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Building a Real Estate Fund with Melanie McDaniel · The Academy Presents podcast

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Did you know that 90 % of the world's millionaires
0:05
invest in real estate? Well, I'm Angel with the
0:09
Academy Presents Real Estate Investing Rocks,
0:11
and I'm here to help you if you want to go for
0:15
your piece of that pie. Are you new? Are you
0:19
new to this and you just don't know where to
0:20
start? It's okay. Are you someone that has invested,
0:25
but you feel stuck, you feel like you've lost
0:27
momentum, you don't know where to really head
0:30
from here? Are you a seasoned real estate investor
0:33
who is doing great but maybe you just want to
0:35
hone a few skills here and there? This is the
0:38
place for you. The Academy Presents Real Estate
0:41
Investing Rocks podcast will connect you with
0:44
industry experts so that you can save time, avoid
0:48
costly mistakes, and begin living the life you've
0:52
dreamed of all through real estate investing.
0:56
You're already taking the first step. just by
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joining us here today. Hey guys it's Angel and
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you're here for the Spring REI Rock Summit. You
1:07
know we've been having a great time. These are
1:09
my favorite six days of the year because we do
1:11
this twice a year and we would really love to
1:14
have you on the live side. Of course there is
1:16
a little bit of an upgrade that needs to take
1:18
place to get there but we've got the VIP subscription
1:20
that will take you there for free. So there should
1:23
be some QR codes or some links. There should
1:25
be something out there that can help you get
1:27
over to the live side with that VIP subscription
1:29
upgrade. And if you don't see it, let me know.
1:31
I will make sure it gets to you. All right. So
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we're going to talk a little bit about funds
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now. Well, we're not going to. My friend Melanie
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is going to, because I pretty much have zero
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understanding of how funds work. I know they
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give you money, they give you the checks, but
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I don't really understand some of those inner
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workings. So Melanie, I'm going to hand it over
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to you if you want to give us a little bit of
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your background and then we can get going. Yeah,
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um, so my journey was I was my background was
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military and law enforcement That's what I came
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from red rich dad poor dad and was blown My mind
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was blown like why am I trading my time for money?
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I want to invest in real estate So my path was
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real estate agent first after quitting the government
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job real estate agent Then I bought my first
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24 unit with partners. I invested passively in
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a syndication And then from my experience buying
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the 24 unit, I realized I really just wanted
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to be on the capital side. I love talking to
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investors. I love finding deals. I love finding
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partners. So in early 2020, January, I launched
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Freestyle Capital Group from Thailand because
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that was another part of my intention was to
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have a lifestyle where I could be anywhere in
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the world and still work. So that's why the capital
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side made more sense as well. And yeah, it was
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a drag those first few months because COVID happened.
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and who knew at the time like if we should even
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be investing in apartment complexes if you remember
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in 2020 the moratoriums and all the unknowns
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and well anyway um so 2020 I didn't do any deals
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at all I spent time launching and building the
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business going to virtual conferences lots of
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virtual meetups remember it was like zoom zoom
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life for 2020 it was Yeah, whatever. It's okay.
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The timing was actually perfect because I met
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a lot more people than I probably would have
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if we weren't forced to be online. And then 2021,
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I did my first deal in the summer. So I went
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a whole year and a half before doing my first
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deal. And then once the first deal was done,
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which by the way was an SPV, which is a form
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of a fund, we'll talk about that in the presentation,
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and then did a couple of co -GP deals, and then
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launched Freestyle Fund, which is my current
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fund, it's a customizable kind of evergreen fund,
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and now you don't know, and I haven't told anybody,
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but I'll probably be out by the time this airs,
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we're recording it early, but I am launching
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my third fund, and it will be a 25 million dollar
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fund. Holy night, that's huge. Nobody's nobody
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knows but you right now. So I'm gonna go ahead.
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Unfortunately the timing it will be a little
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a little uh behind and hopefully everybody in
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the world will know by the time this airs that
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I will be launching that. So anyway what can
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you see? Can you see our faces or? I can see
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our faces and I can see the title page of So
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You Want to Start a Fund. It's a friend journey
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ahead. Yes, it's a very fun journey, but not
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really. So the next page, I'll give you all of
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the disclaimers and disclosures and the don't
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do it talk. But first of all, funds are a next
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logical step for a lot of people. A lot of people
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do a lot of individual deals before they do the
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fund. There is a stop before that, at least how
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I did it. learned a little, I did some stuff,
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learned enough to launch the SPV, which is a
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single purpose vehicle, which is a single asset
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fund, and then launched my fund. And now obviously
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I can go bigger. So my journey has been learn,
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apply, learn, apply, learn, apply. Some people
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can go big on their first one, but I just, I
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don't know, maybe it's my mindset. Maybe I'm
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not like thinking big enough. I'm always just
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kind of bite off a little bit, chew it up a little,
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then bite off the next thing. So. Let's talk
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about this. Disclosure, I am not an attorney.
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I'm not a CPA. I'm not giving financial advice.
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I'm not even encouraging you to start a fund,
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okay? Handling investor money and managing a
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fund is a huge responsibility and has huge consequences.
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Before considering launching a fund, make sure
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you actually know what you're doing and you have
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the professional support needed to be successful.
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This is no imposter's allowed club. don't know
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imposters people ask me like well what about
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imposter syndrome well if you have imposter syndrome
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you're an imposter stay out you're not welcome
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to the club okay it's not a place to fake it
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until you make it screwing up in this line of
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business can break you make you broke oh i can't
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move our faces i can't read it um or it can land
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you in jail if not done professionally so it's
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your fiduciary duty to investors to know what
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you're doing so if it if it doesn't do the aforementioned
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it will at least screw up your reputation and
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send you crawling back to your W2 faster than
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you can say, I'm sorry, I didn't know what I
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didn't know, but I had the best of intentions,
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I promise. On the other hand, it can be fun and
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rewarding if done well. So to sum that up, there's
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a lot of learning to do, and not just your own
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learning, but you need a team to get this done.
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So basically, what's a fund? It's an entity formed
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to pull investor funds to buy securities. We
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are going to talk about real estate. So real
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estate is the security. Actually, it's not really
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the real estate because it's, as we know when
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we do an LLC, we form an LLC for a syndication.
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You're actually investing in the company, not
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the apartment itself. You're investing in the
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company that owns the asset. So we'll talk about
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a real estate fund. My new fund is going to be
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a fund of funds. So my fund will invest in other
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funds that invest in whatever asset class they
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specialize in. But we'll talk about that along
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the journey. We'll start small. So some of the
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topics, my journey to launching funds, syndication
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versus a real estate fund. How do I get started?
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Where do I go for help? How much does it cost?
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How much money can I make? How do I find investors?
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How do I find deals? What platform or portal
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should I use? Can I do this as a side gig? plus
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whatever else comes up. And Angel, feel free
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to interrupt at any time that you have a question
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or whatever. So my journey, I told you I was
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an agent first, then I did a joint venture buying
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my first 24 unit. And then I was attempting to
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be a co -GP because in our space, if you want
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to. be a capital partner on a GP team. Some people,
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you have the acquisitions team, the people who
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talk to brokers, the people getting the loans,
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you have people walking assets, doing inspections.
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And then once the deal is closed, that's their
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job. On a team, they're usually done. The next
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team takes over. It's the asset management and
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refinancing, getting the business plan in place
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and divesting the... the asset at some point
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so they're in that team you kind of have the
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acquisitions team and you have kind of the asset
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management team and capital falls typically in
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the ask the acquisition side though everybody
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on the team should be raising capital for a deal
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but some people are just better at raising capital
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that's their specialty so that's a bulk of what
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they do but we can never get paid to raise capital
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only you need to have other jobs or you need
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to be a broker dealer. So you need to have a
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license in order to do that. So my first attempt
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at being a co -GP with the purpose of raising
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capital, being investor relations, doing due
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diligence, whatever it is I was going to do,
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I kept failing. Because every person I would
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go to, like, hey, I see you have a deal. I'd
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like to participate. And they're like, OK, Melanie,
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sure. We like you. How much capital can you raise?
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And I'd be like, Well, I don't know. I've never
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done it before. So it was always a door slamming
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in my face, door after door after door. So that
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Best Ever Conference 2021, because that was the
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first one that was online. I went to Best Ever
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2020 in person. But at that conference, Hunter
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Thompson was teaching on these SPVs, these single
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purpose vehicles, which are a fun. They are a
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security. and they fall under not just the SEC,
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but FINRA. So two totally separate entities,
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very important to know the regulations of both.
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The SEC regulates the securities and FINRA is
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for more of like your broker dealer, your registered
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investment advisors, that side. They're actually
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two separate entities. And by the way, they're
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federal. But states also have an SEC at the state
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level. So it matters when you get into funds
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where lots of complexity when it comes to funds.
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So SPV, Single Purpose Vehicle, I raised about
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a million, it was 975 or something, deployed
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that into another deal. We got co -GP shares.
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We did take a fee as a due diligence fee for
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the management team. We got CodeGP shares on,
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or sorry, GP shares on top of our LP shares.
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We ran all, we were running all of the shares
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to our investors. So our investors get the GP
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shares and the LP shares. So they're kind of,
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they're bumped, they're boosted. And then when
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we hit a hurdle, when the investors hit a hurdle,
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that's when we'll take a carry or a promote inside
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our little SPV. So my investors will get 14 %
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before they ever have to share anything with
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us. That's how we chose to structure it, and
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that's what we did. Fast forward, I am not necessarily
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confident that an SPV is the tightest vehicle
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when it comes to FINRA. For SEC, probably fine,
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but for FINRA, arguably, if you're raising capital
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for the purpose of investing in a specific asset,
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then you are acting as an investment advisor
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even if you're not registered. You should either
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file an exemption or maybe not do it. I will
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say it's a gray area, which is funny with attorneys.
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Some are fine with SPVs and some say just don't
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do it. It's one of those gray areas. It was the
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first one I did. I've done it a little different
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since. And of course, the third fund will be
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done even more different. Why? Because I learn
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and apply, learn and apply, learn and apply,
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and things change as you learn more. So that
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was the first fund I did. And then after I had
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a track record, I was able to raise some capital.
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Now when I was going back to GP opportunities
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or CoGP, they would say, how much can you raise?
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And then I kind of had an idea of how much I
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could do. So I've done a couple of CoGP since,
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assisted living, triple nets. I think that's
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it for CoGP. And then shortly after I did a couple
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of those smaller CoGP deals, I came across Avestor,
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which is the platform I use for my current fund,
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freestyle fund. And it's kind of like, Robin
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Hood for stocks, but for real estate. So I put
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deals in there. People can go into the fund and
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they can select only the deals they want to take
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part in. They have access to the underlying deal
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information, the sponsor information, the OM,
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the webinar, whatever information I have, they'll
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have access to. And then they get to decide deal
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by deal what they invest in. So if I have apartments,
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build to rent, development, whatever, they can
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go in there and say, you know what, I like apartments
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and storage. I don't care about anything else.
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And they get to pick deal by deal what they invest
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in, and then they create their own little pie
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chart. And then it's on them to diversify their
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portfolio across what I offer. So that's what
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I've been doing for the last year. 2022 is the
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first full year. We have four deals in there,
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and lots of learning, lots of working out the
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kinks, but so far, so good. I think the first
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year is always the hardest year of a fund. if
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it's a new fund I'm hoping my my next fund the
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first year is not hard because I only have one
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year to raise the money so because it's going
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to be a closed fund this is an evergreen fund
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I'm always putting deals in there and always
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uh raising for whatever whatever the deals are
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blind fund is my next stop so my fund of funds
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will invest in other funds so I'm raising a fund
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and I will deploy 10 million there five million
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there five five whatever and it's blind because
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the investors don't know what the deals are.
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Where in customizable or closed fund they well
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that's not true not the closed fund part but
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customizable or evergreen then they well they
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know on the customizable sorry just customizable
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they know or spd they know what the asset is
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they're investing in for a blind fund they're
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just trusting me to deploy the capital in within
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the parameters of my thesis that I'm sharing
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as the fund and they decide if they like me and
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my thesis then they'll invest trusting that I'll
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go deploy it smartly. So the SPB they're still
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driving and in the fund of funds you're driving?
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So in the SPB they know the asset It's a single
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purpose vehicle, meaning it's a single asset
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and we're investing for the purpose of that asset.
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In the customizable fund, same thing. It's like
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a bunch of mini SPVs inside the one fund structure.
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And I did that to save money because it's expensive.
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Every time you launch a fund, it's expensive.
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It's not cheap. So the customizable fund, I thought,
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well, if I can. launch the fund and keep doing
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individual deals in there, then I can spread
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the cost of launching the fund one time across
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many, many assets and a lot of money. So it's
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much cheaper. I'm all, as a fund manager, I'm
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always about keeping things affordable. I'm very
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scrappy, kind of bootstrappy, but for the most
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part, just very conscious of the costs of the
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fund because it dilutes returns if you're spending
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too much money running the fund. And I'm an investor
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first, so I care about those things as an investor.
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And then the blind fund, you have a very tight
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thesis and shopping parameters, and then I can
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go and invest the money in anything that fits
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in that thesis because they're investing based
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on that thesis, if that makes sense. Any questions
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on those? Well, I mean, it makes sense. So in
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the one where they can choose, So the customizable,
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then you're kind of saying, okay, this is, this
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is my big buy box and the stuff in this, in this
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fund fit that big buy box. And then when you
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go to the fund to funds or the blonde one, then
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it has to be a much tighter set of parameters
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because people need to be able to trust that
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there's a higher likelihood of the projections
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reaching. Yeah. I mean, the customizable fund,
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my buy box is big. It's real estate basically.
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Right. And then they'll decide which deals specifically
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they want to invest in. Where a blind fund, my
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thesis just, I can't say anything in real estate,
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come invest with me, nobody's gonna invest, right?
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But if I say commercial real estate, third -party
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audited financials, a 20 -year track record from
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sponsors, and they all send me a Christmas present
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every year, whatever, I want the thesis tight.
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So the investors when they're investing, they
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know what the buy box is. Until I prove myself
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as a fund manager, and I'm like BlackRock making
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$100 million a month because I manage that fund,
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I just have the trust. I don't have that yet.
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So I have to have a tight buy box where someone
16:49
who has a long track record, great fund manager,
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they're winning awards in fund management. Maybe
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you can have a bit bigger box because your track
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record and your name is why people invest and
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not your thesis. got to work our way to the big
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leagues, right? Absolutely. So just basically
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syndication versus a real estate fund. We're
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talking a syndication is a single deal. Sometimes
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I've seen syndications where they'll or an SPV
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where they'll throw multiple assets in one or
17:18
two or whatever, but it's still very specified
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and the underwriting is available for each individual
17:24
deal versus like a portfolio. So a real estate
17:28
fund, I'm a fund of funds. There's also a real
17:31
estate fund where if you had a fund and all you
17:33
did was go by apartments in South East United
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States, 200 units or above, 50 % LTV, XYZ thesis,
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then within your real estate fund, you can go
17:46
shop in those parameters. So it's a portfolio
17:49
and probably blind if it's a real estate fund.
17:53
Otherwise, we're talking SPV or a single deal.
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Special, specific deal vetting versus vetting
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the manager. So in a syndication, the deal, you
18:04
can really underwrite the deal. Where in a fund,
18:07
the manager's track record and experience is
18:10
really what's going to get the fund to make money.
18:15
Their ability to select good deals or good other
18:18
funds to invest in. So as I'm speaking to investors,
18:23
like when they're trying to pick, do I go with
18:25
an individual deal or a fund? So syndications
18:29
are probably not audited third party audited
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where real estate funds if they're big enough
18:34
will be Because they have to be at a certain
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point. I think it I don't know if it's a hundred
18:39
million or something It's required to be audited
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by a third party Where a syndication you would
18:44
never pay for that's very expensive to have a
18:46
third party audit your financials But I say most
18:49
likely because it's still it's possible