Is It Time To Start a Real Estate Fund?
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP. and the author expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion. Reading, downloading, or covering this article does not create an attorney-client relationship.
Real estate entrepreneurs come from all walks of life. Whether they previously worked for a real estate investment company, came from another profession such as a banker, lawyer, real estate broker, worked in a professional capacity where they were in and around real estate on an ongoing and continuous basis, or are making the leap from a completely unrelated profession, most real estate entrepreneurs start out small. First projects can include fixing and flipping single family residential properties, buying small multifamily units or apartment complexes, or buying a few secured promissory notes.
Early real estate entrepreneurs tend to use their own money or that of family and friends to do their initial projects. These projects likely have one investor per deal and are typically structured as a private money loan secured against the real estate asset. Unless real estate entrepreneurs have unlimited capital at their disposal, this model will not allow entrepreneurs to scale past a certain point. Over time, as the ambitious real estate entrepreneur’s reputation grows, they will need to look at a different model to make a full-time career out of real estate investing. If the real estate entrepreneur has reached his or her capacity, the entrepreneur will be required to seek out referrals or new relationships with private money lenders or partners in order to keep growing the business. Developing these relationships can be time consuming and require a new level of presentation and commitment on the part of the entrepreneur.
Many real estate entrepreneurs reach the point where they not able to close on a deal because there is no capital available at the time of closing. This scenario presents a dilemma for most entrepreneurs and causes them to seek funding through other vehicles. When these funding challenges arise, entrepreneurs typically start to look into starting a real estate fund.
There are many different reasons to start a real estate fund, chief among them from my experience are the following:
Increased Control – If you are a real estate entrepreneur that is using a single investor on every deal, the back and forth over terms and underwriting standards can become overwhelming and restrict your ability to expand. Once you have established your systems and processes and become an experienced deal maker, it becomes easier for you to quickly identify good deals. Being able to pull the trigger on the good deals immediately, without all of the back and forth that can take place with individual one-off investors is an enormous advantage for you and presents an extremely convincing argument to start a real estate fund.
Ready Capital – In hot real estate markets, the level of competition for real estate assets is high. Speed is oftentimes the reason why an entrepreneur will be able to beat out the competition. Working under the one investor per one deal model does not typically lend itself to always being able to close deals quickly, resulting in lost deals. While the real estate entrepreneur still has to raise capital for the fund, once the capital is raised, it is available to close on those good deals.
Additional Income Potential – While starting a real estate fund does not always result in the sponsor earning more money as a result of fund as opposed to a one investor per one asset model, the perception in the marketplace is that it will. The ability for the sponsor to make more capital with a real estate fund depends on a number of factors, including, the asset strategy, the management and related fees received by the sponsor from the fund and the size and scale of operations.
Expansion of Operations – Starting a fund will typically allow the sponsor to expand and grow its operations, which can come in the form of expanding outside of the sponsor’s current geographic area or through the number of real estate assets or projects that the sponsor is able to undertake.
You May Also Be Interested In:
Qualified Opportunity Zones: Summary
Opportunity Zone Projects Take Off Around the Country
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP. and the author expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion. Reading, downloading, or covering this article does not create an attorney-client relationship.
Real estate entrepreneurs come from all walks of life. Whether they previously worked for a real estate investment company, came from another profession such as a banker, lawyer, real estate broker, worked in a professional capacity where they were in and around real estate on an ongoing and continuous basis, or are making the leap from a completely unrelated profession, most real estate entrepreneurs start out small. First projects can include fixing and flipping single family residential properties, buying small multifamily units or apartment complexes, or buying a few secured promissory notes.
Early real estate entrepreneurs tend to use their own money or that of family and friends to do their initial projects. These projects likely have one investor per deal and are typically structured as a private money loan secured against the real estate asset. Unless real estate entrepreneurs have unlimited capital at their disposal, this model will not allow entrepreneurs to scale past a certain point. Over time, as the ambitious real estate entrepreneur’s reputation grows, they will need to look at a different model to make a full-time career out of real estate investing. If the real estate entrepreneur has reached his or her capacity, the entrepreneur will be required to seek out referrals or new relationships with private money lenders or partners in order to keep growing the business. Developing these relationships can be time consuming and require a new level of presentation and commitment on the part of the entrepreneur.
Many real estate entrepreneurs reach the point where they not able to close on a deal because there is no capital available at the time of closing. This scenario presents a dilemma for most entrepreneurs and causes them to seek funding through other vehicles. When these funding challenges arise, entrepreneurs typically start to look into starting a real estate fund.
There are many different reasons to start a real estate fund, chief among them from my experience are the following:
Increased Control – If you are a real estate entrepreneur that is using a single investor on every deal, the back and forth over terms and underwriting standards can become overwhelming and restrict your ability to expand. Once you have established your systems and processes and become an experienced deal maker, it becomes easier for you to quickly identify good deals. Being able to pull the trigger on the good deals immediately, without all of the back and forth that can take place with individual one-off investors is an enormous advantage for you and presents an extremely convincing argument to start a real estate fund.
Ready Capital – In hot real estate markets, the level of competition for real estate assets is high. Speed is oftentimes the reason why an entrepreneur will be able to beat out the competition. Working under the one investor per one deal model does not typically lend itself to always being able to close deals quickly, resulting in lost deals. While the real estate entrepreneur still has to raise capital for the fund, once the capital is raised, it is available to close on those good deals.
Additional Income Potential – While starting a real estate fund does not always result in the sponsor earning more money as a result of fund as opposed to a one investor per one asset model, the perception in the marketplace is that it will. The ability for the sponsor to make more capital with a real estate fund depends on a number of factors, including, the asset strategy, the management and related fees received by the sponsor from the fund and the size and scale of operations.
Expansion of Operations – Starting a fund will typically allow the sponsor to expand and grow its operations, which can come in the form of expanding outside of the sponsor’s current geographic area or through the number of real estate assets or projects that the sponsor is able to undertake.
You May Also Be Interested In:
Qualified Opportunity Zones: Summary
Opportunity Zone Projects Take Off Around the Country
