Making a Fund to Buy Apartments

11 Replies

I'm a moderately experienced moonlight investor with solid and relevant non-RE professional credentials, just got my real estate licence, joined my PM's brokerage, and I just had 3 deals pay out. I'm working on leveling up in real estate with goal of going full time in the next 1-2 years.

I've started discussing with a few investors about setting up an equity partnership to buy small apartments, most likely in rural GA or surrounding states. I've been deep in the weeds with research to put together the nuts and bolts of this. Before I go too deep, BP is always a great place for a sense-check.

Below is a list of target property criteria (broad for now, but I'll dial this in) as well as a list of open questions that I'd love your feedback on.

Target Properties: 

-$1-4M purchase price
-6+ unit multifamily apartments in GA and surrounding states
-Value add opportunity through capital improvements, increasing occupancy, and/or raising rents
-Property class B or C, no war-zone areas
-Near stable employment, education, transportation, entertainment/amenities, and future development

Open Questions:

1.Is it realistic for me to be able to set up and operate this type of fund part time?

2.If it’s not realistic, I’m considering taking my capital and investors and bringing them into someone else’s deal as LPs to learn the ropes and gain some experience and credibility. I’m only home 3 days per week, so assume REIAs are not realistic for me. What are some other ways to get connected to people already doing these types of deals?

3.If this is realistic, what is the correct order of operations to get this set up? Do I start with an attorney, CPA, consultant, other? Are there companies that specialize in setting up and managing these funds, soup to nuts? How do I find the right professionals with the right experience?

4.My investors will mostly be non-accredited but with basic financial sophistication. What’s the best way to communicate the deal in straightforward terms? I haven’t found too many offering memorandums that clearly do this, so I’ve started building my own from scratch.

5.What else might I be missing here? Any other advice or words of wisdom would be welcome.

      1) I'm not so certain it's realistic to operate that fund and see a cash flow that you can take out of the business as a profit on the part-time. Being a landlord is so frequently a full-time job, especially if you have 4+ units. If you've only got the three days a week to participate, you're going to need to have an awesome team.

      2) I actually love the idea to come into someone else's deal as an LP.  Getting to know the business model, seeing what people do with their money, and how they make money is a lot easier than trying to make your own deal work for the first deal.  I think learning the business model first is great, especially if you haven't already targeted property for acquisition.

      3) I'd start with the CPA because the money is always going to be the first thing on your mind as an investor. I would then hire a property manager and ask both the CPA and the property manager for a recommendation on a landlord-tenant attorney. You probably won't need a full-fledged real estate attorney unless you're developing the project or going for rezoning. Just a local firm that knows the ropes and the game is definitely good enough for your model.

      4) Who are you looking to communicate the deal to, your investors or the sellers?  If you're having difficulty getting the deal correctly worded for your investors, maybe hire the law firm first so that everyone feels like they're properly protected.  It's so important to get these things started with harmony in management.

      5) Think about your exit strategy.  I tell my investors this all the time, I want them to think under what circumstances they'll sell and look to move on to a new project.  If you know you're take-and-hold as a strategy, then you know that you're gonna have to budget reserves for long term capital improvements.  If you know that you're 3 years from flipping, then you hold enough for 3 years expenses.  You need to know how long to visualize trends in the area and what kind of variance to predict.  I would also tell you to really look into how you're going to keep these units occupied as apartments in the rural south.  Rural tenancies can be difficult because there aren't often many young people looking to get started on moving into their first place.  They can also have a strange habit of staying vacant during the low-times as they're not so near development and jobs.

      I also think your purchase price numbers are a bit high variance. You want $1mm-$4mm, which is a huge spread. A $1mm building (in my area) is a 6 unit in good condition that is ready to rent. A $4mm building in my area is a 20 unit or a 24 unit. A $1mm building is something you can do yourself if you're handy and self-motivated, a $4mm building is something you definitely need staff for. I believe it might be best to narrow your search criteria a little because you're really looking at multiple different REI opportunities of immensely varying complexity given the price points you've named.

      I do think you've got a solid starter plan, I hope you can realize it and succeed in 2020 and beyond!

      Thanks for the comments, Justin.  

      #3, My RE business in its current state (9 units) urgently needs an CPA/bookkeeper, so fund management experience should be a criteria in our search.  My current property manager is in my brokerage, but he would probably only come into the deal if the property was near Atlanta.  A deal in Georgia would also be nice, so I can pick up a commission.  Any idea how much a CPA and attorney would cost to set up the deal?

      #4, I need to communicate the deal to the investors, so they understand it and feel comfortable investing, know what they're signing up for, and know the assumed returns.  

      I'm leaning towards a $1-1.5M deal that I could access with just 2 or 3 partners. If I could get something somewhat near Atlanta, the entire deal becomes simpler, since I can be the agent on the deal and use my current property manager and contractor.

      Although, I talked to an apartment buyer this week that strongly recommended against buying an apartment in Atlanta, since there's too much competition and it's hard to get good enough returns. In fact, when I look at Chattanooga, Macon, Covington, Augusta, etc., the cap rates are much stronger, but I doubt the appreciation will be as strong and I know the deal would become way more complex, since I can't be on-site as often or leverage my existing GC, PM, closing attorney, etc.

      @Nicholas L. I would advise being very careful at this point in the market cycle about jumping into apartments without getting some experience first.

      Further it's imperative if you're thinking about taking in other people's money that you get good legal advice it's much more important than even a CPA. The security and exchange commission has a very strict rules for people that are issuing offerings such as the type that you're talking about. I don't think it's something that just any attorney can handle either You need someone who specializes in SEC compliance or at least is familiar with the basics of it. By way of example, I'm an attorney licensed in two states and had no idea what the rules were or even that there were rules until I started digging further into an attending conferences on multifamily investing.

      I can say that North Georgia and Chattanooga are attractive markets from a multi-family perspective. There's less competition cap rates are higher but continue to decline which means that values are increasing over time.

      If you want more information about my thoughts on market cycle be sure to check out our real estate show on YouTube. I think the idea of partnering with someone who's already doing this and knows the pitfalls might be the best place for you to start. If not you should at least make sure you're getting good advice and maybe finding a mentor that's already doing these types of deals.

      @Nicholas L.

      You are competing in a very competitive field and part-time won't cut it.
      Investor's who are giving over hard earned money would rather give it to someone who is fighting for the money full-time instead of part-time.

      If you want to invest your own money or friends/family part time and they are okay with it. Then go for it.
      Furthermore, they would want to invest with someone who has a proven track record.

      You will want to talk to a syndication attorney, CPA, be well connected with the brokers, wholesalers, lenders, guarantors(if required).

      Good luck in your journey!

      1.  Anything is realistic provided it is disclosed and your investors agree to the risks associated with it.  I've operated private equity funds with both a full-time job and various other competing concerns.  The key is making sure your investors are aware of this and are on board

      2.  REIAs suck in my experience.  There generally are apartment meetups in many cities through Lifestyles Unlimited types of offerings.  Find the reputable ones in your locale and network there.  Austin, for instance, has a few decent apartment meetups

      3.  Starting by syndicating one-off deals and building towards a fund is generally a much easier approach.  It's a lot easier to get investors to commit to your fund for a defined period of time after you've successfully exited and profited in a large handful of individual syndicated projects.  Setting up the fund should be something you as the sponsor drive and you can learn to build funds through programs like Joel Block's Dealmaking Symposium or by apprenticing with other experienced fund operators

      4.  Non-accredited investors aren't going to help a whole lot in the long-run functionally unless you invest the money to do a Reg A+ offering, which is pretty expensive.  We're building a platform after a 2.5-year hiatus while I was navigating a divorce that generates investor leads through outbound marketing and processing with software

      5. I'm sure you're missing a lot, but it's hard in the abstract. I'd recommend learning to syndicate deals and taking Joel's training referenced above. In a year or two you should be ready to start building a fund. Crawl, walk, and then run. Funds aren't all they're cracked up to be and carry other risks that you don't get with syndications so you may find that they don't work as expected for what you're trying to do


      Congratulations on your success so far.

      Putting together a syndication requires a different level of knowledge vs. single family rentals, so it is good to get educated and ideally have someone beside you who has done it before.   While I have never created a fund, I understand they are a step harder than syndication, with more SEC requirements.

      I agree with @Bryan Hancock that you might want to find a group with good mentoring and some education to boot.  I'd suggest you check out Lifestyles, which has an event in Atlanta in a few weeks.

      @Nicholas L. it's possible to run that type of fund part time. It is going to be difficult, but possible. However, I would caution you on jumping in with investor capital and not having a solid track record or someone on the team with one. I would be hesitant to trust money with someone who is doing this for the first time with no one on the team to support them. I call them "grey beards", but basically someone who has been there and done it. 

      @Nicholas L.

      Hi there, great job on the three deal paying out! I had a couple questions for you and hoping I can add value to your journey.

      1. Just curious on rural parts of the state vs suburbs vs city?

      2. By equity partnership, do you mean pooling your money to purchase the property w/o bank financing?

      3. Is saving on taxes important to you?

      The reason I ask this, is there might be a less stressful way to be a part of these multifamily purchases. I'm hosting a multifamily meetup in Alpharetta, GA on Jan 27th if you would like to stop by. I'm actually presenting about 'Multifamily Overview'. Our group just closed on 176-units in Montgomery and 2020 is off to a fast start! Let me know if you are interested...the food is epic too at the restaurant we are having it:)


      1.  Perhaps a little ATL-centric of me, but by rural Georgia I mean more second and third tier cities.  Anywhere I get the right deal and opportunity would be in scope.

      2. I would prefer to use the fund for the downpayment and leverage the rest. I can get more equity growth, interest write offs, and invest in more properties to diversify.

      3.  Yes, I am in (what I consider to be) a very high tax bracket.  

      I appreciate the invite, but right now I'm traveling to New York Mondays to Thursdays, which legitimately makes networking complicated.  I'm still open to connecting with other investors on the weekends.

      Most of the important things have been covered here and I will echo the importance of having a syndication attorney. A fund falls under different rules than the "typical" apartment community syndication and you need assistance from an attorney who has experience with funds. I am NOT an attorney but I can provide an example to illustrate the kinds of details we are all talking about, and there are literals thousands of these details in the syndication or real estate fund or REIT business. For example, a syndicator can accept IRA funds without much concern regarding the % of IRA money in the deal because the kinds of syndications we are talking about are exempt from the rules that would govern the same % of IRA funds in a Fund. If you are a new syndicator you will probably have difficulty raising money for a blind offering, so you will want to do an offering for a specific property and get a track record before trying to get investors to invest in a fund without knowing exactly what properties you may invest in. This is achievable for you, its worth the time to acquire the knowledge first so you can execute a solid plan. Hope this helps!

      Part time will not work. Also, on top of your real estate attorney and a syndication attorney. Depending on how you structure this you are selling securities. Also you want to be able to a complex with a little bit of mass. What I mean by that is there is a good amount of units so you can spread costs and expenses.