How to Start a Real Estate Investment Fund from scratch

Alright. Let’s talk about how to launch a real estate investment fund. For the people out there that are house flippers or wholesaling and trying to scale your business and it’s just not working… we’re going to talk about the most efficient way to start/scale your real estate fund.

Have you ever even thought to scale your investments through a fund model? The most typical way to start is either house flipping or whole selling.

So I have a mentor who is the co-founder of a $20 billion family of funds that are primarily focused on real estate. They buy massive apartment complexes, fix them up and flip them.

Instead of a flipping a house for $100k and selling it for $150k, they’re buying an entire complex for $25 million, fixing it up and selling it for $38 million. Crazy right?

It’s the same concept as house flipping, just lot bigger scale. And they use a fund to do it because, it’s incredibly hard to do it any other way.

Alright. Let’s dive into it. When launching a real estate fund, where do you start? How do you get going now?

I was just recently talking with Aaron Wagner at Wags Capital. He’s one of our mastermind mentors for Investment Fund Secrets (a program to help people start and scale their fund). He came onto our live coaching call to help out entrepreneurs like you and me.

Anyhow- we do this live Q&A every week and we sat down and he started to talk about his journey: How he started off in the real estate world… How he started investing in hospitality and other things like storage units.

Wags Capital now has about $2 billion in enterprise value. Crazy right?!

The biggest mistake I’ve heard from dozens of people is they think they need to go and get all of the legal docs set up when they want to start a fund. NO! – and just so you know…. The first step also isn’t to go find the investors either.

The first thing that you should do when starting a fund is to go out and find an amazing deal. The most important thing is the deal- and you’ll hear that from everybody. The same goes for private equity. The same goes for hedge funds. The same goes for venture capital.

Go find the investment or the deal and then you can play ball. Aaron Wagner always parts the following advice to amateurs:

“Be a bird dog”

Allow me to add some context for him: Bird dogs go out and find the ‘bird’s’ and bring them back and get patted on the head. In high finance- go out and find an amazing deal, bring them to a real estate investor, and, rather than a pat on the head, they will pay you ~5% commission.

And 5% on $250 million is a pretty good piece of pie. That’s how Aaron Wagner started out.

Aaron was in college when he started to go out and find these deals. He was making sometimes $5k – $10k a deal. But then he learned that the people he was giving the deal to, were making like $60k – $80k on the same deal.

And he was the guy doing all the work! He was like, what!? $10k is great, but I would much rather take $80k for doing the same amount of work. You are probably wondering how you can do the same thing right?

A mentor of mine is a co-founder of a $20 billions dollar fund. He always told me that if you have a good deal, the money will find you. Most of you might have heard this before, but he said,

“Bridger, I was always worried about launching a fund too. One of the biggest things I always told myself was, I don’t have a track record. I don’t have experience. I don’t know how to get started.”

And he went on by saying,

“Bridger, step number one is you need to find an amazing deal.

He continued by presenting an example to me…He said, “I want you to imagine for a second with me that we just found a Lamborghini in Billings, Montana, and that Lamborghini – we could buy this weekend for (figuratively) $50k. Just go with me on this. Assume it’s all verified. This Lamborghini is selling for $50,000. We have a buyer on Monday in California that will buy that same model/color everything for $200,000…

Could you find the $50,000 in order to make the $200,000??

I thought to myself, yeah…. I think I could. I have friends and family. I’m sure I could get someone to lend to me the money if it really was that good of a deal…

And he cut me off by saying, “what about $100k?”

And I said, yeah, I still think I could do that…  

He says, “Ha! there it is. It’s not the lack of experience or an ivy league degree. It’s a lack of confidence in the deal. If you are confident enough in the deal, you should always be able to raise the money.”

He said that when he and his partner started this is what is would typically look like:

They would go to Mrs. Johnson’s office- assume Mrs. Johnson was a wealthy woman in the area. Really wealthy-

And she had a meeting to talk with John and his partner about potentially investing, but right before they met, ‘Mr. Harvard’ had just walked out of her office with ‘Mr. Ivy league’ pitching why she should invest in their fund.

My mentor went on by saying: “Their pitch would typically go something like this…

“Hey Mrs. Johnson, we theorize that in the next 18 months, we can start buying properties if xyz take place… And we theorize that…. We’re so smart… And we’re Ivy league so we’re going to make a lot of money…. “

And that was their pitch. Now it was the turn for my dad and his business partner:

“Hey, Mrs Johnson, we’re also launching a real estate fund. However, we don’t have an Ivy league degree, but we just found a property. It’s in Miami, Florida, and it just got appraised for $8.2 million. But we can buy it before the end of this month for $4.1 million, almost half off! The guy is going into bankruptcy. He needs to sell it quickly. If we can close by the end of month at $4.2 or $4.1, we can get this. We’ve checked and re-checked all the numbers and- I mean, this is just a really good deal.”

He said 9 times out of 10, they chose the deal over the degree. And that’s how they scaled their initial funds so well.

So to recap:

Step #1– is the deal.

  • Step #2 is still NOT to go do legal docs.

Step #2– is to frame out the deal.

Get on an Excel spreadsheet. You don’t need to do all this crazy stuff, but frame it out, make a model, make sure everyone’s gonna make money.

Step #3– is to go raise the money.

Raise money? You might be saying- ‘Bridger. I don’t have legal docs. How am I supposed to raise money without legal docs?

My mentor would follow this same process, and he would say-

“Hey, our legal docs are getting done in a couple of weeks, but if everything checks out, can we put you down for $700,000 on this deal?

And she’d say, “Yep- If everything checks out and it works, sounds great!”

They started by pitching the deal over the degree and they would get soft commitments from Mrs. Johnson or whoever and get the money ready. And then, and only then they would come do the legal docs.

Step #4- (last step) would be set up the legal docs.

Now this process is the same for both a fund or a syndicate. However, there are a few long term implications that differentiate them.

A syndication basically means that the investment is on a deal by deal basis. Also, syndication typically means that you are syndicating money together from different sources.

You’re going to compile the money into an LLC and that LLC and all your investors are now partners. Let’s say you retain 15% equity because you found the deal. And then 85% equity is available.

You set up an LLC. The LLC does the deal -buys the real estate- or whatever it is. And then the LLC makes the money(if the deal works out). All your investors get money back pro-rata and you go and you find another deal. It’s that simple!

House flippers are probably the best people on the planet at doing syndication deals-

They go find a deal. They find hard money lenders. They find investors and renegotiate. They set up a new entity. They do the deal and they go back to the start.

I have one friend that has flipped over 300 houses, primarily doing syndication deals.

This a great way to build your track record. If you don’t have a track record just start with something small! That’s fine. On the first couple of deals, build a name for yourself. And then over time you can ask for more and more.

My mentors of a deca billion dollar fund started off by doing these syndication deals until one time, it didn’t work out so great. They raised money in an LLC, like $5 or $6 million for this awesome deal. They were just wrapping things up when their last investor didn’t pull through on his investment. He was like $80 grand short.

They lost the entire deal because of that. At that moment, my mentor said,

“We can no longer do this hamster wheel syndication process. We need to scale through a fund. “

They realized that when you launch a fund, you only have to do this process once. And then you can scale and do as many deals as you want.

You only have to raise money once! You only have to pitch those investors once. You set your legal docs up once! And then you can do as many deals as you want in that fund.

I started with syndicate deals for my debt fund, then finally realized that the fund model is way more efficient. Thanks to the fund model, we’ve done over 275 deals to date!

But it’s simple- I just issue loans, pay out my investors, and put the excess capital back in the fund. I don’t have to worry about raising the money because the money is already committed to my fund.

That’s why with everyone you see at the top of Forbes- they all run funds because it is the most lucrative way to scale a business/investment!

In my mentor’s funds they could go flip a $35 million apartment complex without raising another dollar if they wanted to. They already have the money. They have the investors everything’s lined up and everything. This is a huge advantage because they can close very quickly on deals.

Remember, I started my first fund when I was 23 years old and my first syndicates when I was 22. And I just turned 25 years old!

You’re probably thinking- ‘Bridger- you’ve only been successful because of your connections.”

My mentors have never invested a dollar in any of my funds. I had to go raise money just like anyone else. Trust me though ( I asked).

Well, that’s enough story telling for one day- but I talk more about how I raised my first fund in my free 1-hour webinar. If you’d like, you can go sign up for it at Investment Fund Secrets.

Hope you enjoyed today’s post!

Bridger Pennington

One thought on “How to Start a Real Estate Investment Fund from scratch

Leave a Reply