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

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Did you know that 90 % of the world's millionaires
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invest in real estate? Well, I'm Angel with the
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Academy Presents Real Estate Investing Rocks,
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and I'm here to help you if you want to go for
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your piece of that pie. Are you new? Are you
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new to this and you just don't know where to
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start? It's okay. Are you someone that has invested,
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but you feel stuck, you feel like you've lost
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momentum, you don't know where to really head
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from here? Are you a seasoned real estate investor
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who is doing great but maybe you just want to
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hone a few skills here and there? This is the
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place for you. The Academy Presents Real Estate
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Investing Rocks podcast will connect you with
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industry experts so that you can save time, avoid
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costly mistakes, and begin living the life you've
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dreamed of all through real estate investing.
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You're already taking the first step. just by
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joining us here today. In a syndication, you'll
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probably take a $50 ,000 check, maybe even a
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$25 ,000 check. But in a real estate fund, if
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it's big enough, you can't take a $50 ,000 check.
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If you only have 99 seats in your fund and you
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want to raise $25 million, the average check
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size needs to be $260 ,000. So you can't even
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take a $50 ,000 check. You're going to limit
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yourself to how much you can hit in your fund
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because these talking about the 25 million or
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99 investors, these are set by the exemptions
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that you can qualify for, for not having to register
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your security. And I know I'm talking completely
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bogus right now. Well, maybe we'll get into that
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later. These are things that you need, you need
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to know. That's the FINRA side and not the SEC
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side. The registrations, the exemptions are SEC.
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So you have the 506C exemption, 506B, You have
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reg A, reg S, reg CF, whatever. You have to qualify
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for an exemption or you need to file your security,
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which is very expensive and it takes about a
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year. And nobody has a year to put their legal
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stuff in check so they can go raise money for
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their deal that they have under contract. Nobody's
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going to... You're chasing exemptions and some
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exemptions could be the number of investors,
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the type of investor, meaning accredited, non
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-accredited, qualified, whatever. or the amount,
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like the 25 million or the 100 million or whatever.
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So you want to qualify for an exemption that
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gets you to not have to file. For the SEC, it's
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the registration. And for FINRA, you don't have
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to be a registered investment advisor. You want
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the exemption to that. So you have two regulatory
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entities that you need to file or qualify for
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exemptions under. We'll talk about later how
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you get around that because it's very important
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that you have an attorney working for you, right?
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So barrier to entry versus more skill required.
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It's easy to go buy an apartment complex. honestly,
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then to go and start a fund and have the skill
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required, not just to find deals, that's easy,
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but to get investors to invest with you because
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of the track record issue. So if you do want
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to do a deal and you're new at this business,
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go to a syndication first, go do an SPV first,
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and then build your way, get your track record
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going, I guess. syndication investors and real
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estate fund investors are usually totally different
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databases honestly because if someone subscribes
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to investing in individual deals syndications
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that they can underwrite and vet they're probably
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going to have zero interest in your blind fund
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some people love a blind fund because it's diversified
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they don't want to look at individual deals they
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just want to find a good fund manager put their
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money there and they can that's it they know
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they're going to be diversified within the fund
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so they're two completely different investors
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in my opinion I mean, you might see crossover
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here and there, but typically it's not the same
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investor. In a syndication world, syndication
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investors need to diversify their own portfolio
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by investing in lots of individual syndications.
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And in the fund world, you can invest in one
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fund. You really trust the fund manager and you're
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diversified automatically because you're in the
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fund. And then we kind of talked about evergreen.
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That means it's, you can always invest in money
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can keep going into the fund. Open and closed
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means the fund opens. You raise capital for a
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year and you close it. Or if that's a closed
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fund, you close it. Otherwise open is like people
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can come and go in and out of the fund under
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certain parameters, which is really for a fund
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manager, a lot of work. I love the idea of a
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closed fund. I spend one year raising it, deploy
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all the capital, close it and sit and just manage
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it for like seven to 10 years, and that's it.
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If it's open, then you're constantly raising
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capital. You're constantly finding new deals.
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You're constantly divestiture -ing instead of
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getting investors out as they want to be. I'm
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not there yet. That's not interesting to me,
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but it's harder to raise for because it's illiquid.
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A closed fund is illiquid. An open fund is somewhat
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liquid. Usually, investors can get out with enough
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notice and under certain parameters. Customizable,
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we talked about that, and I don't know why. What
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is under customizable? What's the next word?
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It says blind. Okay, so we talked about that.
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I've got part of the Zoom bar down there. Blind
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Funds. So the investors are investing for the
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investment thesis and not the specific deals.
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So how do you get started? All this stuff I'm
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talking about, the SEC. FINRA, how to structure
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a fund is a whole other topic. Investment thesis,
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because you need to create that, your business
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plan, your investment thesis. These are things
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you need to learn before you can even think about
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launching a fund. Even if you think you have
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the best idea ever, you need to do it legally
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and you need to be structured appropriately and
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have the wherewithal or hire somebody to actually
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run the financials of the fund. because you're
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getting into legal land and people's money and
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you need to do it perfectly. So how can you do
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that? Find a mentor, someone that's done it before
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you, and they could be professionals where you're
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paying them a consulting fee. It could be just
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someone that really believes in you and your
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cause. You can give up some GP for their advisor,
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whatever. You need a really great SEC attorney
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and potentially a FINRA attorney honestly for
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most basic funds like a 506C, 3C1 like I'm going
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to do or I have and will do again. I don't need
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a FINRA attorney but if you're doing something
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more complicated or maybe you're getting into
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REG S or the CF, the crowdfunding one, you might
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need a FINRA attorney. a great CPA, which might
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be built into fund administrator. And if you're
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going to administer your own funds, good luck
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to you. I mean, I'm administering my fund right
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now, Freestyle Fund, and it is a nightmare. And
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I don't love accounting, but I have to do it.
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I forced myself to do this piece because I wanted
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to understand it. But you better believe on the
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big fund, the next fund will be a professional
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fund administrator. you're dealing with people's
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money and you need to do it very accurately and
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have it in checks and balances. So for like a
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fund administrator, if they were gonna make a
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payment, you have to sign off on the payment
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and I can't go spend money without them signing
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off on it. Either it has to be part of the budget,
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it has to be in the financials, whatever. So
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I'm not going off and taking lavish trips on
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my fund dollars or something like that. So tech,
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you need a CRM, your client relation management
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tool or a spreadsheet or however you're keeping
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track of people. Your fund administrator will
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probably have built -in CPA, accounting, bookkeeper,
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whatever. An investor portal is very important.
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I know there are plenty of syndicators or fund
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managers that don't use investor portals, but
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there is, like imagine if you're an investor,
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it's kind of. commonplace, to be able to go log
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in somewhere, look at your documents, look at
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your return profile, you know where to get your
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tax information, you know where the updated newsletter
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copy is, whatever. I personally think it's a
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you have to have an investor portal just to play
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with the big dogs. Deal analysis, if you're not
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the person analyzing the deal, you need professional
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analysis, whether it's an individual deal or
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if you're analyzing a fund with audited financials
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like I get it, they're audited, I'm looking at
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the report, but I don't really know what that
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means. So I need to have somebody actually analyze
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the analysis on my behalf if I don't have that
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skill. Your reporting platform, that's kind of
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your investor portal, newsletter platform, however
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you're setting out your newsletter. Social media
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strategy know what the law is know what you can
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say online And then of course just the marketing
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aspect if you know how to run ads or how to find
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people great You know, that's part of part of
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the business Deal flow so chicken or the egg
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problem, right money deals money deals Do I go
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raise the money first or do I find the deals
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first? Arguably should be doing both especially
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if you're doing a blind fund. You should at least
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have a couple of either properties or funds,
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if you're doing a fund of funds, already identified.
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Because you don't want to be like, OK, starting
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a fund, send your money. And all of a sudden,
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that money is sitting in an account diluting
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because you don't have anywhere to place it.
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That's the problem with a lot of people in funds.
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They've taken all this money. They don't know
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where to stick it. It's costing. It's diluting
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returns because the money is not deployed. And
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then they feel forced to go buy something they
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didn't actually want to buy. So for me and my
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fund of funds, I will not call capital. I will
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get soft commits. But I will not call capital
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until I'm ready to deploy it. I don't ever want
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to have more money in my fund account than is
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actually committed. So deal flow and money. I
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have a question on the social media part. So
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our rule in our GP team is until we are fully
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subscribed, we don't post anything. Now. Yeah.
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Now, so we have like whenever we get the loan.
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that people that give us the loan will post hey
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we just closed on xyz property but we don't post
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until we are fully subscribed are you doing a
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506b yes well that's why you can't advertise
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but if you have a 506c you can advertise all
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day okay i can run ads and raise all sorts of
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capital for my deal because it's a 506c okay
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the difference is my investors need to be accredited
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and i have to verify that so i can advertise
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But for a 506B, you're taking sophisticated investors,
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not accredited. You can't advertise, but you
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also don't have to verify with a self -accredited,
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you know, verify or self -verify. You don't have
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to do a third party verification. So yeah, you
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better not be advertising if you do 506B deals,
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right? My favorite person to listen to on all
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of this type of stuff is Mauricio Rold and his
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YouTube channel with Premier Law Group. He talks
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about what you can and can't do, can and can't
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say, when you can or can't say something, depending
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on what type of deal you have. But yeah, if you're
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doing a 506C or a Reg CF or whatever, or something
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where you're only taking qualified investors,
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you can pay for ads. send mailers, you can do
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whatever. You can put it on the Super Bowl commercial
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if you want. It's the 506B that you can't. And
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then even if you do a 506B and you close and
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you advertise and you start immediately raising
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on another deal, then arguably you're conditioning
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the market and that could look bad as well. So
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again, lean really heavy into your attorney so
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you know what you can and can't do, for sure.
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That's great advice. In my fund, I can only take
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accredited investors, so it would be silly for
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me to do a 506B. I mean, I need a lot more exposure
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to raise $25 million than a deal. So how do you
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get started? Meet people, build relationships,
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investors and partners. And by partners, I actually
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mean your mentor and your consultants and whoever
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has gone before you. So coaches, advisors, I'm
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gonna have an advisor on my board that is a professional
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fund manager because I have blind spots. I need
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someone to, I have great intentions and I know
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some stuff, but I don't know what I don't know.
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And that's where the advisor comes in. A coach
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is paid typically, an advisor could be paid salary
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or potentially in GP shares. A mentor may or
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may not be paid. You could pay them in GP shares,
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but typically the difference between a mentor
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and a coach is one's paid and one's not. I mean
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arguably you could whatever. Professional underwriters
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or any other professional. I mean your attorney
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and your CPA are your professionals as well.
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So you're setting up the fund the right way out
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the gate so you don't have stuff to undo later.
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Or if you really are new to the game and you
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want to skip over, do a deal, co -GP, SPV, whatever,
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then you better work for somebody or really partner
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with somebody that knows what they're doing.
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So those are just a few ways to get started.
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How much does it cost to run or launch a fund?
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Now this varies completely. depends on how much
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money you want to raise, honestly, because there's
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more regulatory stuff and insurance is higher.
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The larger your fund, the more insurance needs
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to be paid so your attorney is even going to
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charge you more just to do your paperwork. So
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up to 25 million, typically you're in the lowest
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tier. Above that, it starts costing quite a bit
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more. So to do an SPV or kind of a starter fund,
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you could do a done for you product. They can
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raise range from 5K up to, you know, I mean,
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25K. These are very vague numbers, but there
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are companies who kind of have rubber stamp copy
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and paste sort of PPMs that you can take a chance
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on, go pay your five grand and get your fund
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docs. There are platforms that supply that. But
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if you don't know what you're doing, man, that's
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going to be a tough road. There are companies
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that do the done for you. They have a product
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though. They're a little bit more customizable
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as far as the legal docs go, but they've kind
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of put a product together and that's like my
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current fund would be like on a Vester. VeraVest
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has a Done For You product. There's a new company
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that was advertising some sort of Done For You
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product as well. There's some out there. Then
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you have kind of, I call it the black card because
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I'm thinking of Bridger Pennington. He's a He
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teaches how to launch funds. He has investment
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fund secrets. That's his platform. He has a conference.
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I've been to it. And he has a black card program
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where you pay him a bunch of money, but you get
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his access to his attorney and you get his legal
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docs that he spent a bunch of money on. You kind
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of get help in a mastermind or whatever. So we'll
16:02
call it a mastermind. A la carte, you could piece
16:05
it all together yourself. get your attorney,
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your FINRA, you know, do it all kind of yourself.
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And that can range, like these fund docs can
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be $80 ,000 just to get your docs together. Again,
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it depends on how big your fund is, what the
16:17
structure is and how ready you are knowing what
16:20
you want and how you want to structure it. Cause
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if you go to an attorney and you're like, Hey,
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I want to start a fund. And they're like, okay.
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Basic question, how much are you raising? Well,
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I don't know. How are you structuring it? Well,
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I don't know. What's your waterfall? What are
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your splits? What's your thesis? And you're like,
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I don't know. And they have to help you. Then
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you're going to be paying them a really high
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hourly salary or whatever to help you. do that
16:45
stuff where if you kind of know what you're doing
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and you go in and you say here's my business
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plan here's my investment thesis here are the
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splits I want here's the timeline you know whatever
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it'll be less so that would be the alacarte method
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and then once it's launched so that the cost
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of just launching is mostly your legal docs getting
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your platform set up whatever that is any marketing
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you're going to do that costs money you have
17:12
llc costs you need three LLCs for a fund. I mean,
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you can do it however you want, but my attorneys
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have three LLCs. One's a holding company, one's
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the management company, one's the fund itself.
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And so there's some expenses. So plan, depending
17:27
on which method you use, it could be 25 to 50K
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upfront. And then moving forward, probably at
17:33
least 1 % of AUM per year in fund expenses. I'm
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running mine super lean right now at point 65
17:43
.7%, but it's very hands -on. I'm doing my own
17:47
fund administration. I mean, I would really love
17:50
to hire an administrator on my current fund,
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but I don't think anybody would want to do it
17:55
because it's so complicated, how it is with the
17:58
customizable. But I just, I talked to a company
18:01
called NAV. That's probably who I'll use for
18:03
my fund administration for my next fund. And
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it's... It's 20 to $25 ,000 a year for a fund
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of funds. Fund of funds is a lot cheaper than
18:11
if you were doing like a real estate fund because
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I'm just getting underlying financials from three
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to five funds and they really don't have to do
18:19
anything except plug it in and split it up and
18:22
send it out to the investors on the portal. That
18:25
includes the investor portal. That includes all
18:27
the administration. That includes all my taxes
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and accounting. So 20 to $25 ,000 a year is very
18:33
good. for a $25 million. Sounded like a lot.
18:37
And I'm like, holy night. But when you break
18:39
it down into everything it is, that's actually
18:41
really, really good. For a $25 million fund.
18:43
And it's professionally administered. I mean,
18:46
they will even onboard your investors. They do
18:48
all of your KYC and anti - your client anti -money
18:52
laundering. I mean, it's very affordable. Don't
18:55
tell them I said that. I don't want them to raise
18:56
their prices or something. The only thing that
18:58
I've learned that they don't do, this company,
19:00
NAV, they don't do the credited letters, so I'm
19:04
going to have to do that separate, which is fine,
19:08
whatever. And there's other companies too, I'm
19:11
pricing out Juniper Square, and I'm looking at
19:13
a few others just for comparison, but NAV gets
19:17
a lot of recognition, a lot of people that I've
19:20
talked to use them and like them, so we'll see.