EP 419 – So You Want To Start A Fund

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NCS 419 | Start A Fund

NCS 419 | Start A Fund

 

Starting a fund is not as simple to do as you may think. It is not something that you should do immediately if you have only done a couple of deals or no deals. Before jumping in head first, there are a couple of very important things that you have to consider – from looking for an attorney to getting in touch with what you really intend to do with it. Scott shares some of the important points you need to cover and lays down some necessary questions that you have to think of ahead.

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So You Want To Start A Fund

We are working through raising some capital for a portfolio performing loans. We’re selling some stuff off. We’ve reached out to some of our investors. We get a lot of interest coming in. We’re going through the qualifications with our investors. What does that mean? That means for those that have expressed interest that we haven’t dealt with before, it’s talking to them. What’s your goals? What are you focused on? Where’s the money coming from? Those specific things. We’d love to have them fill out an investor profile sheet that gives us a little bit of background on where they’re going from, what’s their income, what have they taken, where they studied, what are they looking for to figure out if they are going to be a fit for what we’re doing. It’s a must-have conversation. Then investor profile sheet, CYA, Cover Your Assets. It’s working through those, getting us out. Plus, the fact is we’re in the midst of our Loan Tales book. We’re starting interviews for our chapter authors and going through case studies and things like that.

We had a couple of great interviews. We’ve launched the CenTex Podcasters Munich Group. It’s a local group of podcasters that are getting together. We’re excited about that. Our meet-up group has grown to over 80 people now. We’re looking forward to that. We’ve come up with dates, finalized hotels and date location for our Note Mastermind and that’s going to be the April Note Mastermind. It’s in 26th, 27th and 28th of April to be held here in Austin, Texas. We’re excited about that. Steph’s done a good job negotiating with hotels, getting a pretty decent price point for the time frame. The time of the year is what we’re excited about that. We are starting to finalize speaking spots for Note CAMP seven, which will be the first weekend of April, the 4th, 5th, 6th and 7th of April. I’m excited about that. We got some great things that are in the works. It’s always busy.

I wanted to talk in this episode a little bit about people that are like, “I want to start a fund.” There are some things you’ve got to keep in mind before you hire an attorney and start talking about looking for a fund. It’s always important to talk to an attorney. We’ve had Jillian Sidoti on here a couple of times. Jillian is phenomenal. She’s done some big private placement memorandums, put some PPMs to SEC and stuff like that. We get her for working on ours, working on others. She came back from appearing in the 10X Growth Conference because she helped to get Grant Cardone’s apartment fund one. There are some things that you have to keep in mind. Putting a fund together is not something that you should do right off the bat if you’ve only done a couple of deals or no deals. That’s a big mistake that a lot of people do like, “I’m going to start a fund and then I’m going start buying deals.” No offense, a fund, if you haven’t done probably $1 million in deals as far as raising that capital for individual joint venture deals or passive stuff, you probably aren’t ready for a fund. A fund is a lot of work.

I only want to say that out of respect because some people are like, “I want to do some big things. I want to raise capital.” I’m like, “That’s great.” The first question I ask people when they’re looking to do a fund is, “What do you want to do it for? How big do you want to make it to be?” The mistakes that a lot of people make, “I want to do a fund. I’m going to do a fund for half a million.” I’m like, “That doesn’t make sense.” “Why?” “You’re going to incur somewhere between probably $5,000 initially to $20,000 in costs of putting together, paperwork, accounting and things like that. That’s a sizable chunk right off the bat of fees for you.” Let’s face it, if you start erecting fees, you’ve got to have that money working for you. If your share of the profits is going to fees, that’s a win-lose. It’s a win for your investors if you’re offering something or it’s a loss for them because you’re constantly having to try to do maybe riskier deals than what the fund is lined up to do.

The thing I like to tell people all the time, “Fund is a great idea, but let’s look at where you’re at realistically in your business.” I’m a big believer that if you haven’t done $1 million, raised $1 million in private capital already, you’re not ready for a fund. Because a fund, you’re still going to come back to the point of you having to do one thing, market. You still have to market to find deals. You’re still going to market to raise capital investors. If you’re not doing that already a little bit of a scale over $1 million, you’re not ready. It doesn’t mean you can’t go out and hire Jillian to put together joint venture agreements, other things to help CYA, cover your assets, on things. You could still do that. What you should not do though is look like, “I’m going to do a big thing, but I’m going to do a half million.” That doesn’t make any sense. It doesn’t mean you can’t start a fund at $5 million amount, but you’ve got to be prepared. If you’ve got some wealthy friends that are willing to put some money up for you, they’re willing to invest in and stuff like that, okay, that’s a great thing. There’s nothing wrong with that at all. It still goes back, have you done the deals? If you’ve done one, two, or three deals, you’re not ready for a fund. If you’re not raising capital market on a regular basis, you’re not ready for a fund.

If you’re still working full-time at a job, you’re probably not ready for a fund. Funds fall into a couple of different categories of what people are using funds for, especially in the note space. You have people that are buying nonperforming notes, doing workouts and then selling the assets off or where can we get them to re-performing like our buddy, Jack Krupey, who used to run a big fund on the BK Chapter 13 side where that’s all they focused on. They had investors come in and give them a chunk of cash. They went out and bought a bunch of BK Chapter 13 loans because they were basically performing. You have some funds that are buying performing notes. You will have to look at what you’re going to offer up your investors out too.

That’s another thing to think in mind. With a fund, you’re probably going to offer up some flat ROI, flat return on investment. I will not be doing 10%. I would probably be doing somewhere around 6% to 8% is a preferred rate. It may offer a percentage of the back-end profits. What’s the back-end profits means? That means you’re working assets through. You’re providing quarterly payouts or every six months payouts to your investors. I would not recommend monthly. There’s a lot of paperwork. It’s quarterly payouts, their interest rates to your investors and you’re making profits on the properties, paying the interest out of it, covering your expenses. Whatever’s left, you’re splitting it up. Either 20% back to your investors and you’re keeping the 80%.

NCS 419 | Start A Fund

Start A Fund: You can’t be the only person running the fund because you won’t be able to get anything done.

 

Some funds are doing the opposite. We’re going to 80% back to our investors and keeping 20%. Whatever that backend split is, that’s up to you and what your deals will bring in, what you have to realize is that still working it back. You’ve got to forecast that out with expenses. You’ve got to forecast that out with timeframes. Part of a fund is tying up people’s money for a period of time, not 12 months, 24 or 30. Usually, the common thing I see is you tie up for 36 months and there’s a two-year extension on it. People work these assets through for 36 months. People can then have the opportunity to either opt out or they extended it another two years with their money in. It all depends on how you’re paying and how the portfolio is going on. The minute you start bringing in people’s funds, you better have that money ready to distribute purchasing assets. The last thing you want to do is start taking money in and not have any deals to close.

You’re still paying interest on that money regardless. What a lot of funds are doing is there’s a Stair-Step approach to funding that for every $250,000 they get in. They look to deploy that so that they’re not having to wait for $1-million-portfolio. If they’re buying $200,000, $250,000 in assets, they can deploy that money immediately. It’s not sitting on their accounts waiting for $500,000 trade and go from there. That’s going to start things in the bigger funds obviously. Their minimum investment is $1 million because they’ve ballooned to bigger deals and are skyrocketing and stuff. The thing to keep in mind for everybody that’s important to do is you have to bring on professionals to help you out with this as well. You’ve got some salaries you’re going to be paying because you’re going to bring on some accounting staff. You can’t be the only person running the fund because you won’t be able to get anything done.

You’ve got to bring on employees to help you with your service, due diligence. You may want to bring some of that in-house versus outsourcing it. That’s not saying you can’t have some virtual assistants helping with some things. You’re still going to need some onsite people, particularly maybe not onsite, but some people helping you. You don’t have to have a huge office, but you’re still going to have some people that are coming in. That’s the thing you’ll keep in mind. The salary is going to cost you per year on that if you’re going to bring on somebody who’s an admin staff. Your marketing costs, you’re going to probably want to be attending some different conferences so you can start figuring that stuff into your budget, your travel expenses and things like that. Hopefully, that’s coming out of the profit side of things. That’s more numbers to look at.

A lot of people get excited about the following idea in the romantic nature of having a fund. It is a lot of work. That’s the thing that you keep in mind. It doesn’t make it easier for you because it still comes down to two things. Are you closing on deals? Have you raised capital? If those answers are no, then you don’t need to do a fund. A fund would be a waste of money because you’re not able to deploy it. You spent money to put something together. Having a fund does not automatically raise your capital. That’s the thing that most people don’t realize. That’s not going to help you raise capital. What’s going to help you raise capital is your marketing and the deals that you’re doing.

Those two things, first and foremost, are going to be more anything else. Otherwise, you should probably stick to the individual joint venture agreements. The thing is some people will do a fund because they can offer cheaper rates. You can still offer a cheaper rate. We’re not saying give away half of the deal. We’re not saying give away 12% or even 10%. It’s how you market. Are you marketing IRA investors? Are you marketing to sharks? If you’re marketing other real estate investors, they’re going to want a decent return on investment for the most part. If you have to go out and find those people that are happy with 6% or 8% return, there’s plenty of those people out there.

What you don’t realize is most people get so bogged into being around other real estate investors either through networking groups or meet-ups or conference that we fail to forget that’s the top 5% people that are knowledgeable about things. They’re the most aggressive when it comes to returns. There are a lot of people out there, friends, families, colleagues, peers, people all around us that are going to be completely happy making 8% because their money is making 0%. We had Nathan on. They were talking about they’ve got $250 million still sitting making 0%. People transferred money over but not implemented. That’s a lot of money sitting there making zero. If you could find out or talk to people or communicate with those people and say, “I’ll give you 8% payout quarterly, secured by real estate and a fund,” why wouldn’t you do that? You would, wouldn’t you? You totally would. You would. You’d be silly not to. That’s the things to keep in mind. That’s one of the great things out there, especially with the Jobs Act. They made it a little bit easier for you to raise capital with talking with people that maybe you don’t have a relationship with.

I still believe raising capital is the most effective when you build relationships with people. It’s networking. That means getting out to know. That means being in front of them. Marketing to them with emails or dropping some postcards out or one of the things that we do, we drop our book out. We drop a postcard out with a link to my book. They can download my book for free. Look at some case studies that we’ve got available. This is one piece of direct marketing that we send out to IRA investors. It’s not always the people that have self-directed IRAs but to people that have money sitting on the sidelines. We also take that same list that we have purchased. We market to them on Facebook and LinkedIn by uploading the list of contacts in LinkedIn so we can go out and find out if they have a LinkedIn profile and connect with them. It’s one of the easiest things to do. It doesn’t take that much to do, but you still got to provide content on a regular basis. This is why we are so heavy on marketing. That’s one thing you get to look at too.

If you’re not successfully marketing on a regular basis right now, you need to make sure and probably hire a full-time marketer that understands what you’re doing to help you get things out especially when you have fund. You want to make sure you’re not stepping on anybody’s toes. You want to make sure that you’re not pissing off the state regulators or anything like that. You’ve got to be very careful when you add a fund to what you’re doing because now you’ve gotten approved. It doesn’t mean it’s a bad thing. Make sure you’re falling in line with what’s going on. You don’t want to be like some of the people that we’ve seen get shut down because they violated the laws in advertising because they were saying guaranteed, safe, and secure. Those are three statements you don’t want to have in your business. I was in an event. One of the guys who was talking about real estate was like, “It’s safe and secure,” in the presentation. I’m like, “Don’t do that. You’re dealing with non-accredited investors here. You can’t be saying that. That’s not a good thing.” You’ve got to take safe and secure.

NCS 419 | Start A Fund

Start A Fund: Putting a fund together is not a bad thing. It just takes a little while to do that.

 

There is a risk. It’s real estate. You have to have those type of disclosures. You’ve got to talk with the people that you’re dealing with. We’ve talked to Jillian or any SEC attorney puts together a private placement memorandum. They’re going to tell you there are different levels. There are some that you can work with credit investors, others you can work with sophisticated and accredited. Others you probably don’t want to work with. The most important thing is having a process right now. I’m putting that together as a note investor, whether it’s talking to people you know, and either putting them on individual lending agreements or individual joint ventures versus you look at getting a fund right out of the gates. That’s what I would tell you. If you haven’t closed on $1 million in deals, raise $1 million of private capital, you’re probably under where you need to be. Putting a fund together is not a bad thing. It takes a little while to do that. If you want to do that, that’s a goal.

You have to keep marketing for deals and keep making offers and working in the same round. A lot of that stuff you want to develop and hone your skills, find investors, find the legal side, things like that because I’ve seen so many people talking about putting a fund together. I ran into this as well. I’m having a couple of people, they will be partners with us and I’m like, “Yeah.” After six months of working into and getting things like that, I’m like, “I don’t want to work with these people anymore.” I don’t want to be in a fund. I don’t want to be married to them because that’s what you think. You’ve got to realize you started a fund. You’ve got partners on things like that. You’ve got to have some steps in line. What happens when things go wrong? If somebody wants to leave the fund, what happens? If somebody wants to leave the company, what’s the payout? What’s the buyout? How’s that work out? You’ve got to literally put those things in place to keep in mind. That’s why you may not want to bring in partners. You may want to bring on staff that is paid a salary. You’ve got to figure out payroll. You get all that good stuff, but you have to do with the workforce commissions and things like that, which is a pain in the ass too. It has to be done.

Welcome to being an employer at that point versus an entrepreneur. Those are the things I would tell you. One of the things that are coming up in Orlando, it’s a crowdfunding source. Jean Trowbridge and Julissa Dottie are having their weekend event in Orlando. If you’re going to be there, I would highly recommend you go. It’s $1,000 to show up or $1,400. It’s well-worth the event. They’re having these events on a regular basis going forward. Check them out, go to CrowdfundingLawyers.net and check out what they offer. The best in the industry. Jillian is phenomenal and everything to do with Jean Trowbridge, one of the best people in the industry. That’s what I would say to you looking to start a fund, let’s look at where you’re at. You’ve raised $1 million of the cap or maybe something we’ll look at. I would highly encourage you to talk to somebody before making that decision. That’s the great thing about Jillian. Jillian will sit down and say, “You’re not ready for this. You need to get some training. You need to go through. You need close more deals before we look at doing things in a big picture.” That’s all I’ve got for now. Go out and make something happen. We’ll see you at the top.

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