Process Of Starting A Real Estate Fund?

Question

Hi all,

I am hoping I can find some guidance here in this group. I appreciate any feedback/assistance.

I have been living in Paraguay for almost 3 years and now I am looking to start a RE Investment Fund to capitalize on this growing market, seriously :) I plan on bringing in accredited foreign investors mostly from the U.S. I would like to verify my understanding of how to get to the point where I can get serious about seeking capital. I don't expect people in the forum to be Paraguay experts, so I mostly seek feedback on the U.S. items. However, anyone with international experience that applies to my situation, it would be nice to hear from you. I have made some real estate investments personally, small. This will be my first time putting a fund together.

1) ~~Create Financial Projections, business plan and investor pitch deck.~~ All of this is completed
2) Have initial conversations with potential investors to gauge interest
3) Choose between 506b or 506c since it will be Reg. D
4) Hire both Paraguay and U.S. accountants
5) Hire a Syndication Attorney to create the PPM/Op. Agreement/Subscription Agreement. By the way, how much does this cost?
6) Create a U.S. Based LLC that will be used to acquire the assets in Paraguay
7) Have initial conversations to gauge interest

Mike Lambert · Answer

@Matthew C Dominy

I tend to see everything in the best of light so you shouldn't worry about that. This being said, do you realize that I spend some time commenting on your post just to help you and without getting anything in return? Even if what I wrote was a bunch of nonsense, do you realize how rude it is to write "I find it difficult to take the whole thing seriously". You should listen to BP podcast #973, in which David and Rob taked about the following excellent post from Jonathan Green https://www.biggerpockets.com/forums/12/topics/1192867-the-5.... Check out number #3 and than make sure you don't get people to not reply to your posts in the future.

As if it wasn't enough, you added "If you want to get educated...", which is extremely arrogant. Of course, you don't know much about me but, you could see that I have more than 1,000 posts and likes. Had your taken the time to see the kind of replies I make, you might have concluded that they are always fact-based and that maybe I'm not a complete ignorant. Sometimes people disagree with my point of view but rarely with the facts I bring up. Also, for your information, I have received numerous unsolicited messages telling me that I write the best content in the forum.

I have been lending and investing in Latin America for the last 25 years. I've been responsible for credit/risk assessment for one of the largest Canadian bank for the whole area. I've been working on the legal side with the world's best law firms so I'm not sure who should be educating who. Now on to the substance of what you're "educating" me on:

I know that the credit rating was just raised. I know that but BB+ is still junk. It's like saying to parents your sun or daughter's grade has been raised from E to D. Does that make it good? I have no doubt that the bonds were 5x oversubscribed. Small amount and high yield and there's a clientele for that. That doesn't mean it's a good risk. The US is the main investor in most Latam countries by so that means little.

I never suggested that the Paraguayan legal system is useless. If just wrote that it's highly unlikely an investor in your syndication would recover any money in case the investment turns bad. If you don't understand why I wrote that, maybe you should get educated on legal matters pertaining to the region.

To conclude, I wasn't attacking you so there was no need for you to be defensive and there's nothing wrong in dismissing my attempt to help. You could just have limited your reply to "Thank you for your detailed response as well. There are some good pieces of feedback in your reply for sure". There aren't many investors active internationally on here and I could have been helpful to you. Wasn't that better than showcasing rudeness or arrogance? What would a potential investor who doesn't know you think if he were to read your reply?

If this makes you think, it wasn't wasted time after all.

This being said, best of luck in your endeavors!

Basit Siddiqi · Answer

I read some posts of @Mike Lambert in the past and I found them to be helpful and informative. Some tax topics to mention - 1. Depreciation may be calculated different for assets purchased outside of the united states.2. If you dispose of the property and pay taxes to Paraguay, you may need to pass foreign tax credits to the investors / partners3. If there are any foreign entities involved, there are very strict reporting requirements on reporting said foreign entities. Failure to report the foreign entities can result in high penalties.Best of luck

Chris Seveney · Answer

@Matthew C Dominy

Laws overseas and raising capital as you mention are 100% based on those laws - us laws may not apply - you will need several attorneys for this

To be honest the chances of getting us investors to invest overseas in projects will be very challenging as they will have little to no protections.

Just being upfront as it’s very difficult raising $ in the us - in another country makes it even harder

Mike Lambert · Answer

Matthew, if you want to do anything like this, you'd have to respect the law in every country in which you raise capital, for the capital raising part I mean.

The question you might want to ask yourself is whether you should be attempting to be doing that at all and if you're qualified for it. I've been investing internationally for years and I've never come across anybody that has done anything like this and for good reasons. So should you be the first one to do that. The commercial real estate market is littered with syndications turning bad in the US because they were made by inexperienced investors and you're going to attempt one in a far way risky country. Is that reasonable?

What you need to understand is that you'll have to disclose two things in your offering document:1. The investment is very risky, especially given that Paraguay's credit rating is junk and (even for lending to the government) so investing  there would be reckless for most investors any you would have to make that very clear, possibly in contradiction with your pitch deck.2. Should anything go wrong, the chances of the investor recouping any of their money invested in a foreign country when they're not on the title is 0. If they even try to attempt to recover anything through a court of law in Paraguay, good luck to them! They'll most likely lose even more money.3. To top it off, you live there so investors would have no recourse against you.

So in other words, for the investor, it's a very risky investment with no chances of recovery! I thought I was being adventurous investing in other countries but Paraguay I'd never personally invest there or invest other people's money there. I know plenty of people who invest in exotic locations but they've never invested there and won't. So, your chances of finding investors are slim, especially through a syndication. Be careful to not spend a lot of money for nothing.

Because I hate to be a party pooper and I understand you want to invest where you live (and you can't do anything about what the country is or does), this is what I'd do if I was in your shoes and wanted to use OPM to invest there:1. Offer my services to existing investors so I can learn first and have access to their networks.2. Start with friends and family. They might be willing to invest to support you because they know and trust you and they might be ok losing money in the process if it comes to that and you did your best still. Also, they might assume that you will do your best to pay them back even if there is no money left in the deal and you don't have any legal obligation to do so (and hopefully you're the kind of person who will if push comes to shove).

3. In my humble opinion, this isn't the right kind of opportunity to pitch to people you don't know (through syndication or otherwise). You need to establish relationships first and people need to know you. Yes, it'll take time but real estate isn't a get rich quick scheme.

4. It's a small minority of people who will invest in real estate in Paraguay. They need to have a high risk appetite, they probably need to have a connection with and know the country.

What I'd do specifically is go and live for a while in Buenos Aires, one of my favorite cities in the world and get to know people there (don't pitch right away). There are a lot of wealthy Argentinians and they love investing in real estate. Their country is in a much worse shape and so many of them invest mostly overseas. You could be their man on the ground there. Since Paraguay is a neighbouring country to them and they'll know it much better than Americans, speak the same language, have a similar culture and legal system, ..., if Argentines won't invest there, I don't see why Americans would.It's great to be ambitious but sometimes (if not all the time) you have to learn to walk before you start to run.

Hope this helps

Mike Lambert · Answer

@Basit Siddiqi

Thank you. Writing (quality) posts takes time that we take out of our "free" time so it's always good for the writers to know that they don't spend the time for naught.

Great that you mention the tax issues, which I didn't comment on because they're not really an issue in the countries where I invest. However, you didn't mention the elephant in the room. It looks that there's no tax treaty for the avoidance of double taxation between the US and Paraguay, which would mean that investors will be double taxed. I assume that Matthew knows that from the beginning if that's the case.

I'm one of the first to say that investors should be careful making decisions based on taxation, mostly or solely but I'll never invest and get double taxed, as that means low returns and I'm not sure which investor would ever do that knowingly. If you make a risky investment overseas, you'd want a much higher after-tax returns than you can get at home. At least, that's what I'm doing!

Matthew C Dominy · Answer

@basit

Thank you for these considerations. One thing on #2. I don't think I need to pass on anything. I need to document all local taxes withheld for my investors for sure. I receive foreign income where that country collects taxes and I need to report this information on my taxes to have the credit apply

Matthew C Dominy · Answer

@Mike Lambert

Some fair points. Thank you

Matthew C Dominy · Answer

@Mike LambertThank you for your detailed response as well. Please see this response in the best of light.While, I will take the feedback in your message that I think is helpful, I find it difficult to take the whole thing seriously (but noting that there are some good pieces of feedback in your reply for sure). Not that I am not open to feedback as I certainly am. But you have made several incorrect assumptions and statements. If you want to get educated, please read the below. With all due respect, your response was negative and ill-informed. I don't mind scepticism as long as the feedback is constructive and supportive.Below are some things for you to be aware of...Paraguay's credit rating was just raised from BB to BB+ citing a stable economy and the region's highest growth expectations. The government recently issued $1B in bonds which were oversubscribed by 5x, with the demand coming very much from the U.S. A simple Google Search will uncover these facts.BTW, I am not looking to do commercial real estate. And Argentina already is a primary source of investment in Paraguay real estate so no need to verify that. And by the way, the United States is the 2nd largest investor in Paraguay.The title will be in the name of the U.S. LLC. Yes, this is an area I am investigating. This is why I am coming to this group to hear things I need to consider. So thank you for keeping my attention on this. This is something I have considered, but need to ensure I nail it down.There is an assumption that the Paraguayan legal system is useless. Yes, it is not the U.S. But let's not go too far. In addition to the fact that the U.S. is the 2nd largest investor as a country, there are Americans who have invested in real estate here and are running successful STR businesses for instance.I plan to start with credible people in my network. This post was to make sure I had everything in order before approaching them. And the deal size is nothing very significant.I was not planning on raising capital here for a few reasons as mentioned in my messages.  So what local capital raising laws do I need to follow if this is the case?The opportunities are strong here with people who have the risk appetite for it. I acknowledge the difficulties I will face with this venture and who knows how successful I will be. I welcome all feedback, even criticism, if it comes from experience and knowledge.

Matthew C Dominy · Answer

Thanks Brock.The reason I am attempting a fund is that while I have 2 immediate opportunities, I was hoping to get some additional capital for the next opportunity that is TBD since the market is growing rapidly. But maybe it would be easier to raise less capital and have more proof of the market potential.

Brock Mogensen · Answer

I would suggest starting with syndications instead of fund structure, if you are planning to just do capital raises on a per deal basis. The legal and compliance side of a fund is much more complicated than a single syndication deal. We've done 13 syndications and just pivoted to a fund model..so talking from experience.

Process Of Starting A Real Estate Fund?

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