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Minimum LP Investment

Happy Wednesday! 👋

I wrote previously (one of my first articles on here actually!) on why you shouldn’t invest $5k in a syndication. I often get calls about small investment sizes, so today I’d like to address three topics:

• **What’s a Reasonable Minimum Size of an LP Check? **

• What Should This Check Size Be in Relation to Your Net Worth?

• Exceptions to the above

The First Gut Check: Can You Afford to Lose The Money?

Before diving into our three topics today, your first and most important gut check should be:

Can I afford to lose this entire investment without impacting my lifestyle?

This isn’t really the topic of the article today, but if losing the entire investment (regardless of what that investment is!) would affect your lifestyle, your ability to meet financial obligations, or your peace of mind, it's likely not a good idea to invest it into an illiquid highly concentrated opportunity…end of story.

With this out of the way, let’s dive into our three topis today:

1. What’s a Reasonable Minimum Size of an LP Check?

When deciding how much to invest in a real estate syndication, $100,000 is a sensible minimum for most LPs. There are three reasons why this check size often works best in my opinion:

• Return on Hassle: Real estate syndications require time to research, vet GPs, and conduct due diligence. For smaller investments, this time commitment might not justify the effort. I talk about this a lot but let me give you a practical example:

• You should expect to look at 10-20 deals before investing in one deal … it’s very rare for you to stumble on a golden opportunity early on, and I certainly wouldn’t advise you to assume you’re that lucky person from a risk mitigation perspective

• For instance, a $50K investment in a deal offering a 2x multiple would generate you $100k, or a $50k return.

• However, to get to that return you needed to (1) spend 200 hours to look at 20 deals seriously and (2) keep up with the investment during it’s investment horizon which would take another 20 hours. In total this is 220 hours, and assume you make $200/hour this is $44,000 in time that you spent… in order to make a net $50k! Not worth it already, right?

• But here’s the additional catch - you don’t even know if you’ll make that $50k, the return is in probability! So that’s exactly my point… the diligence effort doesn’t make sense for a probabilistic return below a $100k threshold (where you’d stand to make $100k… or roughly double of the personal time cost you spent on diligence)

• K-1 Tax Forms: Syndications issue K-1 tax forms, which can delay your filings. If you're only investing a small amount, the hassle of dealing with this paperwork (and the additional cost of filing / late filing fees) maybe not be worthwhile. You can read up more on this here.

• Illiquidity **and Hassle: **At some investment amount, I just think it’s not worth it to be bothered (so to speak) to think about another investment account, it’s updates, and perhaps its challenges. Beyond that, having an investment that’s illiquid feels differently than having one that’s liquid - and that’s particularly true when you actually need the money!

• This is why you should never investment money you might need

2. What Should This Check Size Be in Relation to Your Net Worth?

This is just my opinion, and I’m not a (or your) financial advisor. :)

The allocation topic is complex, because risk tolerance changes with both net worth and age.

• For example, someone who’s wealthier (in my opinion) should have a higher allocation to alternatives than someone who’s less wealthy because they likely don’t need as much liquidity (to buy a home, for example).

• As someone gets older, it’s normal to notch down the risk as well.

As a general rule, around the $1mm dollars of net worth line, I do not think you should have more than 10% invested in illiquid investments. In this case, investing $100K in a single syndication means you've allocated 10% of your wealth to that one deal. This is generally the upper limit of what you should risk in a single deal or with a single GP. For wealthier investors, say with a net worth of $5 million, investing $200K to $500K across multiple syndications (and syndicators/asset classes) is more balanced.

The principle here is simple: Don’t overcommit to a single investment, GP, or even asset class — spreading your risk is the smart move.

Don’t overcommit to a single investment, GP, or even asset class

3. Exceptions to the $100K Minimum Rule

While the $100K check size is a solid benchmark for most investors, there are scenarios where it makes sense to invest less. Here are two key exceptions I see (and suggest!):

• Learning Opportunity: If you’re new to real estate syndications, starting with a smaller investment—say $25K or $50K—can be a valuable way to learn the process without risking a large amount of capital. The knowledge and experience gained can outweigh the limited financial return.

• BIG caveat here - this does NOT mean you “spray and pray” just because the investment sizes are small. You can see a simply table illustration with numbers on this here.

• Testing a New GP or Strategy: When working with a new General Partner or exploring a new strategy, it can be wise to invest a smaller amount to assess their performance and how well the strategy works. Once you’re confident in the GP, you can commit more capital to future deals.

• **BIG caveat here too - **this does NOT mean as soon as you get your first distribution you should send the GP another check on a new deal. It’s good that you got your distribution, but wait for exits .. and even then don’t overcommit to a single GP, I’ve seen this lead to painful outcomes.

As always, I hope this was helpful and I look forward to your feedback!

I advise LPs on existing and potential positions and write articles here weekly on what I see in the marketplace that could help you invest better. You can find me on LinkedIn or Twitter.

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