All Forum Posts by: Randal McLeaird

Hey Dan,

Not sure how well you know the lender but it's always good to ask them what they want (return that is) not necessarily give them what terms you want. You might find that they just want a secure investment with a return lower than you were willing to offer. 

I'm in the same boat as you, looking for funds to do more deals. Can I ask how you came across this lender? Is it someone in real estate or just someone with some money they need to place and you're making the pitch to put it with you? If they're not familiar with real estate, how did you get them interested enough to sit down with you? 

Good luck at the meeting!

order property specific deposit slips and send them to each tenant at the start. when they deposit the check at the beginning of the month, it shows the property address on the deposit slip for easy tracking

@rafael vargas

Hey Raphael - congrats on the deal. From the numbers, this is a much larger deal than the typical SFR wholesale deals I come across in San Antonio so this advice may not work in your situation. However, if your sole goal is to keep the seller from seeing your profit, the easiest way is to close the deal at a title company that will provide two separate HUDs. Title companies have the option of printing out a Seller HUD, and a Buyer HUD. All the figures are the same on each and the bottom lines are the same as if they were printed as a fully disclosed HUD. The difference is that the Seller HUD only shows the seller's side of the transaction so they have no idea what you have to pay, or if you got a loan, what your loan fees were. The same is true for the buyer's side, you never see how much the seller makes. Therefore, if you tack on a 1/4 mil assignment fee, the seller just see's their bottom line and nothing else matters. Ask your title company if they will do that for you and you have an easy, no cost solution. Again, congrats on a deal like that. I'd be interested in knowing more about it just for the story.

Bill, I'm sure you could answer that for me but here is my understanding if you're talking about a public REIT or MF:

I'm not publicly advertising for funds, I'm using less than 30 or so investors (or accredited), and I'm under a certain dollar amount

Those were the exceptions as I understood them.

My attorney is the one with the better answers and the guy doing the paperwork. He's raised money, taken companies public, and done all that I'm trying to do so that is about as good as I can hope for.

Haven't yet. I've heard a few things and came across some posts on here while researching the reg d. my attorney mentioned it but didn't have any concrete facts to tell me. I appreciate the link. I'll review it and see what options are available.

Have you had success with crowdfunding?

Just in case anyone is following this thread or reading it in the future, I wanted to post an answer to my own question regarding a system for paying investors in your fund.

I was racking my brain trying to come up with a complicated system of profit sharing and no one was really helping me with information about how they structured their payouts until I sat down with a commercial developer. I mentioned my plan to raise some capital and explained how I thought it would be beneficial for me to pay out a fixed rate of return annually. I also mentioned a profit sharing strategy and went into a convoluted explanation of my plan. He stopped me and said what I was proposing was too complicated for what I was trying to do. He suggested a simple preferred return to investors and then a profit share %.

Example:
$100k invested
9% preferred return
25% profit share

Assume $50k profit year one. Investor would receive

$21,500

This may sound like an obvious thing to anyone who has done this before. However, I felt like I was trying to reinvent the wheel with a complicated system so it made my life easier to hear that type of proposal.

yeah I get the idea that the percentage return could be the same for all investors yet their yield would differ because their principal amount is different. I'm really just asking what you, or others, have done/offered that's worked in the past.

I'm using the funds to buy and rehab. Again, I can work out different scenarios. The math isn't the issue. Just looking for some guidance on specific strategies you, or others, have employed when raising capital. What worked and what didn't work so well. What did you offer. Did you go for equity partners or lenders? what is your experience...?

Sorry if the initial post made it sound like I didn't understand some of the basic concepts. That came from me trying to do brackets for investment levels and in my mind, a guy investing $25k year one fits into a 2.5% return on NET PROFIT and compounding their investment to have around $27,500 (just pulling out numbers) in year two - shouldn't receive the same amount (2.5% return since he's still under $50k bracket) as a guy who invests $25k in year two. This is why I came up with a load factor for their % contribution of total fund and that would be added to the base rate of return for that investment bracket. All that seemed to be too complicated so I just changed it to a simple % of the total fund they had invested and they would get paid based on that. Again, I'm pulling in arbitrary numbers but this is what I'm talking about:

Investor 1 - $100k
Investor 2 - $50k

Total Fund - $150k
Total Profit year 1 = $100k

Investor 1 expected return
$100/$150 = 66% of total fund or 6.6% return on Profits or $6600 yr 1

What I'm saying is, I'm arbitrarily making up the return for the investor based on 1/10 of their investment in the total fund amount. There are so many problems with this type of scenario that I'm not going to go into it but that is why I'm asking what others have done in order to come up with that percentage for the investors. I'm just asking that question because I've not had to do this before and seeing what someone else has done will open my eyes to the different possible structures.

I'll keep digging and I'll see if there are some books or other threads on this. Thanks for your posts J - keep em coming and I'll try to come up with a more concise way of asking what I'm trying to find out.

the simple answer would be whatever is more attractive to the investors. In reality, I would prefer to pay private money rates on their investment so any of the excess profits after paying out their interest earned are held by the company. how attractive that is for an investor...I don't know. But the nut grows a lot faster that way as far as I can tell.

I've run scenarios with equity investors and that seems like it would be more attractive from an investor point of view but that's where I'm not sure of the structure used by others in determining the return for the investor. One who puts in $300k shouldn't get an 8% return based on net profit if a guy putting $25k gets the same return. So, I thought about doing brackets for certain investment levels ($50k,100k,200k) and then adding a load factor for their % of the total fund but these are all just guesses and arbitrary. So, guidance and advice is welcomed.

Thanks

I recently read through as many posts on BP as I could regarding raising a small amount of money to use for my acquisitions. After going through - what appears to be a normal knee jerk, 'I'll just start a company and have friends and family invest in the company and I'll use the money at my discretion to buy whatever good deal comes along' - I've realized it's a little more complicated than that. Not much, but thanks to the posts here, I stopped making projections and started figuring out what actually needed to be done to be legal when asking other people for their money.

So, this is just an informative post for anyone else looking to raise capital - big or small fund.

In my case, I'm looking to raise less than a million. If you call up a big corp and securities attorney in your area, you may get similar responses...from no response to, 'well i guess you gotta start somewhere' with no indication that they wanted to waste their time on a peanut fund. I simply shrugged those statements off and kept doing some research and listened to the great podcast BP just put up about raising capital:

http://www.biggerpockets.com/renewsblog/2013/01/31/raising-money-getting-started/

I finally heard back from my RE attorney (who has already done PPM and reg d filings for himself and others and used to be a corp attorney) and got a price of $10k to setup the reg d offering. I also found some online resources claiming to do it for $3500 and they set you up with a consultant, help with the marketing of your fund, and have a list of brokers who can help sell it as well.

It might seem like overkill if you're just going to borrow money from you family/friends but if you want discretionary power and the ability to draw the funds quickly without getting a bunch of signatures from the investors, this is the way to go and still be covered. As many have said - so said my attorney - the docs are to protect the guy controlling the funds because you're disclosing the risks to the investors. My advice (for what it's worth), if you're looking to raise money and you don't want to do a DOT for every single deal, spend some time speaking with your attorney and it shouldn't be very difficult to set it up the right way the first time so you can ask friends and family while looking like an absolute professional.

Now, that said - I'm curious what others have done to setup a return that is fair for the investor and fair for the fund and fair for the manager. @brian burke mentioned in his podcast that his guys made close to - or more than - 20% in the first year. I've run some scenarios for realistic projections based on previous rehabs and number of rehabs and I can project the same type of returns for my investors but I'm not sure on some of the specifics. For example, when do you pay out the profits, are there penalties to the investors if they pull out of the fund before a certain number of years, do they roll over the profits they've made and if so, are there incentives for that other than compounding, are you paying out - or allocating - ALL of the profits to investors or yourself each year (meaning if the fund closed tomorrow would you keep the chunk of money left over after paying out the investor profits and initial investments or would you divide that chunk up between all the investors), are you paying yourself a salary for managing the fund and if so, are you also profit sharing??? I ask that last one because once I switch over to a fund like this, the money I am currently pulling out of each deal to live on, would need to stay in the fund and I'm left with no income until the end of the year if that's when the fund distributes profits.

So, now I'm going to sit down and speak with my attorney about those questions and how to setup the fund to be as attractive to investors as possible but I'd love to get some real world experience in on this convo. If you've done a fund like this in the past, any info you can provide would be helpful.

Bill Gulley - glad to hear I picked a few winners. I'll look up the urban economics and plow through it as well. Musical/arts background - negative. I pick up the guitar once in a while but can't say I'm any good at it.

Rob Gillespie - definitely helps. I was considering joining the local apartment association (it's around the corner from my house) but I've put it off. I'll get to it. The other one is new to me but I'll look into it. I have some buddies in CRE now and we drink and chat but I try not to make that the only thing I talk to them about. So, I'm glad you mentioned those things.

thanks again fellas