What is therevenue potential of a Real Estate Fund?
If this is your first fund, I suggest you limit the raise from $1,000,000 to $5,000,000. All the financial examples are based on raising $5,000,000.
As a licensed Realtor and the Managing Member of the company, you will receive both the purchasing commission when the property is acquired (usually) 3% and when liquidating the property, a listing commission of3%.
On a $5,000,000 fund that’s $150,000 for the initial purchases and $150,000 for the sale listings. Additionally, upon liquidation, you will need to re-invest the sale proceeds by purchasing other properties to replace the properties sold. Another possible 3% ($150,000). Of course, If you are representing both sides of the transactions then the commission is 6% ($300,000 / $300,000) / $300,000.
Annual Property Management Fee
You will alsocreate a property management company that will contract with the real estate fund entitling your management company to an annual management fee that is typically 2%. A 2% management fee on a $5,000,000 fund is an additional $100,000 that would be paid to your management company annually.
30% Equity Ownership Interest
As the Member Manager, the Offering Documents will also provide you with a 30% ownership interest. This is usually referred to as “sweat equityparticipation”. There is no need or requirement for you to invest your own money.
The company’s Operating Agreement will require a minimum of 75% to a maximum of 100% of the annual profit or free cash flow to its member investors.This distribution will be from the Airbnb Rental income and the Fix & Flip business activities from the properties fixed and flipped during the year. The profit distributions would be based on each investor’s ownership percentage. Example: If the company earned an annual 20% return on $5,000,000 that would represent a maximum of $1,000,000 available for annual profit distribution. If your ownership interest is 30%, your annual distribution share would be $300,000.
Fix & Flip
- If you turn the property over as a Fix and Flip that is a 3% broker fee and a 3% listing fee. You will likely turn the money over at least 2 times or more per year. On $5,000,000 that is $300,000 + $300,000.
- You are not restricted to just organizing one Real Estate Fund. You can create as many funds as you need. Each fund is tailored to a specific investor’s needs.
Requirements for Soliciting and Using Investor Funds.
See:Securities & Exchange Commission – Regulation ‘D’ Rule 506(c)
Taking money from investors is governed by Federal Securities Laws. In this case, you would comply with Regulation D, Rule 506(c). Compliance with Reg ‘D’ Rule 506(c) is the purview of the U.S. Securities & Exchange Commission.
- Your responsibility under Reg ‘D’ Rule 506(c) is to provide investors with all “material information” regarding your investment offering that an investor would reasonably need to make an informed decision. This information is presented in the form of a PPM – Private Placement Memorandum.
- I am sure you have heard the term (IPO) – Initial Public Offering. Companies raising investor capital usually do so through an IPO. However, it is very expensive and the cost is in the hundreds of thousands if not millions of dollars. Raising investor capital through the use of Regulation ‘D’ Rule 506(c) provides an exemption from requiring an IPO registration. In this document, you can learn how to create the Offering Documents – (PPM) Private Placement Memorandum that provides the investor prospects with the information needed for them to be reasonably informed for $3,600 – $6.500. I also have arrangements in place where you can finance part or all of my fees. If you repay the loan within 6 months there is no interest charged. You repay the principal only. (Note: There is language within the PPM documents authorizing your reimbursement of funds spent to prepare the Offering Documents.)
- Investor Solicitation -Under Rule 506(c) you are permitted to advertise for investors. For example, a website, newspaper advertising, television, radio, etc.
The basis of your investor presentation should be:
- Buy / Fix and Flip. 75% to 100% of the Profits from the Fix & Flip are distributed annually.
- Buy / Fix / Run it as an Airbnb investment.
a) Airbnb Rental income is included in the annual distributions.
b) Sell the Airbnb assets in 2 – 4 years as the real estate assets appreciate over that time period. Sold appreciated assets profits are part of the annual distributions.
c) Investor funds are always secured by either the real estate properties or the funds in cash.
**All the Offering Documents I create (PPM) will be structured to anticipate and answer most investor questions.This is in the format of a “Private Placement Memorandum a.k.a. (PPM)”.
- Four (4) documents together make up the Private Placement Memorandum. We prepare.
- The Primary Offering Document is 50 – 60 pages.
- Subscription Agreement 19 – 20 pages.
- Limited Liability Agreement 18 – 20 pagesThe $3,600 fee covers my preparation of the Offering Document, Subscription Agreement, and Operating Agreement (if LLC). It does not include the preparation of the Business Plan. There is an additional charge if I create the Business Plan.
- The Business Plan – If you decide to create your own business plan there is no additional charge. If I create the business plan there is an additional $2,900 charge. The plan will be 15 – 25 pages and cover all the issues for Buy / Fix and Flip and Buy &Hold for AirBnB rental income / Sell.
My Business Plan: $2,900 (This is an optional service. You may create your own plan.)
The document I created for your PPM and your fund is specific to the stated purpose of the Use of Funds, Risks, and Returns.You are very unlikely to be able to create as strong or as compelling a document.
Cost for PPM – $3,600
Cost for Business Plan – $2,900 (optional)
*There are no other charges.
You can pay with any major credit card, by ACH transfer, or by wire. Also, as previously mentioned, I have financing arrangements in place if you wish to utilize them. There is no interest charged if you pay off the loan in 6 months.
How it works.
When you are ready – request an invoice by phone or email and provide your contact information including name, phone number, and email. Please advise me at the time of your request for an invoice if you plan to finance all or part of the fee.
After you pay the fee, I will provide you with a list of talking points. The talking points are to provide the basis of our discussions over 3 – 4 conference calls to assist you in deciding what terms and conditions you wish to offer your investors. we will review your different options so all decisions you make come from an informed understanding.
Once all the elements that will be in the PPM have been decided by you, I will prepare the documents within 8 business 12 days.
If you have any questions, call me. I offer a 30-minute – no-charge consultation. 239-300-9725.
Call 239-300-9725 or fill out the contact form using the link below.
Lance W. Shields
Shields Capital Partners