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Cutting Out the Fluff: Comparing Real Estate Equity Arrangements for Investing Success

We can spend a long time on an intricate introduction, or we can get down to business.

Jonathan Livi
Jonathan Livi

Just like the guest on episode 24 of The Executive Real Estate Investing Show, Jonathan Livi, we are interested in cutting out the fluff and getting down to the most important things: how to build a network to build your experience in real estate investing.

Jonathan Livi is an equity broker who is “asset agnostic”—he does it all! Any asset class is fair game and he enjoys the diversity of investing in real estate. Jonathan is interested in the deals, getting them right, and making money. In this conversation, he explained the different kinds of equity classes and what waterfalls are all about. To get to where he is today, he had to build up his network, which he gives us some tips about, too.

So, let’s dig right in to some of Jonathan’s advice on networking and his explanation on different types of equity and waterfall structures.

Building your network for real estate investing

Jonathan got into real estate investing after his college studies. As someone who was always interested in finance, he quickly got into understanding capital stacks and the nitty-gritty finance details. After receiving his securities license, he started out as an equity broker, choosing it because there were less people in this space.

From there, his success really took off. Besides his extensive knowledge in this area, a lot of Jonathan’s success has been due to his ability to network. Networking is important in all industries, but is absolutely essential in real estate investing.

As an equity broker, Jonathan networks on both sides of the business: with developers who are building real estate projects, and with the investors who have the funds to invest into those properties.

So, how does Jonathan build out his networks? LinkedIn has been key. And while LinkedIn is a super effective site, there are opportunities to network on any and all social media patterns. When focusing on building your network, consider these tips:

  • Focus on relationship maintenance. Once you’ve connected with someone, take the relationship offline. Maintain the relationship through phone calls and in-person conversations, when possible.
  • Provide value to your network. Jonathan will put out information on LinkedIn about JV structures or the general waterfall structure, giving his audience real and tangible information to learn and implement. You don’t have to necessarily post a lot, but all of your interactions should have value to the person that you are reaching out to.
  • Be light on the fluff. This was a big theme in Jonathan’s advice for networking, and even for doing business. Consider how many messages are exchanged on a platform like LinkedIn. You want to get down to the essentials of the value you can provide, and why you want to connect. It helps save time and respects the other person’s time, too.
  • Try, try, and try again. The first person you reach out to might not turn into anything. Maybe even the first 10 or 20 people. But eventually you will be able to connect and get your foot in the door. If you focus on creating value and doing a good job, your network will grow through word-of-mouth referrals.

Different types of equity

One of the most exciting things about the world of real estate investing is that there are infinite possibilities and directions to go. You can choose a variety of paths and structure your deals in a ton of ways. This does involve in-depth knowledge—we always recommend learning as much as you can and educating yourself to make the best decisions possible.

Jonathan is highly knowledgeable about the different types of equity. As an equity broker, he understands just how many ways you can structure a real estate investment deal. He breaks down a few of the main types of equity and what sets them apart from each other. Equity can cost different amounts, and also come with different conditions and regulations on them.

The four main types that we discussed are join venture equity, limited partner equity, co-GP equity, and preferred equity.

  1. Co-GP (General Partner) Equity: This is the most expensive type of equity, and considered “top of the food chain.” This is an equity arrangement where the sponsor also has some skin in the game by investing in the property with the developers. This is set up as a 90-10 split, so 90% of investment by the joint venture partner and 10% by the sponsor.
  2. JV (Joint Venture) Equity: This is an equity structure that is a “single check” equity writer, or institutional groups that are writing large checks to invest in the property. Under this arrangement, both investing parties have voting shares, so they can make decisions on the property.
  3. LP (Limited Partnership) Equity: Unlike JV equity, where it is a single institution investing in the property, an LP equity arrangement would be multiple small-check writers. So, it might be individuals, small firms, or “mom and pop” businesses investing smaller amounts. Syndicators will work with these kinds of investors, bringing dozens of small investors together to make the investment into the property. It can be a lot of work up-front, coordinating multiple investors, but the sponsor can make a lot of money off of fees.
  4. Preferred Equity: This is fairly new to the capital markets and is relatively unknown. Preferred equity is a debt product, not an equity one. It is a riskier investments strategy that does not protect the investors downside. A preferred equity investor will always get their money out first after the sale of the property. For this reason, they are willing to invest a lot and a broker can make a lot of money off the deal. However, if the deal goes south, the preferred equity investor can take over control of the project.

This is just the tip of the iceberg when it comes to equity arrangements. There are other types of equity, such as default equity and mez (mezzanine) debt. Because there are so many ways to structure deals, there are infinite possibilities and ways to be creative in real estate investing.

Waterfalls 101

One of the other things that we discussed with Jonathan in this episode was waterfalls. Most people outside of the finance world start to tune out when discussing this, but it’s important to understand when you are getting into real estate investing.

A simple explanation of a waterfall is that it is the agreement between two partners on how they are going to distribute cash flows. So, for example, a sponsor will usually have a number of fees associated to their work—an acquisition fee, an asset management fee, or a construction management fee. But they are generally not able to earn those fees until a certain level of return on the property is achieved.

Written into the waterfall is an agreement that they will reach an 8% return, for example. Once that is reached, then the fees are released and the next level of earning cash is reached. If the sponsor invested 10% of the original amount, they will earn back 10% of the IRR (internal rate of return). But the waterfall will dictate that once they reach, say, 12% IRR, the sponsor can take 20%. If they achieve higher than that, the amount goes up. Waterfalls are an incentivizing structure for the sponsor to achieve as high of an IRR as possible.

Waterfall structures can vary significantly, depending on the partners and equity structure. Jonathan recommends that real estate investors start modeling different structures on Excel or another platform to truly understand how it works in real life.

When playing around with different numbers, try to stay conservative and not over-leverage yourself. Given where we are in the market now, those super-high yields are not going to stick around forever. So, be okay with making less if it means that you are protecting your investments and not over leveraging yourself.

Conclusion

Real estate is an exciting field, with so many different avenues to explore. As an equity broker, Jonathan Livi understands that there are so many different equity structures, which he shared with us. It’s important to understand that each type of equity comes with its own cost and conditions attached to it. So, choosing what works for you and your goals is important.

We also talked about the importance of networking and building your connections. This helps you find more opportunities and build both our skills and knowledge. Jonathan is a big fan of LinkedIn—if you want to connect with him directly, you can shoot him a message there or email him at jlivi@buckinghamadvisors.com.

Michael Holman

Michael Holman

Michael has extensive financial and operational experience. He is a licensed Certified Public Accountant and has a Masters of Accountancy from Brigham Young University. Before working at Overland Group, Michael worked at Ernst & Young on some of the largest real estate and technology companies in Utah.
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