Real Estate Fund - Where to Start?

Question

I have a lot of friends and family that want to get involved in real estate investing in various capacities. My thoughts are why not start a fund or company that everyone can participate in? Pool our money and resources together to get things moving. I can see the vision in my head, but I'm struggling with where to start to get things organized, get the knowledge I need and make sure everything is set up properly. Does anyone have suggestions for where to start? Any resources, books or tips would be helpful!

Paul Moore · Answer

@Charese Allen - many good points here.  You may want to get some resources on the topic. Check out @Whitney Sewell's podcast "The Real Estate Syndication Show" as well as @Brian Burke's book "The Hands-Off Investor."  Good luck!

Chris Levarek · Answer

@Charese Allen You can check out "Raising Capital for Real Estate" by Hunter Thompson. Although focused on of course raising capital for syndications, the book is a good guide on the topic and has a great chapter on funds.

That being said, it just takes having a call with a securities attorney and discussing your idea. Equity funds or fund of funds are quite common and they'll be able to guide you in setting one up. Initial setup can be fairly expensive so just ensure you build it into the cost of your venture. Reach out if you need further info.

Jessica Connor · Answer

@Taylor L. I think that you have a really good point, this can be quite tricky and there's more details regarding the SEC regulations than was previously pointed out on this thread. Also you are correct Kim Lisa Taylor runs that website; as full disclosure I have not been her client or anything, I just found that since she is a member of the certain state bars and has experience in this area she should have a lot more knowledge than any of us in this area.

@Charese Allen @Anna Laud As Taylor alluded to, there are specific SEC regulations even for cases like this (where you are trying to do a friends & family pooling of funds), so I wanted to highlight that contacting a lawyer is the way to go and make sure to rely on a lawyer's guidance / advice rather than anything I previously mentioned.

Taylor L. · Answer

@Kim Lisa Taylor runs SyndicationAttorneys.com

I would comment that the note that filing as an LLC, remaining under 100 owners, and not publicly soliciting gets you out of the SEC's purview does not seem correct. The test of whether a security is being offered does not factor in whether it's an LLC or not, and many syndications in fact are handled as LLCs, including those with under 100 partners. However, I am not an attorney, just someone who syndicates. Talk to an attorney.

Jessica Connor · Answer

Hi Charese! I totally agree with what Anna has said, she provided a lot of useful information. My friend and I have been thinking of the same thing, except we are out here in California. Basically when you get there, you'll want to get in touch with a "syndication attorney." One syndication attorney I know of has some good free information on her website that goes into more detail regarding the things Anna mentioned, see her website here: Syndication Attorneys PLLC

If you'd like to chat more about this over the phone, etc. I'd be more than happy to. Feel free to send me a private message.

Charese Allen · Answer

@Anna Laud

Yes this is extremely helpful! Thank you for the response! LLC is definitely the way to go it seems. And you’ve outlined a lot of good things to consider.

Anna Laud · Answer

@Charese Allen

Hi Charese!

At first glance it may seem like you would be thinking along the lines of a S/C-Corp situation, however this may not be the ideal set up for you. (I say that as you used the word "company")

With that in mind here's why;

Moving real property out of a  S/C- Corp is taxable when it comes to capital gains and a personal suit of judgment against you or one of your shareholders can filter through to the corporation. Not the other way around as the 'corporate veil of protection' is still valid while incorporating a business entity mind you.

Alternatively, an LLC (perhaps married with an umbrellas policy) would be the way to at least organize your business entity. Many investors choose to have LLCs registered in the state of Delaware (expeditious, minimal fees, separate court for business capacity dealings to make any suits as timely as possible).

You question indicated numerous people involved in this particular business plan and is covered under the LLC as well in the ability of 'unlimited owners' (people involved).

When you go to organize this, while filling out your articles of organization, be sure to obtain an EIN for tax purposes, as well as being able to have a business banking account.

While obtaining funding with an LLC can be trickier, it sounds like there would be enough 'pooled funds' to eliminate this step. The business account would be best suited however as this does further separate an induvial member/owner from the transaction(s) and keep the veil of protection intact of the LLC (no commingling/allocating of business funds for personal use).

Another benefit of going the LLC route over an S/C-Corp will be the exclusion of no reporting to the SEC (Securities and Exchange Commission) if you can say you'll adhere to things like less than 100 members/owners, no public 'call outs' to join (i.e. Facebook) etc. as generally speaking an LLC like you would be organizing doesn't fall under these parameters.

You will have ongoing fees (mostly annually, others at set up alone)

1. Set up/original filing in state or origin

2. Tax prep

3. In most states a business entity report (not an outrageous fee usually)

4. Ongoing filing fees yearly (again, not outrageous) in state of LLC(s)

5. Umbrella policy premium (if you choose to go that route)

Having said this, set up would be best discussed (especially if this is beyond yourself alone as a sole proprietor) with a CPA/real estate attorney. If nothing else, a free consult on the matter would give you more (and include any state specific) answers.

If your group should shift into a more passive approach and go the route of pooled funds for (syndicated) lending to investors you would be very well suited (and much safer) to get in touch with proper legal council to organize (SEC attorney, CPA)

As far as organizing however, this is where I would start;

Define the active or passive  REI approach and proceed with legal formation accordingly.

Hope that helps!

Real Estate Fund - Where to Start?

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