I'm going to say something really unpopular.

I think ”make sure the GP has skin in the game” is vastly overrated.

Allow me to provide some counter points...

The GP having their own money in the deal is treated like an irrefutable precondition for investing in private equity real estate (like a syndication)

What is the value of GP capital in the deal?

Theoretically, it aligns their interests with yours (you being an LP investing capital of your own).

I can tell you, as a GP, I am no more motivated to make a deal work if my own money is invested.

My sole motivation is my investors’ capital.

That I have money in a deal is immaterial to me if my investors aren’t getting their returns.

The most valuable capital I have in any deal is my reputation.

That is what motivates me to outperform. Not some small contribution to the LP equity.

Now let me tell you several reasons why, as your GP, I might not want to put capital in my own deals...

First, I am the one putting up the risk capital (EMD, inspections, lender fees, etc…) for each deal to get it under contract and see it through to close.

That's significant money I have to put up before the property is even successfully acquired.

I need non-trivial liquidity available to put the next acquisition under contract and can't have it all tied up in my existing deals.

I wouldn't be able to grow if I did.

Second, if a deal gets into trouble, I will be the first to put money into the deal vs. requiring a capital call from investors.

(This is not stated in the operating agreement, but is my personal position)

I need liquidity to provide this first layer of financial back-stop.

If it’s tied up in equity, it does none of us any good.

Third, I am growing and investing in my business and need capital to do that.

I just can’t afford to put meaningful capital into every single deal and still run my business.

This might change once a sponsor goes full cycle on several deals (and, thus, has much more available capital).

But every GP I know hits this wall, even if they have large portfolios.

There's always a limit to an individual's liquidity (unless they have other side businesses that are funding this one).

Despite these reasons, you still may not feel comfortable investing your own money if the GP isn’t right beside you.

That’s fine!

It’s up to each of us to evaluate operators and our own risk factors.

But don’t just assume the only reason a GP isn’t invested in the deal is that it’s a bad deal.

This is categorically untrue.

Nor does this rationale mean I don't invest alongside my investors.

I do.

I just hate seeing dogma spread w/ no critical thinking or counter-consideration.

If “skin in the game” is a flawed way to vet a sponsor, what do I recommend? I have many thoughts...

Follow for this topic, and much more info on the business of multifamily real estate