How to Create a Local Real Estate Fund

Question

I am creating a local real estate fund with friends/family. The goal is to raise $10-20mm in order to invest in a specific area in the South-side of Chicago

Here is the focus:

• Multi-family, Office, and Land
• $500k - $10mm assets with value-add and core plus risk profiles
• On- and off-market opportunities sourced through brokers, note purchases, recapitalizations, shore-sales, and bankruptcy sales
• Medium-term investment cycle (5-10 years)

My partner is a man who has lived in Chicago his whole life with 50 years of RE experience. He has done development, SFR, multifamily, and office investments here and has the right political connections

For those who have created a little fund like this or have been involved in one before:

1. What is the best structure for this type of fund? (given silent partners, outside money, etc)

2. What is the most effective way you've pitched the investment?

3. Who are the best money partners with these types of deals?

4. What questions should I be asking myself?

Thank you, -Jeremy

Nelly Licona · Answer

Hello everyone, I am looking to start a small local fund. I am new to the concept, so any pointers as to where to start?

I read all your comments and there are still a few concepts I need to get familiar with.

Any suggestions will be greatly appreaciated

Shaun Vembutty · Answer

There are dozens of ways to structure the fund and returns. I would suggest talking to your first batch of potential investors and get a feel for what they are looking for. Be careful with promising distributions especially early on in the life-cycle of the fund. With a PPM offering, the only thing you have working for you is your reputation and track record and one slip-up could mean the end of this venture. I would also suggest you don't start a large fund to begin with. You could start with something around the $2 - $5 mil range, get your feet wet, deliver results, build your track record so that when you go out the second time for a larger offering you can promise lower returns and you would still have investors willing to take you up on it. A lot of people think that if they raised the capital, that is the end of the road. However, that is only the beginning and where the work starts is in making sure all of that capital is deployed and making a return for you and your investors. As mentioned in the previous posts, don't skimp on attorney's fees in preparing the Offering Memorandum and Subscription Agreements. It is well worth it.

Jay Hinrichs · Answer

you need to start a fund.. and with the jobs act its easier than before.

PPM you and your partner are the sponsors and off you go.. you need to be mindful of securities laws. you can google these to help your thought process

syndications

General partnerships

Private placement memorandums

506C 506 B exemptions

Michael Nerby · Answer

Jeremy,

How are things going? Any further updates on progress?

What type of structure are you setting up on the back end?

What type of returns are you promising your investors?

What returns are you receiving from loaning the money?

Thanks.

Jeremy W. · Answer

@Shaun Vembutty word to the wise. I agree.

Before going out to all FF, and to keep the things simple, I am partnering with my most strategic investor so we can hit singles/doubles to build the track-record and portfolio. Going to do one-off LLCs and plan to manage/live in the properties until they are up to snuff.

Progress the last 3 weeks:

• Starting to build a relationship with a contractor who comes from a trusted-friendThey focus on redevs in Chicago - condos and MFs
• They focus on redevs in Chicago - condos and MFs
• Connected with 2-MF brokers in Chicago
• Now have direct access to MLSAlso obtained access to foreclosure, bankruptcy, probate, and mortgage data in Chicago thanks to a friend in the industry
• Also obtained access to foreclosure, bankruptcy, probate, and mortgage data in Chicago thanks to a friend in the industry
• Connected with an inspector who has 20+ years of experience in Chicago
• Connected with a developer in Pilsen, who we may be partnering with on deals he doesn't have the $$$/risk appetite for

• They focus on redevs in Chicago - condos and MFs

• Also obtained access to foreclosure, bankruptcy, probate, and mortgage data in Chicago thanks to a friend in the industry

As of now, we are building the team and vetting off-market properties and a number of properties on the Southside. More to come. -J

Jeremy W. · Answer

Thank you @Jay Hinrichs @Joe H. an @Eric Bergin

To Joe's point, the new crowdfunding law opens up our investor pool, but the waters are shallow. There is also "white-label" software specifically for sponsors. More due diligence is needed on my end...

Origin Investments in Chicago is doing a mix of "old school" and "crowdfunding." Smart guys.

For my own journal, and maybe for others, here is a little of what I learned on syndication:

• Your track record, reputation, and communication with investors the initial, and ongoing, factors that can make or break you as a sponsor - emotionally and financially.
• For RE crowdfunding sites (PeerStreet, RealtyShares, etc) can get you fund (or so they say) with investments of 500k-3mm.
• Preferred Returns and Profit ReturnsPreferred returns occur on a monthly, quarterly, or annual basis and are based on a %. Average preferred return is 8-12%, but with low interest rates...how do you determine this?Total profit returns are the NET returns after preferred returns are distributed and are determined by the Sponsor/Investor split
• Preferred returns occur on a monthly, quarterly, or annual basis and are based on a %. Average preferred return is 8-12%, but with low interest rates...how do you determine this?
• Total profit returns are the NET returns after preferred returns are distributed and are determined by the Sponsor/Investor split
• Acquisition fees are .5-2% depending on the size of the deal

• Preferred returns occur on a monthly, quarterly, or annual basis and are based on a %. Average preferred return is 8-12%, but with low interest rates...how do you determine this?
• Total profit returns are the NET returns after preferred returns are distributed and are determined by the Sponsor/Investor split

As it stands now, I think makes more sense to create individual LLCs for my investors because securities laws make the communication, disclosure, and liquidity less efficient, as far as I see...

Joe H. · Answer

I opened an SEC registered Part D fund with PPM late last year. Use good attorneys, it's expensive, but it's worth it to have all your bases covered. The attorneys can cost an arm and a leg though so for smaller funds (less than $500k) it's not worth going that route. If you are going less than that you might just want to do a series of one off LLC's with your investors where you won't have to worry about complying with securities laws.

They also opened the door last year for crowd sourced funds, but I know very little about those and am wary of that format given how untested the market (and litigation environment) is.

How to Create a Local Real Estate Fund

How to Create a Local Real Estate Fund

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