Why I'm Passing on Open Door Capital Fund 3

Question

First, I want to say a thank you to BiggerPockets and Brandon Turner for all they have done to help educate investors and of course I love watching and learning from Brandon's videos. Thank you.

When I read that Open Door Capital was offering another fund, I was excited but on reading the docs. However, I decided to pass for the following reasons:

1) The principals running the fund are not putting in any of their own money

2) They take 10% of the initial raise to pay themselves and fees, so you're starting down 10%

3) I would have rather seen 80/20 for 8-15% and 70/30 thereafter

At a high level, I love they are opening this up to all investors and its clear its super profitable for them. However, its really items #1 and 2 that were a deal breaker for me but even if this had not been the case, we still might have considered a bit too risky and might have passed anyway. I'd love to hear other folks thoughts.

Brandon Turner · Answer

Hey thanks for the post about the fund! That said, just to clear up a couple quick things:

First, I AM investing in the fund. I invest in all of my funds. I think the docs say that we don't "Have" to - but I am. I mean... that's the whole reason I got into this - I make too much money and need to invest it somewhere I trust. And I trust myself and my team ;) Anyway - I'm in!

Secondly - I'm not sure where 10% came from for fees. The acquisition fee is 2.5% upfront, not 10%, and that's fairly standard across syndications and funds. Some are lower, for sure, but mobile home parks have significant upfront costs that apartments don't, so it's designed to mostly cover salary overhead. There is an asset management fee as well on the income collected (which is also standard), but the targeted returns have those fees already assumed and accounted for.  So while I'd love to take a 10% upfront fee and be able to afford another dozen team members, that's just not the case. Hope that helps clear some things up!

Thanks!

Jason Merchey · Answer

Boy I wish this thread had continued!

Hamilton Hitchings · Answer

Brandon, thanks for the response and its always a good sign when the principals do not shy away from hard questions.  Can you say how much you'll be putting in?  With regards to the 10%, here's what I was referring to and maybe you can help clarify what the 10% or $3 million would go for since I am not an expert in this type of offering:"Company anticipates using all of the proceeds raised in this Offering towards acquisitionof the mobile home parks and activities related to the improvement and disposition of such parks,except for (i) 10% or $3,000,000 (in the event of a fully subscribed raise) for working capital,including the Acquisition Fee and (ii) legal and compliance costs of approximately $25,000. "

Valerie Hiscoe · Answer

Looking above I see that Brandon Turner said very clearly he was investing in the fund so I'm not sure if people aren't taking the time to read or what the problem is. And I don't think it's necessary for him to reply to a question about exactly how much he has invested in it. If it becomes a publicly listed company then I guess that will change but until then he has a right to some privacy. Or would you like to publicize your Investments? I'm looking forward to seeing both Brandon and hopefully Jay at the conference. Take care all.

Peter Tverdov · Answer

Most funds have a fee. A lot goes into running funds, hence the fees. Not having skin in the game doesn't bother me. I don't plan to invest in any of his funds, but just pointing this out.

Jay Hinrichs · Answer

@Hamilton Hitchings

Just curious I have seen other more established syndicators ( I think these are the first few this group has done together..)

put in significant sums and I would suspect they do that so they can be treated just like the investor and make returns on their personal capital.  ???

At some point when your giving away 80% of the deal or more you have to make money somewhere or why do it.. ton of work in these deals to only end up with 15 or 20% of the back end ??  unless there is some massive movement in values.

Just have to trust the sponsor end of the day  how experienced are they at what ever your investing in.

I think folks should not invest for one simple reason..   Hey this is BP stars so no way they would or could fail and risk their reputation.  while I get that thought process but sometimes thing happen out of EVERYONES control.. so at the end of the day all the folks on BP talk about taking emotion out of it..  I think same thing here  what is the underlying asset and how likely is it to perform.

Only thing that gives me some pause now is investor syndicators that in the last few years have taken on CALL debt we are seeing some really tough things happening in the CMBS markets.. those calls could be a big problem for some if that capital were to get very tight ..  I know we saw that in the GFC  perfectly functioning syndications that had balloon notes and there was NO refi available. that would be my only real worry right now..  And it may be moot  but still something to think about IE what do we do if the loan comes due and there is no refi  how does the group pay off the debt?

Paul Gutierrez · Answer

I appreciate this thread as I am considering investing in the fund.  Thanks for all opinions as well as for clearing up any misconceptions, Brandon.

Hamilton Hitchings · Answer

In hindsight I regretted not investing in OpenDoor Capital 3's fund.  However, it really came down to the fact we were not ready to invest in syndicate deals.  However, if we had been this was at the top of our list. Mobile Homes are such a great investment area but its way too risky & difficult to invest directly and thus investing through a syndicate / group is the way to go. The returns are very attractive and the biggest obstacle is perceived risk. I think one thing that could help boost new investor confidence is if existing investors in OpenDoor Capital's funds shared their experiences but regardless I think OpenDoor Capital 4's fund is worth a close look.

Tushar P. · Answer

No need to regret as it may be a good pass. Many syndicators claim skin in the game but ignore follow up questions as the fees they collect may be greater than their contribution. They would have nothing to lose when the deal goes south. I think their business model relies on showcasing successful exits during good times (everyone is a genius in a bull market) to ensure that there is no shortage of sucker LPs.

Marina Wong · Answer

In fact, most investors want to know how much the GP as a whole (not individual GP) invests. There needs to be an alignment of interest. Most GPs invest about 10-15%. Less than 10% are usually frowned upon. It is a very legitimate question to the GP group as a whole. Some GPs run out of money to fulfill the 10% and would get Co-GP for that reason.

Why I'm Passing on Open Door Capital Fund 3

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