What you need to solicit investors to fund your Real Estate Company
Question: What is the cost of setting up a “Real Estate Fund” where you control the investments?
Answer: $3,600 if you do your own business plan part of the documents.
Question: How large can the fund be?
Answer: There is no limit as to the size. However, if this is your first fund, I suggest you limit the raise from $1,000,000 to $5,000,000.
Question: What would be the revenue sources for the Broker/Member Manager of the Fund?
For an Airbnb Operation
Presuming you are a realtor you get the purchase commission generally 3% of the purchase price and on the property liquidation a listing commission of another 3%.
On $5,000,000 that’s $150,000 for the initial purchase and $150,000 for the sale listing. That’s assuming you don’t represent the purchase of your listing which would compensate you an additional 3%. Also, on liquidation, you will be purchasing other replacement properties. Another possible 3% and 3%. So, the potential income on $5,000,000 is $150,000+$150,000+$150,000+$150,000
If you set up a property management company there is an additional 2% annual management fee that will also be an option. On $5,000,000 that’s $100,000 annually.
You will also be the Member Manager with a 30% or more ownership interest. Therefore, 30% of whatever money is distributed you would also participate in whatever your ownership percentage. If you can show a 20% return that is $1,000,000 x 30% = $300,000.
For a Fix and Flip Operation
In a Fix and Flip operation, the numbers are different.
If you turn the property over as a Fix and Flip that is a 3% broker fee and 3% listing fee. You will likely turn the money over at least twice or more per year. On $5,000,000 that is $300,000 + $300,000.
Compliance rules for soliciting investors to fund your Real Estate Company
- Taking money from investors is regulated by the Securities & Exchange Commission.
- To avoid the substantial expense of an I.P.O. (Initial Public Offering) you would use an exemption from registration under SEC – Regulation ‘D’ Rule 506(c).
- To meet your responsibility under Rule 506(c) you must provide investors with all “material information” that an investor would reasonably need to make an informed decision.
- You would provide the required “material information” in the format of a “Private Placement Memorandum – a.k.a. (Offering Documents) (PPM)”.
- Under Rule 506(c) you are permitted to advertise for investors. For example, create a website, newspaper advertising, television, radio, etc.
How Shields Capital can assist you in meeting your compliance obligations
I will create the Offering Documents (PPM) for a fixed fee of $3,600.
I provide three of the four documents that together make up the Private Placement Memorandum.
- The Offering Document (50 – 60 pages)
This document contains all the details of the Offering. The potential investor keeps this document and it requires no investor signature.
- Subscription Agreement (19 – 20 pages)
This document the investor signs and returns to you with their investment check. It also contains an acknowledgment that they have received the Offering Memorandum and its addendums.
- Limited Liability Operating Agreement (18 – 20 pages)
We will discuss the structure which will likely be a Limited Liability Company which will be the company that the investors invest in. Your position will be the Broker/Member Manager responsible for all real estate investment decisions. Your fee structure as indicated earlier is also spelled out and fully disclosed not only in the Offering Document but in the Operating Agreement as well.
- The Business Plan
For the fee of $3,600, you must provide the equivalent of a business plan.
The Business Plan explains how you intend to select properties and the Use of Funds. You can either prepare the business plan document yourself or I will prepare it. If I prepare it the cost is an additional $2,900 fee.
If I create the business plan it will be 15 – 25 pages and cover all the issues from a Buy / Fix and Flip operation to a Buy and Hold for AirBnB rental income operation. My fee to create the business plan is $2,900 and the business plan is specifically geared to the Offering Documents. The information provided to the investor prospects is very compelling since it anticipates the questions the potential investor prospects need to have answered.
*There are no other charges from me.
Of course, you will have advertising costs.
How it works.
After you pay the first half of the fee
I will provide you with a list of talking points. Then over 3 – 4 conference calls 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 to 12 business days.
If you have any questions, call me. I offer a 30-minute – no-charge consultation. 239-300-9725.
Fee Payment Terms:
Half of $3,600 or $1,800 is due to start. You can pay with any major credit card, by ACH transfer or wire. I also 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. The balance of $1,800 is due when the Offering Documents, Subscription Agreement, and the LLC Operating Agreement are completed and ready.