Funds involve significant risks that you must carefully evaluate. Without a strong foundation, you could jeopardize your investors’ money and your company’s reputation.

This journey demands a wealth of experience and resources. Managing substantial sums involves navigating market fluctuations, adhering to regulatory requirements, and meeting investor expectations. A solid team and reliable systems are crucial for handling these challenges.

Let’s explore the requirements of starting your own fund. At the end of this article, you should be able to determine whether or not it is the right path to take.

Various Types of Real Estate Investments

Understanding the most common types of real estate investments available can help you decide the best fit for your company’s goals.

Joint Ventures

Joint Ventures (JVs) are an excellent starting point for a real estate investing business. It involves partnering with other entities for specific projects, all actively engaged in generating their own profits. The preferred entity is a Member-Managed LLC where all parties are “managing members” with the authority to open and close bank accounts and enter into contractual agreements on behalf of the company.

A JV model is ideal for smaller projects that don’t demand significant capital as there isn’t a single person or group controlling the investors’ funds. JVs are a collaborative way to leverage each partner’s strengths, offering the potential for mutual benefit. By sharing risk and resources, you can undertake targeted developments more efficiently.

Specified Offerings (Real Estate Syndications)

This method involves raising capital for predetermined properties. Passive investors typically purchase interests in your company in exchange for a share of the profits or a fixed return. It is the simplest way to raise funds of $500k or more for commercial real estate projects.

The challenge with specified offerings lies in the tight time frame — usually 30-90 days — to raise the necessary funds, which can be daunting without pre-established, substantial relationships with vetted investors. Setting up specified offerings can cost between $10K to $15K, at a minimum.

Blind Pool Real Estate Funds

With blind pool real estate funds, you raise capital without specific property plans in place. This allows for greater flexibility in selecting investments as opportunities arise.

But be warned: Raising and managing investors’ money through a fund is the most difficult method. Setting it up can cost $20K to $30K with no guarantees of securing commitments. That’s because a real estate fund requires certain foundational elements that not all companies are able to put together.

Key Components for a Real Estate Fund’s Success

Starting a real estate fund successfully hinges on having a few critical elements in place:

1. Experience with Similar Properties

This shows investors that you understand the market and can manage the types of assets your fund will acquire. A track record of completing 5-10 similar deals is highly appealing to investors. Including asset classes you or your team are not adept at will be interpreted by investors as you learning the ropes using their money.

2. History of Raising Capital

Combine this with a substantial network of ready investors, and you can guarantee the financial support needed to operate your fund. Without substantive and established relationships with investors, you are unlikely to succeed post-launch. Some mistakenly believe institutional investors will invest in their fund, but this rarely happens.

3. Consistent Pipeline of Potential Deals

Adequate deal flow ensures you can maintain the fund’s momentum and meet investor expectations. A fund typically specifies limits such as a maximum dollar amount or a certain number of properties to acquire within a finite period.

If you do only one or two deals a year, you likely don’t need a fund and specified offerings will suffice. Even with a fund, you might take commitments but won’t collect money from investors until you have a matching investment opportunity.

4. Reliable and Capable Fund Management Team

With specified offerings, you have the flexibility of changing syndicate managers per deal. However, once you establish a fund management team, you’re committed to them for the fund’s life, which could span 5-10 years.

It’s wise to trial potential partners in specified offerings to evaluate performance before committing to a long-term partnership. Their expertise will be crucial in managing assets and instilling investor confidence.

5. Presence of Loan Guarantors

These individuals add a layer of security and credibility by being able to guarantee loans for fund projects. Lenders will require guarantors in your management team with a collective net worth equal to the loan amount. Keep in mind that they are entitled to a share of all the fund’s deals.

6. Solid and Robust Bookkeeping System

Managed by experienced fund management accountants, this will ensure transparency and efficiency in handling the fund’s finances. Funds are more complex to manage than specified offerings. You need to consolidate earnings from multiple projects at the fund level and reconcile financials quarterly to distribute earnings to yourself and investors.

7. Clear Launch Plan

Your objective is to raise funds or get commitments, at the very least, in a short period. To achieve that, you need to implement marketing efforts announcing the investment project, create urgency, and offer enticing benefits like discounts or competitive returns.

Alternatives to Real Estate Fund Formation

If your company isn’t fully ready to start a fund, explore strategies for preparing to get there. Here are a few suggestions:

Build a Track Record Through Specified Offerings

By executing 5-10 specified offerings with the same management team and targeting similar property types, you can build credibility and gain valuable experience. This allows you to refine your processes and prove your fund management capability to potential investors.

Engage Directly with Current Investors

Having open conversations about their interest in a fund can provide crucial insights. Their feedback will help you understand their expectations and gauge the level of interest in participating in a larger fund.

Scale Existing Syndication

Instead of jumping into fund formation, focus on expanding your current operations to handle bigger deals. Building a strong management team capable of managing larger transactions can be a practical step toward growth. It might even end up being more lucrative for you and your investors.

Final Considerations

Deciding to start a fund is a significant milestone, but it’s essential to ensure that it’s the right move for your company. Think about how well-prepared you are to handle the complexities that come with managing a fund. More than just the necessary components enumerated above, you need a deep understanding of and adequate experience in the responsibilities entailed.

Evaluate your team’s ability to maintain trust with your investors throughout the fund’s lifecycle. Study the long-term implications as well. Starting a fund can significantly impact your business strategy and operations. Make sure this step aligns with your overall vision and growth plans.

By being thorough in your assessment and preparation, you can make a well-informed decision that supports your company’s success and the interests of your investors. If there are any gaps in your readiness, it might be wise to work with alternatives or delay fund formation until you’re fully prepared. This approach ensures that when you do launch a fund, you are in the best possible position to achieve your goals and protect your reputation. Need legal counsel as you decide on starting a fund? Shams Merchant is the leading real estate private equity and syndication lawyer, representing clients in award-winning real estate projects. Specializing in real estate syndications, fund formations, securities law, and private placements for commercial property investments and development, Shams has been featured in publications like Law360, the Austin Business Journal, BisNow, and The Real Deal.