like we do at Trion Properties, with at least 10 percent of our principals’ own capital going into every fund or individual deal—have skin in the game and are more likely to care about the outcome of each investment. This is compared to those who only manage other people’s investments.
What It Means to Co-Invest
They will naturally be more fastidious about researching the market, “kicking the tires” at the property, getting the best price possible, and extracting the highest profits from the deal for investors—because they’re one of those investors.
When managers do not co-invest, their interests cannot be fully aligned with those of their investors. Because if the situation gets tough, there is little to prevent them from walking away from the deal.
Further, when principals have none of their own capital in a project, investors may find that the fees are driving their asset acquisition decisions. This can result in transactions with higher risk profiles because the manager is motivated by deal volume and not the quality of each individual deal.
Related: 8 Secrets to Structuring an Efficient Real Estate Partnership
A Better Partnership
By choosing managers who have their own capital in a project, investors can be sure that the threat of loss is equally balanced between the two parties. Companies whose managers co-invest in real estate deals tend to produce better outcomes for their clients.
Their assets will be more carefully managed, more thoroughly vetted, and more focused on both risk management and profits than assets managed by professionals who don’t co-invest. This is by no means a guarantee, but the odds are in favor of co-investment as a better bet for strong yield and safer transactions.
Related: How to Lose the Management Headaches & Invest More Passively in Real Estate
When considering a real estate investment company, take into account whether its managers co-invest. If they do, it will add another dimension to the type of service you will likely receive from that company and just how vested the firm is in your success.
Have you worked with a manager who co-invests, and what was your experience like?
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