JF3822: How Fund Managers Think: A Guide for LPs Seeking Smarter Investments ft. Sanjay Vora

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Hello Best Ever listeners, and welcome to another episode of the Passive Income Playbook here on the Best Ever CRE Show. I'm your host, Pascal Wagner, and today I'm thrilled to welcome Sanjay Vora to the show. Sanjay is the CEO of Avestor, an active founder, fund Manager for the Ariel Fund, an Advisor to over 200 different funds and fund managers, and a former Vice President at Intel. I've had the pleasure of knowing Sanjay for over a year now. We first connected in person at his fund manager retreat in Seattle. And in this episode we're going to dive into the evolving role of private funds in today's market, explore trends and challenges that fund managers face, and then also just learn from Sanjay's lessons of investing as an lp, including his approach to underwriting, spotting red flags and navigating different funds. So stay tuned. This is an episode packed with actionable insights for anyone looking to elevate their passive income strategy.

Welcome Sanjay thank you, Pascal. Great to be here. Super excited.

Yeah, I'm excited to have you on here. So first, just to kind of get us started, can you please give a little bit of context to Avestor how it came to be and generally customizable funds?

Sure. Kind of long history back. So what happened was, is when I was at Intel, I was pretty much 100% in the stock market. And I'm not sure why, but at one point, I'm like, man, this is just really not smart. I really need to diversify out of the stock market. So I started looking at alternative investment options. And this was back around 2013, right when crowdfunding was taking off. And so a lot of press around crowdfunding and all of the new legislation out there. And so I'm like, hey, this is a great opportunity. Let me go ahead and start diving into everything that's kind of crowdfunding. You know, passive investments, real estate investments, et cetera. So I kind of got my feet jumped right in, probably faster and harder than I should have gone in, and went right for the deep end of the pool. Threw a lot of money at it, tried a lot of different platforms and a lot of different investments and stuff, and learned quite a bit along the way. So as I went down that journey, five, six years down the road, I realized that it's a pretty tough journey for anybody from an investor standpoint. So we kind of said, hey, why don't we try to help others start our own private fund? So that was kind of where Avestra was born, where we thought, hey, there's probably a better way to do stuff, easier way to help investors, help managers. And we kicked off the company, and we launched our own fund and just started running our own fund. And that was kind of how we started was went from being an investor to being a manager in the early days, and then from there did that for a few years that we're like, hey, there's an opportunity here not just to help investors, but to help others that want to get into the space of fund management. That was kind of really how it took off in terms of trying to build a company.

Let's dig into first. Why did you feel like you needed to switch away from the stock market?

I think it was pretty simple, right? You see the ups and downs, and everybody always first talks about the stock market. The swings were a little bit uncomfortable for me, number one. And some years you do amazing. Other years you just go down, number two. I just felt like it was all. All the same thing over and over in terms of asset classes. And I really wanted to get into a different types of asset classes that I wasn't getting into. And then the returns you talk about average of 8% over the life over a decade, two decades in the stock market. And I'm like, there's got to be better ways to make money than 8%. So reading up on real estate and other things, you see the returns and in general, if you pick your deals well and you do well, you'll do better than that 8% and stock market. So I figured it'd be a good way to diversify as a passive investor and take a portion of my money and move it out and try something different.

Okay, so for context, we've talked about this, that you've done a lot of different deals and you've seen this from a lot of different angles. As an LP, you've done over 25 syndications, so equity investments. And then you've done over 100 different debt deals. You've lost money on debt, preferred debt, mezzanine, you've.

I've made money, lost money everywhere. I've lost money in a lot of different ways too. So I've learned the hard way. It's great to make money, but it's not so much when you fund, when you lose money.

So one of the first things I think about is many people, especially after how the real estate market has performed recently, if they've invested in the 2021, 2022 vintage, a lot of those deals are not pausing distributions. There are more capital calls, and you've kept coming back after losing deals. Whereas I hear a lot of people saying, I'm done with these types of investments for good. I'm just going to go back to the stock market. What do you think has kept you investing in this space?

I think it's super simple. It's all about diversification at the end of the day, how many of those investors have never lost money in a stock? The stock market's not guaranteed either. When you're picking individual stocks, unless you're just going to stick it in a mutual fund, forget about it for a decade and then come back and hope it's done well. You're going to lose money in the stock market just like you're going to lose money in other investments. And the goal at the end of the day is to look at the whole portfolio and say, how is your portfolio performing? And it isn't a yes. You're going to lose money in some places. You're going to win in Some places, and you might win big in some places, and hopefully the average is where you need it to be. So for me, I don't get too emotional about losing money in any one investment. It's painful, it's hard, but it's part of investing, right? You just have to do your best. You have to try to pick the best in terms of what you think will be the winners, who the winning sponsors will be, who the winning stocks will be, and then you keep an eye on it and make adjustments as you can. So for me, I don't get emotional about it. It's just if you want to make money, you got to invest money. And with investment comes risk. With the risks comes the chance you may lose some of the money.

What do you think are those lessons learned that you might have learned from your first couple investments that are maybe different now to the lessons learned in this most recent cycle?

I would say when I did my original investments, probably the biggest mistake I made was taking sponsors for what they say, and not that people don't want to be accurate. And I see it now as we're running the platform and managers are raising capital and sponsors raise capital. Everybody has good intentions in mind. Everybody has a good idea of what they think that Endpoint is going to look like for that specific offering they're doing. And they're super positive and they're gung ho. That's the only ways you can raise money, right? You have to be excited about the project that you're raising capital for. So I don't think it's ill intent or bad intentions, but I think as an investor, you have to dig deeper to truly understand the details of the deals. And that was probably some of the early mistakes I made was I went with what the sponsors said without doing enough of my own due diligence and truly understanding the risks associated with a given deal. And the deals that I got burned on are probably the ones where that is exactly what happens. And I think it's a combination of, do you understand the sponsor, do you understand their background, do you understand the investment, and do you understand the asset class you're getting into? And if you don't, then you should really try to learn as much as you can about it. And maybe you start out small, right? Don't go in with 50,000, 100,000 investments. Tell a sponsor, look, this is the first deal I'm doing with you. I want to see how you perform. I want 10,000. And they'll say, no, my minimum is 25. And you say, okay, thanks, I'll move on. And chances are they may come back and say, well, okay, I'll let you in because it's your first deal or something. So I think you have to decide what comfort zone you're in for any of these deals and you have to be willing to lose the money because at the end of the day you will lose money in some places and you will win in some places and you just don't know which ones are going to perform the best at the end of the day.

Yeah. What do you think you learned in this last cycle?

This last cycle was quite interesting. So in Ariel Fund, we had done over 50 plus syndication investments and we've done hundreds of debt deals. One of the things I did as part of managing that fund is I really looked at interest rates and interest rates were always one of my biggest caveats. And so truly understanding what happens to me, the cash flow on a deal when the interest rate rises is probably something that has always been top of mind for me. Especially after losing money on a couple deals, you really focus on, okay, what are the big risk factors that impact the P and L? And when you think about it, on any real estate deal, your largest expenses is going to be the mortgage. And what drives the mortgage is the interest rates, especially on commercial properties where people are doing variable rate loans. So I think probably the driver that you got most is people didn't put the caps on. Sponsors didn't want to spend the money on caps. Sponsors didn't predict the rates going that high. None of us predict that the rates going that high. But the question becomes, did you predict enough buffer in your cash flow and in your P and L that you could absorb the interest rate hikes even a little bit and still survive? And now you're seeing the play out of those that took that into account versus those that ignored it and went shooting for the stars.

How do you think that's going to affect your investing strategy moving forward? What do you think about now?

I don't think it's changed much. I'm kind of in what I would call stage three.

Right.

Stage one was early investor not knowing what the heck I was doing, getting burned on a few deals, learning what it feels like to lose money. Stage two was becoming a more sophisticated investor. And then more than that, putting my own due diligence and underwriting models to together. Stage three was okay. Running my own fund where I'm responsible for other people's money and ensuring that I'm really looking at things as best as I Can. That doesn't mean we're going to hit it out of the park. But when you kind of progress through those three stages, I'm a lot more careful about the deals. We invest in the deals where you put your money and you spend a little bit more time doing the analysis and underwriting and understanding is it truly a good deal and what are the things that can go wrong.

So to dig into that, what do you think is a different aspect that you appreciate more putting together your own fund and managing others capital that you've learned more than just you investing in deals as an lp?

I think when I invested in deals as an lp, I got excited over an offering and I invested in some hotels that had a very high, good brand name. I won't put the name on here. And I went after, oh, it's this, is this brand name, I want to go do that. And I probably got more excited about the name of the brand and not as excited about doing my due diligence on the sponsor and the property manager that would be managing that hotel and a lot of things like that. And I lost all my money. So I think you started learning that you got to take the emotion out of it and focus on the data. And probably as a fund manager, that's probably one of the things I don't get emotional about deals, I don't get excited about deals. I just look at the deals as data and I say, okay, does the data make sense? Does the analysis make sense? Does the business model make sense? Does the money they're requesting make sense? Does what they're trying to do, if it's a multifamily, I've seen multifamily deals where people are saying they're going to turn 40% of the units in a year, but their income hasn't dropped. Okay, help me understand how you're going to turn 40% of your units in a year, which is ridiculously high and you don't have any impact to your income when all those units are empty for multiple months as you're turning them. It just doesn't make logical sense to me. So those are kind of the kind of things you look for in terms of red flags and business model and saying, okay, what is the business model? Whether it's a multifamily, a self storage, new construction versus value add, what is the business model? And then look at the financials, look at the D12 for the last 12 months, look at all the data and start saying, okay, does it make sense? And the last thing I ever really look at is the PowerPoint, because the PowerPoint is the spin. So I always try to start with the spreadsheet. If the spreadsheet's not there, that's the first thing I ask for. Let me see the underwriting spreadsheet. If they don't want to give it to me, I say, thanks, I'll move on. So it's super simple, right? If you're a passive investor and you don't take the time or energy to review the underwriting spreadsheet, that is a failure on yourself because you should be reviewing it. You should be trying to understand what is it that they're doing, how are they assuming the numbers are going to change, what costs are they going to cut, how much is the revenue going to go up by, why is it going up by? What are the rent assumptions, for example, they're making and are they realistic? Yes. You can't do everything and you can't figure it all out. But there's a lot of basic stuff you can do as an investor to get you comfortable with the data set. And it definitely doesn't come from the PowerPoint. So if I was an investor, that's the one thing I've learned is don't spend any time on the PowerPoint.

I think a lot of people get into being a passive investor because they frankly just don't have the time to do the due diligence in finding a deal, managing a deal. But to also do the type of due diligence that you're talking about takes a lot of time and effort. And especially if you don't know what you're doing, you don't know what to look for. Maybe you don't have that wherewithal to understand that you're renovating 40% of the units. Why isn't the income dropping? It almost seems like you get into bigger trouble trying to invest in this space if you don't have that expertise. What would you say to that?

I would say there's multiple options there. It's just like anything else. If you don't have time to invest in individual stocks, what do you do?

You invest in the index or invest.

In an etf, you invest in a fund, a mutual fund, or a different type of fund. You're basically paying somebody a fee to invest on your behalf your capital into deals. You feel accurate. That's what a private fund is. It's the same thing. You are paying a manager to do the due diligence, do the work that you don't want to do. Or you don't have the time to do, or you don't have the expertise to do. So choices are very simple. You don't do the due diligence and you take the risk of losing your money. Or you take the time to do the due diligence and you can invest directly. Or if you don't want to take the time to do the due diligence, then you invest through a vehicle where somebody else is doing the due diligence for you and you're paying them to do it. So those are your options. Or you bow out or you just.

Stuff your money in a safe. Yeah, exactly.

So that's just the way you got the driver, right? Somebody's got to do the due diligence and make a decision on what to invest in. So it's either you or somebody you pay to do it for you.

There have been obviously many deals that have gone sideways in this cycle and a lot of the chatter I see in these text threads, forums, groups are all about, wow, I trusted this manager to do the due diligence and I lost my money. And it sounds like they didn't do any due diligence. And there's always that question of, okay, well, I'm trusting someone to do due diligence. I think this person is doing due diligence. How do I verify? How do I know? How do you approach that?

You ask. It's simple as that. Before you invest, you ask and say, what is your process? What do you use? How do you do it? How are you picking deals? How are you deciding what deals are good, what deals are bad? Walk me through it. Before I invest with you, I want to understand your investment criteria. I want to understand, you know, what you've done. And honestly, the sponsors that scare me the most are the ones that say, oh, I've never lost money because to me, that in itself, maybe there's somebody out there that's absolutely phenomenal or they've been so crazy lucky that they've never lost money on a deal. But to me that's rare. And when a sponsor only shows you all the great deals and they show you, here's all the amazing deals I've done, the first thing you have to ask yourself is there's something wrong or isn't there something wrong? Why isn't there a bad deal? Why isn't there a low performing deal? Where have they lost money and are they hiding something? So my red flag, actually, when I see these sponsorships and performances, they've done my red flag flag Instantly goes up when I see the IRR numbers and there's nothing low or there's nothing negative or there's no losses, because my instant reaction is, okay, are they truly that lucky or are they just hiding stuff? And if they're hiding stuff, that in itself is a red flag. So, as an investor, the real questions you ask is not what deals have gone well. You ask what deals have gone bad, where did you lose money or where did you not go where you predicted to go, and what was the result and what did you learn? Because everybody's going to lose money at some point. It's a question of did you learn from your mistakes? And I personally would rather find a sponsor that's been burned once or twice, because I guarantee they've learned their mistakes and they're not going to get burned again and they stuck in the game versus somebody who tells you they've never lost that penny for their investors. I just don't buy it.

You've now had a lot of different experience when it comes to advising other funds. You give a lot of training to new fund managers. What does that look like? I imagine a lot of this carries over.

Well, number one is the funniest thing I always get from fund managers is I'm just starting out my fund. I don't want to charge anything. I just want to give away. And to me, that's like, the first thing I say is, absolutely not. If you're getting into the business, it's like opening a restaurant and giving your food away from free. Oh, I just want to give away all my food away for free for a couple weeks or maybe a month so that people love my restaurant. But I don't want to charge any money for the food. That's what it sounds like to me, right? Like, I want to be a fund manager. I want to get in the business of managing people's money, But I don't value my own time enough that I can defend that I should be paid for my value. So that's like the first thing I see with a lot of managers, which is they're too scared to take compensation. Well, if you're too scared to take compensation, then you got to get your sales pitch down because you got to be able to explain to people what your value is because you're providing real value. If an investor comes to you and says, I don't want to pay you your management fees, if somebody said that to me, I'd say, okay, good luck, have fun. Because I know how much energy and how much Time it takes to do due diligence and evaluate 30 deals to find one deal you might invest in. And the 29 deals that you spend time on, your investors don't know about those 29. They know about the one you put in front of them. So I think if you're not willing to get paid for your time, that in itself is a problem and it doesn't matter what you're doing. So that's number one. Number two is around structuring of deals, which is you want to structure deals in a way that's a win win. And you want to make sure that your investors get money when the returns go well. But you have to make sure it's a win for you too, because again, if you want to run a nonprofit, then go run a non profit. If you want to run a business where you're going to get compensated for your time and energy, then set up the business model and set up the fund in a way that you're getting compensated. And if some investors don't like that, tell them there's plenty of other places they can put their money. So you got to ensure that as a fund manager, you're doing a lot of work and you're getting fairly compensated for that work.

Okay? To me, that's a clear sign of someone who's a newbie versus not. And to me, that would just be a clear red flag of not someone who I want to work with.

I don't think it's a red flag. I think when you come into any new business as what fund management is, that doesn't mean the person's new. The person could have 20 years of experience in what they're doing. They just never started a fund. So they don't understand how it works. It's like you could be a chef for 20 years and then you decide to start your own restaurant. You just don't know the business side of you know what it takes to run the restaurant. You, you know how to cook the food, make amazing food. You may just not know the business side of things in terms of pricing and structure. So I don't view it as a super negative or a red flag. I just view it as, in many cases, people are, they've been doing deals, they've been doing them a certain way, and then they're transitioning into wanting to operate and raise capital through a fund or they're just doing it a different way. They may not know how to monetize it.

So I'd like to dig into that a little bit. And I realize I'm going to put you in potentially an awkward situation with this question, but I am very of the mindset that when I am investing, my number one priority is not to lose money. And with that in mind, I am not paying a new fund manager or a new syndicator to learn with my capital. And I would much rather prefer to invest. First off, I'm a much larger proponent of investing in funds than syndications because I think if, if one deal goes sideways, that doesn't mean you've lost your entire investment, one out of many in a portfolio. So I think if you are a newer investor, the fund approach is a much smarter approach to take and then also one that has consistently delivered distributions and returns to investors. So how do you think about that in terms of a lot of new fund managers come onto your platform and they're raising and yeah, it's super simple.

Have you ever invested in a startup?

I have.

Okay. In anything you invest in. A lot of times you're investing in a startup where people have experience, but it's a brand new business. There's very high risk and you're taking a risk, but you're assuming that the person that's got the passion and they're smart and they'll figure it out. So sometimes it isn't always about you have to evaluate the person versus evaluating the level of experience because it's a combination. I'm not saying you're not right. And you could be one of these guys that hey, I only want to go into business with somebody who's been doing this for 20 years, but somebody who's been doing it for 20 years has been doing it probably the same way. And it may or may not work in the future where somebody new may see something. And a lot of the fund managers we're getting on our platform right now are investing in asset classes you would never think about before or doing things very differently because they're coming up with new innovative ways of wanting to do things. So there's pros and cons to it. Some people are willing to take a risk and try something new. And they know that with that comes a set of risk and potentially high returns. So I would say you have to as an investor, look at who you're investing in and see how well and how confident you feel about that person. And it can be a combination of their personality. The go getter. You got 20 year olds that get millions of dollars in VC funding in startup world. Why? Because these kids are working 24 hours a day, they don't sleep, they live, they breathe, and they dream. And people like that because they think their chances of success is higher. If your brain never shuts down and you're at it all the time, right? So it really varies. It just depends on your personality, depends on the type of person you want to invest your money with. And we've got fund managers on our platform that have done phenomenal and raised millions of dollars very, very quickly. And they're brand new to the game, but they're super hard working, they really go at it and they're putting it all into the business so they're able.

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Unico que.

Comprehens San Marcas.

Yeah. Where do you in your journey today invest? What types of opportunities are you looking into? Are you also looking at new fun opportunities? Are you looking at institutional grade?

We don't invest into deals on our own platform just because of a conflict of interest. So I see an incredible amount of opportunities that I would love to do, but I also feel that it becomes kind of a conflict of interest if I am investing in funds where I'm supposed to be responsible for taking care of our customers. So I see a lot of good choices, but we don't pull the trigger on any of those. But at a personal level, I invest across everything because again, to me, diversity is key. So different asset classes, different types of things, everything, you know, from stocks to crypto to real estate. I do invest across the board. It's just diversity.

So you've been in the game for decades at this point. What have you seen the shift in the types of assets or the types of opportunities that LPs are gravitating towards over your career?

I think in commercial real estate, it's been pretty consistent. So most of the asset classes have been around forever. You do see some new things, such as BTRs, you're seeing, you know, build to rent, you're seeing a few new things like that in terms of a few asset classes around real estate. But most asset classes have been around for decades longer than I've been doing it. So part of it depends on what your asset classes interest you. Some people love hotels and they'll only invest in hotels. Some people love multifamily, they'll invest in multifamily. I kind of like to tiptoe across different asset classes just so I can learn a little bit about them. And so I kind of try to hit hit investments in various asset classes. And then you get your quarterly reports, you get your webinars, you get all that stuff as an investor and you started learning about that asset class. RV campgrounds. Going from, you know, kind of old school RV campgrounds to luxury RV campgrounds these days. So there's lots of different change happening. Hotel conversions into low family housing and affordable housing. So a lot of different projects and a lot of creative projects out there. So you kind of have to look around and talk to different people and then see what are the things that interest you and where do you want to invest your money.

What do you think are the most interesting opportunities that have come around today?

I don't think there's any one or two I would point to. It's usually projects or different types of projects or different things that people are doing that get exciting. I don't think it's a full asset class. Like, oh, this asset class to me is super exciting and this one is boring. I think within any different asset class you take, some projects are pretty cool and exciting and some projects are not so much. Right. So I think it's more just at the project level. I'll see different projects and I'll get excited over some of them just because I think they're unique opportunities or doing something different.

Okay, good take. I like that. What would you say is the threshold that you look for when you're looking to invest in a project today?

I would probably say number one is it comes back down to the financial plan to me, right. That's always the most important thing. At a personal level, I've gravitated probably towards projects that are not high risk construction projects and moving more towards income generating projects. But that's maybe because of my age where there's a little bit more of conservatism on a project that's already pre existing. But I think on our platform we're seeing some interesting funds coming together around new types of businesses and Using the funds to raise businesses or purchase businesses, that those are pretty exciting in terms of. I won't name the fund or the managers, but we've got a set of guys that are going to be buying medical practices. Pretty interesting. Create a fund to raise capital to go buy medical practices. Something different that's not something traditional like buying multi family. So lots of different things happening out there and some of it's pretty interesting.

You mentioned that you're looking at these, maybe the decks or the pro forma, the financials over the deck first. Are you saying, oh, I need a deal to cash flow at least 8% and then anything else on top is gravy?

No, I would say when I analyze it, I look more at the data itself. Whether it's cash flowing. 8% or 6% or 7% isn't what I'm looking for. It's what is the data set that gets you to that 7% or 8%. So for example, simple one's always multifamily. Let's say it's a 150 unit multifamily complex. When you look at the last 12 months of financials, which by the way, most sponsors don't like to share. So that's like the first thing I always ask a sponsor is can I see the last 12 months of financials? Give me the spreadsheet so I can look at them. Because then I'll look at it and I go, okay, what does the last 12 months look like then? What is the jump for your one post acquisition and does it make logical sense if the income is jumping pretty significantly and the expenses are dropping radically, I would really start digging in then and saying, okay, what's going on here and what's driving this behavior or what's driving the spreadsheet? Because in the end all of this is just Excel spreadsheets. So if there's a number you want at the end, let's say 18% IRR, oh, I'll just tweak the rent up $20 a month and hey, the 18% IRR shows up at the end now. Cool, we're good. Okay. But it's great to say that now. How are you going to actually be able to pull that off? So I think it's important to look at if it's an existing property or existing business. What do you always do when you want to buy? You look at what's the historical track record. Then off that historical track record, what is it that is going to happen in the business plan that would drive the Revenue to go up, drive the cost to go down, get the margin to go up, that would increase the valuation of that asset. And understanding that is key. Then you go into the next thing, which is risks, which is okay, what are the top risks? How many investment overview decks have you seen where the sponsor focuses on risk? Very few. Maybe you've seen them, but it's rare to ever see an investment overview deck where the sponsor says, here's my top five risks on my project. They never did.

Right.

Okay, so why don't you ask them what are your top five risks? If they can't answer it, that should be red flag number one. Because either they don't know the answer, which is scary, or they do know the answer and they don't want to tell you, which is also a red flag. The guy that's doing the best is. The guy says, yeah, it's a great question. Here's what we think are the biggest risks and here's what our mitigation strategies are against those risks. Okay, now you've thought through it and okay, that sponsor has at least a good answer. Whether you believe it, whether you agree with it or not, that's difference. But does that sponsor have the confidence to tell you what those top risks are and what they think going to do to mitigate those risks? And if they can answer the question, that's great. Should be a good sign because anybody who's going into a project, if they're not evaluating what the risks are or where their business model is going to break as an investor, that's not good.

Yeah, I'm with you. I think the best deals are ones not the best deals. I think some of the best decks are the ones where they do share all of those things and then exactly how they are tackling them. Do you have examples in this episode already you've talked about different things that you ask for. You ask for 12 month historical financials. You want the pro forma spreadsheet, not likely a PDF, but the actual spreadsheets. You can see what the formulas are for new LPs. What is the best way for someone to build confidence in their ability to assess the underwriting?

Part of it is you got to get in and get your feet wet and you got to do it. But if you can't read the spreadsheets, that's scary. What are the loan terms from the bank? What's the number one risk of any asset purchase? 70% is likely going to be coming from the bank from a capital perspective. So the bank has control when anything goes wrong, the bank's going to start clamping down on that sponsor and ensuring that they get paid first way before the investors get paid. Right? Okay, so what are the loan terms associated with the asset purchase? Most LPs won't even ask the question. That's kind of scary if you don't know what the loan terms are. Are there caps? Are they purchasing caps? They're not purchasing caps. Right. Can they buy out? What are the penalties if they want to refi early? All of those basic questions on what is the financing? Sometimes they don't even realize that there's two sets of financing. Okay, that's problem number two. You're coming in as an LP and you don't recognize there's a pref equity guy in front of you. So now you've got the bank in front of you and you've got a pref equity guy in front of you and then you've got your standard equity. Okay? Do you realize that? Do you understand the risks associated with that? Are you okay with that? Because if anything goes wrong, the pref equity guy is going to get paid way before you're going to get a penny. So those are the types of things you have to look at and understand the capital stack. As an lp, you have to know the capital stack and understand it and be comfortable with the capital stack. How much is the manager putting in? Right. How much is the sponsor putting in? Are they putting in 1%, 2%, 3%, 5%, 10%? That tells you a little bit about skin in the game. Right? So understand the stack. Are you comfortable with it? Understand the loan terms, Are you comfortable with the debt and what the debt is giving? If there's pref equity, what are the terms of the pref equity? Do you understand that? If you're going to be sitting everybody that's sitting below you, what's the sponsor putting in? When do they get paid versus when do you get paid? If you were going to get the fund documents, nobody likes to read, sorry, sponsoring, offering documents, fund documents, anything. But if you're going to go jump into a syndication, if you're going to read any one page out of that 30, 40, 50 page legal document, read the distributions page, what is the order of distributions on how people are going to get paid? Who's getting paid first? What's that split going to look like? What are the caveats associated with the distribution payments? Really important to understand that stuff. You know, most of the legal language is written in a way to always favor the sponsor. So, yeah, you can you ask a bunch of questions on it. But 90% of the doc is going to be written in a format that always favors the sponsor. But as an investor, you want to look at that other 10% in terms of what performance are they putting in? What are the caveats they're putting in in terms of risks? And are there anything specific with the risk, with the specific property you're participating in? Is it in a flood zone? Is it a tornado risk? One of the deals that went south on me looked like an amazing multifamily deal deal. Really good revenue. I thought, wow, this thing's a winner, right? Guess what? 65% of the units were rented by a military base that happened to be a couple miles down the road. And guess what? There was a deployment boom. Revenue just tanked. And luckily I didn't lose all my money. I lost about half my money on that one. Why? I didn't realize that with a multi family, you always assume that there's no one big rent renter. Well, in this multifamily, they never told us as part of the disclosure documents that most of the units were being rented by the government. So that was a risk that I just didn't see as an investor. So sometimes you don't realize it until you get burned on things to go look for. And that's a great example, which is when you're doing underwriting, if you're doing retail center as an example, right. And you're going to go and invest in somebody's retail center. Okay, what are the terms associated with each of the leases that are on that retail center? How much is the anchor lease taking? What happens if the anchor lease goes under? How much does the whole property not even have enough money to pay the bank at this point if the anchor lease goes under? So those are the types of things you have to think about.

So I'm with you. These are all questions that you should go through. I also think to make it easier on myself, I've made myself a Google sheet where I literally have a hundred questions. And when I look at a deal, I make sure that I answer each question so that I know I've crossed every T and I've dotted every I. And every time I get burned on a deal or I find a new helpful hint from a podcast like this, I go add another question to the bottom of my questionnaire to just make sure that I don't miss it going forward. And that's a process that I teach people how to go through. And I'VE started to use to cut down on the amount of time that it takes takes in order to vet a deal. What are the little maybe tips, tricks that you do? Maybe they're similar, maybe they're different. Maybe there are more. Maybe you hire third party people. What are things that you do or what order do you do them in in order to help you not waste time on this? Because there could be so much time. This is a full time job on top of your already busy life with kids and family and job and whatever else you have going on.

I always have a two stage model. Stage one is what I would call the 10 minute review of a deal. And then if it passes my 10 minute review, then only will I spend more time on that deal and get into the details of it. So I would recommend any LP create your 10 minute review process which is what are the things that you're going to look for that will eliminate your, your desire, whatever that is, but eliminate your desire to invest with that deal. It could be like what you saying basketball, that hey, I don't want to invest with new guys. Okay. So one of your initial deal questions would be I don't want to invest with anybody who hasn't done five deals at least. Okay, boom. That's your investment question for stage one. I don't want to invest in anything that's over 65% LTV. Okay, boom. Stage two. I don't want to invest in anything that there isn't at least a 5% sponsor equity investment themselves. I want that much skin in the game. Boom. That's number three. You have to decide what are the criterias that will allow you to cut a deal off the table so you don't spend time on it. And once you determine what are those three, four, five, six things that you're going to look for to cut a deal, then you'll end up eliminating 90% of the deals and the 10% that remain. Now go spend the time on them and and go due diligence. So build the spreadsheet or build your model of questions on what are the things that will allow me to not find a good deal? What are the things that will cause me to eliminate all the bad deals? Then I'll spend the additional time to figure out which ones I want to actually go invest in.

I love that. That's also a framework that we teach. I think of it a lot about what is your investment thesis is kind of how I frame this question. What's the end goal? I'm trying to get to Am I trying to increase my cash flow? Okay, what, what kind of minimum cash on cash do I want on a deal? Do I want monthly or quarterly distributions? Does it matter? Do I want to invest in funds or syndications? Do I want to invest with new or institutional size? Do you think of your investing approach as somewhat of an investing thesis? How do you approach that process?

Well, everybody's process is different. Everybody's thesis is different, right? So, yeah, you have to have a set of goals in terms of what you're trying to achieve. When I was doing it at a personal level, it's different than when I was doing it at the fund level. When we were doing it for our fund, we took an approach of debt plus equity together. The debt side give us some of the cash flow and ongoing income. The equity side would give us long term capital gains. So you merge the two together and then you play with both of those and you have both levers to kind of adjust on depending on how the market's doing, what the deal flow looks like. Sometimes you find more good debt deals, sometimes you find more good equity deals, and then you can kind of decide on how you want to do it. So I think everybody's different. I don't think there's one professed answer. I think you have to, as an investor, decide where you're going to invest, what are your criteria, and then look for things that match those criteria and write it down. As an investor, here's the things I want to do, here's what I want to achieve, here's how I want to go at it. Then you try to follow that path and then you checkpoint it. Even like my portfolio at the end of every year, I may pay a little bit of attention to my portfolio during the year, but at every end of the year, I do a thorough analysis of my portfolio, every aspect of my portfolio, and say, okay, where are we on everything? How are these investments doing? What's exited, what's good, what's not good? Where's my money sitting? Is that where I want it to be? You kind of do that annual checkup and that gives you an idea, okay, maybe I need to do this or do that. And I did move some money here, move some money there, and you get those high level models into your head and then you start executing them. So I always do it in December, and come January, I start executing my changes. I've done it forever. Very simple. Take a few hours and have a master spreadsheet that tracks everything. And then you review that spreadsheet and you say, okay, this is where I was last year. You duplicate, copy paste into the same spreadsheet. This is this year's review. Look at what you're doing, what has changed from last year, and then you set some new goals.

Yeah, it's having a complete system for how you manage your investment. Like an LP investment schedule is how I think about it. Just like in real estate, if you own real estate, you have a real estate investment schedule. You need to show the bank that shows what you bought the properties at. What's the leverage, what's the interest rate at? I do the same thing for my LP investment schedule. So good tip there. What do you think are the biggest misconceptions that LPs have about fund managers?

That's a tough one. I'm not sure I would know what a misconception would be. I think sometimes people don't value the fund managers for the time and energy they put in and they think that it's super easy work and don't realize how much energy it takes actually go do all of this stuff and run the thing. So I don't know if I would call it a misconception. I would say they undervalue how difficult the job is and what it takes to actually find good deals, especially find investment opportunities and the energy and time it takes. And at the end of the day, time is money and you have to value. You look at yourself and you put a dollar amount on the value you have for yourself. Well, assign a dollar amount to the fund manager because their time is money too, at the end of the day. So I wouldn't say it's a misconception, but I would say it's more just understanding. When you go to a doctor, you don't debate what the charges are. Maybe you do, but most people accept that the doctor has a set of expertise that they've gained over the years for what they're charging for. If you go to an attorney, you go to an accountant. Everybody has expertise. A fund manager over time has an expertise. And if you don't need the expertise, then go invest yourself. If you need the expertise, then be open to pay for it.

Yeah, that's fair. That kind of leads me into. I'd like your take on, I think every time an investor loses money, man, the amount of negativity that I think are in these chats where they call certain operators, fund managers, scams, terrible people, scumbags. And I'm sure there's a fair share of those that haven't disclosed all the Proper things or they ran away. But I think there's this shift of moving the blame of, oh, this fund manager lost my money. They should have done better instead of looking inward. Where do you think that responsibility sits?

It depends on the situation. If the fund manager made investments, look, deals do go bad or things happen. A tornado hits and all of a sudden you get hit with a multi million dollar renovations insurance. Takes six months to work through, can't get the property back up. Okay, you can sit there and blame the sponsor all you want or the fund manager all you want, but sometimes things are just out of your control. So I think in the end, as an investor, when you lose money in the stock market, do you go and scream up a storm? Maybe you do, Some people do, some people don't. Some people throw lawsuits out there. All kinds of stuff happens. I think the best thing to do is diversify to a point where you're not so heavily emotionally attached to any one investment that you get that angry. If you have $250,000 to invest and you go invest 100,000 into one project, well, I would say you're being pretty stupid. So look back at yourself and say, why did I invest 30, 40% of my total available cash in one deal? Was that really smart on my part? Forget the fact that that person may have lost your money, but there was some stupidity internally that you should have looked at too. So if you're ever investing more than 5% of your money in one place, well, you better put a mirror up to your face and say, okay, are you willing to lose more than 5% of your money in one investment? Because why are you investing so much into any one particular investment? It's kind of like in stocks. Again, I go back, what do you do at the end of the year? You look at your winners, you look at your losers. You kind of try to recategorize. If there's a big winner, you might sell some of them and then take your gains off the table and go invest it somewhere else. Why? Because you're kind of rebalancing your portfolio. Okay? So if you're doing an alternatives portfolio and you sticking a ton of money into any one deal because, quote, that was the only way I could get in. Well, maybe you shouldn't have gotten into the deal, right? Don't put 50,000 in if you only have 200 to invest because if it goes bad, you are going to be mad and you're going to be unhappy because you lost 25% of your money. But you should have never put 25% of your money into a single deal in the first place. Place.

Totally. I think it's fascinating how a deal goes bad in this space and then people are like, oh, I'm going to give this up. I'm going to go back to the stock market. Only to realize that that happens anywhere you invest and it's not specific to any one niche.

It isn't. If you went into the stock market, let's say you had $100,000 to invest and you went into the stock market and you invested in only five companies, 20,000 each, then I guarantee you'd be pissed when one of those goes bad and you lose the 20,000. It's the same thing. So I think if you're a smart investor, you will diversify and diversify also. I see people getting excited over single sponsors where they keep investing in the same sponsor over and over and over and over and I'm like, you're being stupid. I get mad at our fund managers when I see them investing into other sponsors too many times. Why? Because what is it that you think that that sponsor is God, that they're not going to make a mistake? And then what happens when you've over invested in one sponsor or in one geography? Don't go invest all your money in the southeast. Go buy some deals in Northeast, go buy some deals in the West. The markets are different. Spread out the risk if you're a fund manager. That's why I'm a big proponent of multi asset class spread across multiple asset classes. Because not all asset classes behave the same and they all work differently. So it's always about diversification at the end of the day.

Yeah, you nailed it on the head, Sanjay. Where can people learn more about you, what you're up to at Avestor?

I'm not that proactive. The company. We're on Facebook, we're on LinkedIn. I'll have some posts. You can follow me on LinkedIn. I'm not one of those guys that posts every week. I post when I have something to say. So I'm on LinkedIn. You can follow me there.

Cool. Thanks, Sanjay. And thank you, best ever listeners, for joining me for the episode of the Passive Income Playbook here on the Best ever CRE Show. Join me next Thursday and every Thursday for more passive investing insights and strategies to help make you a better, more informed investor. If you found value in this episode, please subscribe and leave us a five star review. And until next time, I'm Pascal Wagner and see you next week for another episode of the Passive Income Playbook.