Forming a real estate investment fund

[Andrew Jennings Freerks]

Hello fellow investors,

After running my real estate company for 10+ years, and completing numerous value add plays, I am looking to scale up and go after bigger (commercial) projects.  In the past, I have raised $100,000+ for each one of my projects, but all on equity partnerships or by giving the investors a flat fee on the deal.  The larger projects I am looking at, would require more funds (probably around $500,000) and a longer hold period (3-5 years).  Questions I have:

- do I structure the deal where investors are paid out on an annual basis or keep them in as equity partners until we refi once the project is complete (3 to 5 years down the road)?  

- I think equity partnership makes the most sense for the investors I know, so how much does a fund manager usually charge and does he bake in a percent ownership, for running/ finding the deal?

- does anyone have legal paperwork drafts I could have to set up the real estate investment fund?

Thank you all for your help!

[Henry Clark]

Looked at your investment portfolio, very clean looks great.  But if you plan to scale up, aren't you talking about $1mm to $2mm upfront cash to support your deals, prior to lenders?  Not that your $500,000 doesn't have a place, but will there be enough Meat on the Bone for your $50,000 or $100,000 investors along with your Management or Syndication fees?

Although you are not talking a Syndication, I would seek out Syndications in the type and size of REI you're interested and go through the investment process with them to see their setup. See if there is anyone in your closest real estate group doing Syndications that would walk you thru.

[Chris Seveney]

Quote from @Andrew Jennings Freerks:

Hello fellow investors,

After running my real estate company for 10+ years, and completing numerous value add plays, I am looking to scale up and go after bigger (commercial) projects.  In the past, I have raised $100,000+ for each one of my projects, but all on equity partnerships or by giving the investors a flat fee on the deal.  The larger projects I am looking at, would require more funds (probably around $500,000) and a longer hold period (3-5 years).  Questions I have:

- do I structure the deal where investors are paid out on an annual basis or keep them in as equity partners until we refi once the project is complete (3 to 5 years down the road)?  

- I think equity partnership makes the most sense for the investors I know, so how much does a fund manager usually charge and does he bake in a percent ownership, for running/ finding the deal?

- does anyone have legal paperwork drafts I could have to set up the real estate investment fund?

Thank you all for your help!

 you will not want to take documents from anyone on line and will want an attorney to create docs for you which would range from $5-$10k.

Regarding management fees, 1-2% is what those fees typically, are so even at $1M you are taking $10-$20k/yr in management fees, which probably does not get you super excited, but thats where they typically are.

[Andrew Jennings Freerks]

Thank you @Chris Seveney.  Besides the fund management fee, do you build in a percent of the deal?  I am thinking of a lower Fund Management fee, as my company will also have a property management fee, and I will also build in a percent ownership for putting together the whole deal, but I don't really know what is standard (or if there is a standard).

Thanks @Henry Clark.  I have thought of syndication in the past, but shied away from it due to the legal fees to set it up and the regulations.  Thankfully I have friends and family that have done well, so I think I can pull out a sizeable fund $500K+) without going the syndication route, but I appreciate the comment.

[Don Konipol]

Quote from @Andrew Jennings Freerks:

Thank you @Chris Seveney.  Besides the fund management fee, do you build in a percent of the deal?  I am thinking of a lower Fund Management fee, as my company will also have a property management fee, and I will also build in a percent ownership for putting together the whole deal, but I don't really know what is standard (or if there is a standard).

Thanks @Henry Clark.  I have thought of syndication in the past, but shied away from it due to the legal fees to set it up and the regulations.  Thankfully I have friends and family that have done well, so I think I can pull out a sizeable fund $500K+) without going the syndication route, but I appreciate the comment.

Syndicators usually get what in slang is called “promote”.  Simply, a percentage of the profits; so only AFTER the investors get their investment back + a “preferred” return of usually 6-8% annually.

Here is how our equity (as opposed to our debt/loan/notes) syndications are set up
we as syndicators get a either a 3% broker fee or 3% acquisition fee at purchase
we get a management fee competitive with outside management
we get 10% of gross rents as ASSET management fee
once investment is liquidated we receive 15% of proceeds ABOVE or AFTER investors receive their capital returned plus 10% annual calculated income including any distributions of earnings. 

Most importantly to our investors we individually invest in each deals and under the same terms as the other investors to the tune of about 10-15% of the capital. So if it’s a $10 million deal and we are using 50% leverage then the capital raise is $5 million my partner and I will personally invest between us $500 - 750k into the deal under the exact same terms as the other investors.  

[Andrew Jennings Freerks]

@Don Konipol thank you sir.  This is helpful.  The broker/ acquisition fee is a percentage of the total deal (estimated property and reno) or just the purchase price of the property?  I am a broker as well, so unless the deal is off market, the seller is usually paying sometime of a commission.

[Brock Mogensen]

You are likely talking about a syndication not a fund..big difference. Syndication is deal by deal, fund buys multiple deals. There is extraordinary differences on the legal/compliance side between the two.

For a syndication, offering equity for investors is the most common way.

There are many different fees and structures you can go with.

I suggest learning the underwriting side of syndication deals before engaging an attorney. And you definitely want to engage an attorney and not just copy and paste docs.

Happy to send over my underwriting model for syndication deals, just shoot me a DM.

[Henry Clark]

OP what is the total size of the deals you’re looking at?

$1mm, $10mm, $50mm. $100mm Fund??

How many investors are you looking at?

That would clarify what you are trying to achieve.

LLC with a good operating agreement.

Syndication

REIT fund

Each one has an increasing level of complexity and reporting requirements