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My guide to designing a real estate fund

I think the majority of fundraising writing is quite un-actionable. You read it, and it might sound good, but when you get out in the real world, you really have no idea how to actually implement it.

So, in this issue, I want to get a “real world" scenario as possible, especially regarding real estate funds, as they are more confusing.

Let's jump in: but first, please note this is not Financial Advice

I’ll spare the basic details, but if you raise capital, there will be two main ways for you to consider.

  1. Real Estate Private Equity Fund - Raise money to invest in many deals.

  2. Syndicates - Raise money to invest in just one deal at a time.

There are a number of important considerations that are unique to funds but are not typically issues when it comes to Syndicates

Here are some scenarios to consider when you are raising a fund.

Initial Capital Contribution

One of the main issues that needs to be considered is addressing the concern that you might have to raise all the money upfront, yet it may take some time to find the properties that fit the pre-defined fund criteria. This means that the investor funds are sitting in your account, earning no return, and the opportunity costs begin to mount for the investors.

How do some fund managers handle it?

Option 1 - You can get commitments when documents are signed, but you can delay the need for funds until you find a deal. The problem with this is that while you may believe you have a certain amount to invest, the longer it takes for funding to occur, the more likely it is that your investor will either change their mind, find a "better" investment, or experience a financial or medical emergency that prevents them from providing the funds when you need them.

Option 2 - Accept only a small portion of the total capital commitment at the time of commitment, say 10% or 20%, and when a deal is found, make a cash call for the remaining amount the investor has committed. Usually, if they don't produce within 5 business days, there is some form of penalty (like surrendering the deposit).

Option 3 - During the hold period, create a return! Raise more capital than you require, then utilize it to offer investors a fixed return so that they are at least getting something rather than not earning anything like they would if they had invested it elsewhere. Since you are essentially paying them with their money, this must be disclosed. However, their original basis is retained, and you are still obligated to pay them the initial capital contribution.

Option 4 - Alternately, simply raise funds and assure your investors that while they won't make any money immediately, the project will more than make up for it in the long run. This is how I do it mostly because I am able to.

Investment Thesis

In comparison to a Syndicate, you would have to sell the investor on your investment thesis. Since you won't have yet identified the property or properties, there won't be any attractive images of the property, a pro forma, or a clear game plan like in a Syndicate. Your fund criteria, which merely describes the criteria you will use to decide which acquisitions to make, will be what you have.

A fine line must be drawn here. On the one hand, you should provide them with as much information as possible so they know what they are getting into. On the other hand, you don't want to place limitations on your activities.

Your business plan should at least cover the following:

  • asset type or types. For eg - Single families in C+ areas

  • if and how much leverage will be used

  • Give the investors a good understanding of the type of property you will be purchasing by giving them two or three examples of properties (either actual from your past portfolio or from elsewhere), along with price points, leverage, value additions, and rentals, etc.

  • a comprehensive profile of you if they don’t know you already since they are placing far more faith in you as a person than they are in the property itself (since it has not yet been identified)

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Ok back to it.

Fund Returns

The aim of the Fund is usually to deliver an annual target net return to Members of x%.

Since you don’t know the exact returns of a particular property, how do you discuss returns with your investors up front?

There are 2 ways here:

Option 1

Many people choose to just give a fixed return. In other words, investors will receive a return of x%, and everything beyond that will go to the Syndicator. There might occasionally be a small profit bonus on top of that, but that is typically icing on the cake.

Option 2

You just divide the net profits between your investors and you. The reason why many operators like to present a "target" cash on cash or IRR is because you never know what returns the fund will generate when they are having these conversations way before the fund is setup.

Term of the Raise

Do you intend to raise the entire amount in the first several months, or will it be a lengthy and ongoing project that may last some time or be continuous?

There are 2 issues here.

Issue 1 - The major problem with continual raises is updating disclosures, especially if you have non-accredited investors. For instance, you have no holdings and no finances when you first launch the fund. In six months, with six months of operational financials, you may now have many properties in the fund. With non-accredited investors, you'd have to

  • give them audited financial statements, and

  • update your thesis and offering on a regular basis to ensure you're not selling obsolete material that may contain misrepresentations or omissions now that you're in business.

Issue 2 - Secondly, how do you handle investors that join the fund later? (say 6 months from now versus the first investor in). Do you treat the first person who joins in (who arguably had more risk) the same as the person who comes in once the Fund is up and operating with 5 cash-flowing properties?

How do some fund managers handle it?

  • Raise as much money as you can in the first few months, then stop, and whatever you have is all you have.

  • Raise as much money as you can until your first property is bought. Then pause. (In this manner, all investors are on an equal basis and share in the risk-reward of all properties.)

  • Charge a higher fee for the investment as the fund grows (or offer a discount for the first in). In this manner, you recompense early investors in relation to future investors.

  • Continuously raise - Then the problem becomes how do people come in and out of the fund (withdrawals), which is addressed next. If you have accredited Investors only, you are under no obligation to provide audited financials and have more leeway with your disclosures.

Withdrawals and/or Redemptions:

In general, withdrawals allow investors to exit the fund, whereas redemptions allow the your entity to buy back the units.

Some options

  • A minimum lock up period before you may withdraw. Investors must stay in for at least x years (2 or 3) before they may request a withdrawal. Some constraints should be imposed to prevent everyone from wanting to go simultaneously. Remember that in order to get them out, you'll either need to acquire additional funds or liquidate assets.

  • Whether or not there is a minimum lock-up, there will be certain brief windows of time to deliver notice. You don't want to have to deal with this every week or month. Investors would have two months once a year to let us know you want to leave, and if you don't, you are committed for the next couple of years.

  • How does the buy-out look? Is this a courtesy in which you just refund their money, or is this part of your transaction and there is a mechanism to calculate the buy-out price like appraisal?

  • No withdrawals are permitted. The fund has a predetermined period (e.g., 5-7 years), and all investors should anticipate staying invested for that length of time. This is my preferred option.

Plan B provision

Having a clear and particular Plan B or succession plan is typically more crucial with a Fund since the investor is usually "betting" on you, so if something happens to you, have a detailed and explicit Plan B or succession plan.

Exit of Each Property:

You will most likely have many properties with a Fund. Consider how you will handle the funds generated by the sale of each property.

Some options to try

  • The profits are simply reinvested in the purchase of other properties.

  • Returned to investors to lower their investment principle;

  • A mix in which part capital is returned and the remainder stays in the Fund as reserves, for withdrawal requests, or future purchases.

Asset Protection

Asset protection is pretty standard in this scenario and can be done by putting

  • Each Property has its own LLC, and a Fund LLC owns all of the LLCs.

  • If there are too many properties, combine two or three into a single LLC that is completely owned by the Fund.

Few other considerations

Fund is One Company

Even though you will have multiple properties, the Fund is one company, and all the investors are part of that Company and share in the risk of all the properties. So ensure the investors are aware of this.


Will all the investors enjoy the profit and loss of all the properties or will you have tranches so the first tranche of money only participates in the profit and loss of the first property, the next tranche with the 2nd property and so forth. This is a more complex nuance so best to talk with a lawyer.

That's a wrap!. Hope you enjoyed it.


Thank you once again. I really do appreciate people reading.​



PS — If you found this useful (and feel generous) please forward to a friend. Also, It'd be nice to learn more - What is the most challenging part of real estate investing for you? I’ll reply

P.P.S - If you are interested in a daily newsletter with 5 - 10 actionable real estate trends, check out Zero Flux

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