I am starting a new project of a multifamily building. New ground up construction. Im still in the development phase, but I am curious about how crowd funding works. I have a few questions and Im hoping the BP community can help.
How do I start a crowd fund?
Is this the best route to go to raise capital? Im looking in the range of 600k
How does it work?
thanks for any help or direction you can offer
A lot depends on your track record and experience. Most of the platforms that exist today take the approach that they're going to screen out 99.9% of the applicants and select the best ones to list on their platform. They are also looking to intermediate the relationship with investors in your project.
There are new tools forming that give promoters the ability to directly bypass the marketplaces and give sponsors the tools they need to control their own capital formation process. These include:
1. Software that is compliant with the securities laws, builds the workflows needed, has tools to track the efficacy of marketing campaigns, handles back office functions, etc. A good platform can wrap around your existing website to provide these tools
2. Legal referrals to attorneys knowledgeable with crowdfunding. These are hard to find if you don't know much about the industry. A good crowdfunding attorney will save you a lot of time and money
3. Marketing assistance that helps you get the word out about your site and targets accredited investors. It generally takes 3-5% of the amount you raise in marketing spend to develop the relationships needed. This cost can be thought of as an investment though. If you do a good job you can harvest these investor relationships over the course of your investing career
4. A marketplace to help you sell your securities for deals that qualify
Hope this helps some....happy to help in any way I can.
This sounds very complicated.
Would there be a company that I contact to set up this fund? Or is this something done on my own?
Im not even sure this is my best route, but im seeking options for what Im looking to develop.
There are equity and debt funds that can usually fund 100% of development deals. Usually it is something like a pref return of 8 to 12 and then an equity upside split of 50/50 to 70 to you and 30 to them. A lot depends on what developer fee you want to take upfront and how much of the ongoing cash flow you need.
For me and development deals I need less of ongoing cash flow and would take more of the equity upside to myself.
What I like about equity and debt funds is you can do deal after deal and you do not have to worry about crowdfunding, distribution K-1's to investors, and doing a syndicate deal by deal where you have to keep getting new investors etc.
Instead you can focus on development deal after development deal.
Where would be a good place to start to learn about the marketing side?
My assumption is the best deal in the world with the best attorney prepared contracts mean nothing if someone can't get the deals in front of accredited investors. Thoughts?
@Joel Owens Please explain your definition of "equity upside split of 50/50". Does this mean the deal sponsor would be entitled to 50% of the equity build up over time or 50% of the profit when the asset is disposed?
@Joel Owens I would like to get a better understanding of these equity and debt funds as well. Thanks.
They structure it on a case by case basis. Split could be 70/30 to me and they get more cash flow once tenant takes CO and rent starts coming in or I could take some cash flow and they split 50/50 on equity upside on sale.
Equity partner tries to limit their downside risk. I make money with my transactions with clients on commercial for income so immediate cash flow is not as important to me versus my equity position.
Someone needing the cash flow might take less equity on the backside.
On a equity and debt fund wouldn't you still have to produce a K1 since they are investors with a percentage of the profits?
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