Starting Real Estate Investment Funds
For those who are house flippers or wholesalers trying to expand their business and it doesn't work out, let’s talk about the most efficient ways to start or scale your real estate fund. The most common way to start is either house flipping or wholesaling. I have a mentor who's the co-founding father of a multi- billion own family of funds centered commonly on real estate. They buy huge apartment buildings, fix them up, and turn them around. Instead of flipping a $100,000 house and selling it for $150,000. They buy the entire complex for $25 million, repair it, and sell it for $40 million. Crazy, right? This is the same concept as "house flipping," just much bigger than individual ones. They use the funds for that because it would be very difficult otherwise. Where should you start when building a real estate fund? How are you doing now?
For all these questions to get answered, I once spoke with Aaron Wagner of Wags Capital. He is one of the masterminds behind my program that helps people start and grow their funds. He comes to our coaching calls to help entrepreneurs like you and me. Anyway, we do live Q&As every week, and one day he sat down and started talking about his journey.
About how he got started in the world of real estate and other things like investing in hospitality and storage space. Wags Capital's current enterprise value is around $2 billion. Crazy, right? The biggest mistake I've heard from dozens of people is thinking that if you want to set up a fund, you have to have all the legal documents ready. And as you know, the first step is not even finding an investor. The first thing to do when starting a fund is to go out and find great deals. The deal is what matters, and you'll hear it from everyone. The same applies to private equity. The same applies to hedge funds. The same applies to venture capital.
Find an investment or trade, and then you can play ball. Aaron Wagner always gives amateurs this piece of advice. In high finance, go out and find a big deal, take it to a real estate investor, and instead of slapping them in the head, they'll pay you 5% commission. 5% of $250 million is pretty easy. That's how Aaron Wagner started. It was while in college that Aaron began looking for these opportunities. Sometimes, he traded from $5,000 to $10,000. But then I found out that the people with whom he traded made about $60,000 compared to him making $80,000 on the same trades. Perhaps you want to know how to do the same thing correctly? My mentor always used to tell me that if I made a good deal, the money would find me. One of the biggest things I've always told myself is that I don't have a track record or experience. I don't know how to start. And he continued, "Vijay, the first step is that you need to find a lot of things." Let me ask for a moment about what you can buy for $50,000 (figuratively) over the weekend. Assume everything is true: A Lamborghini is sold for $50,000, and on Monday, a buyer in California purchases all of the same model and color for $200,000 "Can you find $50,000 to make $200,000?"
Yes, I think you can. You have friends and family. If it's a really good deal, I'm sure someone will lend you the money. He said that nine times out of 10, they preferred the deal to the closing. And that's how they scaled their initial funding very well. In summary,
Step 1 Make a deal. Step 2 is not creating legal documents.
Step 2 is to close the deal
Step 3 Collect money. No legal papers How are we supposed to raise money without legal papers? My mentor followed the same process and said, "Hey, our legal papers will be ready in a few weeks." But can you claim $700,000 for this deal if all goes well? The investor said, ‘Yeah if all is well, that's exquisite!
Step 4 (the last step) is setting up legal documents. This process is now the same for both funds and syndicates. However, some long-term effects distinguish them. Fundamentally, syndication means that investments are made on a deal-by-deal basis. Also, syndication usually means pooling funds together from different sources. You put that money into an LLC, and that LLC and all of your investors become partners. Let's say you found a deal and hold 15% equity. And 85% of the equity is available.
Form an LLC. The LLC makes the transaction and buys the property. And the LLC makes the money (if the deal goes well). All investors get their money back on a pro-rata basis, and you go find another deal. It's as easy as that! If you don't have a track record, start small. It's good. In your first few trades, make a name for yourself. And as time goes on, you can ask for more and more. When launching a fund, you only need to do this once. And you can scale it and make as many deals as you want. Only collect once! You only need to pitch to these investors once. Set up legal documents once. And you can do as many deals as you like with that fund.
