How do I start a real estate investment fund?

[Benjie DeVera]

Hello BP!

I own an LLC with a business partner doing residential filps. We are looking into opening up a real estate investment fund to raise private capital. We figured we could save money by opening up investment funds, than paying a lot of interests using a hard money lender. Hard Money Lenders cost about 12% per year, while our Investment Funds can pay a range of 7 - 12% depending on risks.

I've never done this before, but I'm hoping someone has in this forum has. How do I structure my investment fund? What are the typical items that we need to cover? Does anyone have any resource for me, on how to make this happen? 

I'm thinking we'd have two options - one secured, and one unsecured. I'm curious to know how others have structured their investment funds, equity partners, withdrawing their funds (is there penalty if they want out? etc.)

Can anyone point me in the right direction how we can make this happen! Thanks in advance BP!

[Brian Burke]

@Benjie DeVera, @Brian Gibbons is right...it isn't simple but it's doable. 

First, you need an attorney. Not a wills/trust attorney, and not a real estate attorney (yeah, people really do make that mistake)...you need a securities attorney. This is someone who specializes in creating public and private investment offerings. You'll want to do a private offering--a public offering is cost prohibitive.

Next, you have to choose if this will be an equity fund or a debt fund. A debt fund would simply loan money to your flipping business and your flipping business would pay interest to your debt fund, which in turn would pay interest to its investors.

An equity fund would actually acquire title to the properties and the profits therefrom would be split in some fashion (there are thousands of ways to split the pie--you have to choose an arrangement that'll be compelling enough to attract investors).

This is a 30,000-foot level overview, your attorney would have to help you with the details, and there are many, many details to consider that are way beyond the scope of a forum post written by a non-attorney.  :)

All of that said...you'll need to consider the cost of setting up a fund versus the incremental interest savings. You'll pay $10K to $50K to set up a fund.  If you are doing a high amount of volume, fine. But if you're flipping a couple of homes per year there's no way that you can justify the cost.

If your volume is light, you are probably better off just borrowing money from investors. One investor, one loan per property. Don't put more than one person into any one deal.  Give them a first position mortgage or deed of trust with an equity cushion behind them and title insurance.  Basically the same thing you are doing with the hard money, but direct with individual investors. You can likely find capital in the 8%-10% range if you have experience and a solid track record.  Run the process by your attorney before pulling the trigger. If you don't follow the law you'll expose yourself to consequences, and the nuances in the law are complicated.