EP 419 – So You Want To Start A Fund

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This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property for pennies on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now, here's your host CEO of We Close Notes, Scott Carson.

Good morning, good afternoon, good evening, everybody. Welcome to this episode of the Note Closure Show. As always, Scott Carson. Excited to be here with you today. What a great day. It's hump day here in the office, Very busy afternoon for a couple of reasons. We are working through raising some capital for portfolio performing loans. We're selling some stuff off. We reached out to some investors last night so we had a lot of interest coming in. So we're working through, kind of going through the qualifications of with our investors now. What does that mean? Well, that means really for those that have expressed interest that we haven't dealt with before is literally talking to them, literally, hey, what's your goals? What are you focused on? Where is the money coming from? You know, those specific things. We'd love to have them fill out an investor profile sheet that gives us a little bit of background on where they're going from, you know, what's their income, what have they taken, what have they studied, what are they looking for to figure out if they're going to be a fit for what we're doing. It's a must have, you know, conversations and then investor profile sheet, kind of a CYA cover your assets aspect of things. So working through those, getting this out. So that's kind of a busy day. Plus, the fact is we're in the midst of our Loan Tales book, starting interviews for our chapter authors and going through case studies and things like that. So we had a couple great interviews yesterday and we've got a couple more scheduled for today. One of the things that we started last month is we launched the Sentex Podcasters Meet a group. It's just as a local group of podcasters that are getting together. So we're excited about that. Our meetup group has grown to over 80 people now and we've got 34, 35 people RCP to attend tonight. So we're pretty stoked about that meeting in South Austin tonight at Austin Custom Winery. So we're looking forward to that. We've come up with the dates, finalized hotels and date location for our Note Mastermind. And that's going to be the April masterminds, the 26th, 27th and 28th of April to be held here in Austin, Texas. So we're excited about that. Steph's done a good job negotiate with hotels, getting a pretty decent price point for the time of the frame and the time of the year is what we're excited about that April. We've also tried to finalize speaking spots for note Camp 7, which will be the first weekend of April. 4th, 5th, 6th and 7th. Excited about that. Got some great things that are in the works. So it's always busy, but I wanted to talk to this episode a little bit about people that are coming. Hey, I want to start a fund. And there's some things you got to keep in mind before you hire an attorney and start talking about looking for. Now, I think it's always important to talk to an attorney. You know, we've had Julian Sadati on here a couple times. Julian's phenomenal. She's done some big private placement memorandums, put some PMs of the SEC and stuff like that together for working on ours, working on others. I mean, she just came back from appearing and I guess the Growth con or the 10x conference and because she I'll put together Grant Cardone's apartment fund one. But there's some things you have to keep in mind. Putting a fund together is not something that you should do right off the bat if you've only done a couple deals or no deals. And that's, I think that's a big, big mistake that a lot of people do. Like, oh, I'm going to start a fund and then I'm going to start buying deals. Well, no offense, a fund. If you haven't done probably a million dollars in deals as far as raising that capital for individual joint venture deals or passive stuff, you probably aren't ready for a fund. A fund is really, it's a lot of work. And I only want to say that out of respect because some people are like, hey, I want to do some big things. I want to raise the capital. Mike, that's great. The first question I ask people when they're looking to a fund, what do you want to do it for? How big do you want to make it to be? And mistake that a lot of people make is like, I want to do a fund. I'm going to do a fund for half a million. Like, well, no, that doesn't really make sense. Like, well, why? So you're going to incur somewhere between probably five grand just initially to 20 grand in costs of putting together and paperwork and accounting and things like that. That's a sizable chunk right off the bat of fees for you. I mean, let's face it, you start racking up fees, you got to have that money working for you. And if your share of the profits are going just to fees, that's a win loss, the win for your investors if you're offering something or it's a loss for them because you're constantly having to try to maybe risk your deals and that what the fund is lined up to do. So the thing I like to tell people all the time, hey, fund's a great idea, but let's look at where you're at realistically in your business. And I'm a big believer. If you haven't done a million dollars raise $1 million in private capital already, you're not ready for a fund. Because a fund is still going to come back to the point of you having to do one thing, market. You still have to market to find deals and you still got to market to raise capital investors. So if you're not doing that and already at a little bit of a scale over a million dollars, you're not ready. It doesn't mean you can't go out and hire Julian to put together joint venture agreements, other things to help CYA cover your assets on things. I think you should still do that. What you should not do though is look like, oh, I'm going to do a big thing but I'm only going to do a half million dollar. That doesn't make any sense. It doesn't mean you can't start a fund at 5 million amount. But you've got to be prepared. Now if you got some wealthy friends that are willing to put some money up for you, they're willing to invest in stuff like that, okay, that's a great thing. There's nothing wrong with that at all. But have you done the deals? If you've done one, two or three deals, you're not ready for a fund. If you're not raising capital market on a regular basis, you're not ready for a fund. If you're still working full time at a job, you're probably not ready for a fund. Now funds kind of fall into a couple of different categories of what people are using funds for. Especially in the note space. You have people that are buying non performing notes and then selling the assets off or working to get them to reperforming. You'll have like our buddy Jack Croupy, runs a big fund or used to run a big fund on the BK chapter 13 side where that's all they focused on. They had investors come in and give them a chunk of cash and they went out and bought a bunch of BK Chapter 13 loans because they're basically performing. You have some funds that are just buying performing notes. You have to look at what you're going to offer up your investors owe to. That's another thing to think it might. Now with a fund you're probably going to offer up some sort of flat ROI, flat return on investment. I would not be doing 10%. I would probably be doing some. Around 6 to 8% is a prep rate and may offer a percentage of the back end profits. Now what's the back end profits mean? Well, that means you're working assets through. You're providing quarterly payouts or every six month payouts to your investors. I wouldn't recommend monthly, that's just a lot of paperwork. Quarterly payouts, their interest rates to your investors. Then you're making profits on the properties, paying the interest out of it, covering your expenses and then whatever's left. Then you're splitting it up either 20% back to your investors and you're keeping the 80. Some funds are doing the opposite. Oh, we're going to back to our investors and keeping 20, whatever that back end split, that's up to you and what your deals will bring in. What you have to realize is that's still working a back end. You've got to forecast that out with expenses, you got to forecast that out with time frames. Great thing about a fund is tying up people's money for a period of time. Common thing I see is you tie it up for 36 months and there's like a two year extension on it. So people work these assets through for 36 months. People can then have the opportunity to either opt out or they extended another two years of their money. And just all depends on how you're paying and how the portfolio is going. But the minute you start bringing in people's funds, you better have that money ready to distribute or start purchasing assets. The last thing you want to do is start taking money in and not have any deals to close because you're still paying interest on that money regardless. So what a lot of funds are doing is they're kind of a stair step approach to funding that for every quarter million again. Then they look to deploy that so that they're not having to wait for $1 million portfolio. Those are buying 200,000, $250,000 in assets. They can deploy that money immediately so it's not sitting on Their accounts waiting for a half million dollar trade and go from there. Now that's going to start things in the bigger funds, obviously their minimum investments a million bucks because they've ballooned to bigger deals and are skyrocketing. That stuff. The thing you also to keep in mind for everybody that's important to do is you have to bring on professionals to help you out with this as well. So you got some salaries you'll be paying because you're probably bringing on some accounting staff. You can't be the only person running the fund because you won't be able to get anything done. So you've got to bring on employees to help you with your servicing your due diligence. You may want to bring some of that in house versus outsourcing it. And that's not saying you can't have some VA virtual assistants helping with some things. But you're still going to need some on site people, particularly not on site, but some people helping you. They don't have to be. You don't have to have a huge office, but you're still going to have some people that are coming in. That's the thing you keep in mind where salary is going to cost you per year on that. If you're going to bring on somebody who's an admin staff, your marketing costs, you're going to probably want to be attending some different conferences. So you start figuring in that stuff into your budget, your travel expenses and things like that. And hopefully that's coming out of the profit side of things. That's just more numbers to look at. So a lot of people get excited to follow the idea and the romantic nature of having a fund. It is a lot of work. That's the thing you keep in mind. It doesn't make it easier for you because it still come down to two things. Are you closing on deals, you raise capital, are you marketing for deals? And do those answers are no, then you don't need to do a fund. A fund would just be a waste of money because you're still then you're not able to deploy. You just spent money to put something together. That's having a fund is not automatically raising capital. That's the thing that most people don't realize that that's not going to help you raise capital. What's going to help you raise capital is your marketing and the deals that you're doing. Those two things first and foremost can do more anything else. Otherwise you should probably stick to the individual joint venture agreements. The thing is that some People look to a fund because they can offer cheaper rates. Well, you can still offer a cheaper rate. We're not saying give away half the deal. We're not saying give away 12% or even 10%. It's just how you market. Are you marketing to IRA investors? Are you marketing to sharks reminding other real estate investors they're going to want a decent return on investment? For the most part, you have to go out and find those people that are happy with a 6% or an 8% return. There's plenty of those people out there. What you don't realize is most people that we get so bogged into being around other real estate investors, either through networking groups or meetups or conferences, we fail to forget that that's the top 5% people that are knowledgeable about things. They're the most aggressive when it comes to returns. There's a lot of people out there, friends, families, colleagues, pierced people all around us that are going to be completely happy making 8% because there's money making 0%. You know, we had Nate here on a couple days ago on Money Monday's podcast. They were talking about they've got quarter billion of A$250 million still sitting, making 0% on their books. People have transferred money over but not implemented. That's a lot of money just sitting there making zero. If you could off find out or talk to people or communicate with those people, say, hey, I'll give you 8%, pay you out quarterly, secured by real estate and a fund. Why wouldn't you do that? You would, wouldn't you? You totally would. I think you would. Think you'd be silly not to. So that's the things to keep in mind. I'm trying to pull up our Facebook profile here real fast, see if we got any other questions from people. Good stuff. One of the great things out there, everybody is, especially with the Jobs act, they made it a little bit easier for you to raise capital. Talking with people that maybe you don't have a relationship with. I still believe raising capital is the most effective. When you build relationships with people, that means just networking. That means getting out to know them. That means being in front of them, marketing to them with emails or dropping some postcards out or one of the things that we did, we drop our book out. We drop a postcard out with a link to my book. I can download my book for free. Look at some case studies that we've got available. This is just one piece of direct marketing that we send out to IRA investors. Not always the people that have self directed IRAs, but the people that have money sitting on the sidelines and we, that's one thing that we farm. And then we also take that same list that we have purchased and we market to them on Facebook and LinkedIn by uploading the list of contacts to LinkedIn so we can go out and find out they have a LinkedIn profile and connect with them. It's one of the easiest things to do. It doesn't take that much to do, but you still got to provide content on a regular basis. This is why we are so heavily in marketing. So that's one thing you got to look at too. If you're not successfully marketing on a regular basis right now, you need to make sure and probably hire a full time marketer that understands what you're doing to help you get things out. Especially when you have a fund, you want to make sure you're not stepping on anybody's toe. You want to make sure that you're not pissing off state regulators or anything like that. So you got to be very careful when you add a fund to what you're doing because now you've gotten approved. Doesn't mean it's a bad thing. Just make sure you're falling in line with what's going on. You don't want to be like some other people that we've seen get shut down because they violated laws in advertising because they were saying guaranteed and safe and secure. Those are three statements right there you don't want to have in your business. Like I was literally in an event and one of the guys was talking about real estate and he was like, oh yeah, it's safe and secure. In his presentation, like, dude, don't do that. You're dealing with non accredited investors here. Can't be saying that. That's just not a good thing. You got to take safe and secure. There is risk, it's real estate. You have to have those type of disclosures. You've got to really talk with the people that you're dealing with. And you talk to Julian or any SEC attorney, puts together private placement memorandums, they're going to tell you there's different levels. There's some that you can just work with accredited investors, others you can work with sophisticated and accredited. Others you probably don't want to work with. The most important thing, like I said before, is having a process right now, putting that together as a note investor, whether it's talking to people you know and either putting them on individual lending agreements or individual joint ventures versus you look at getting a fund right out of the gates. And so that's what I would tell you. Like I said, if you haven't closed down a million dollars in deals, you've raised a million dollars in private capital, you're probably under where you need to be. Now, putting a fund together is not a bad thing. It takes a little while to do that. If you want to do that, that's a goal. But you have to keep marketing for deals and keep making offers and working the same routes. So a lot of that stuff, you want to develop and hone your skills, find the vendors, find the legal side. I've seen so many people talk about putting a fund together. I ran into this as well. I was having a couple people that were gonna be partners with us. And I'm like, yeah, after six months of working through, getting things like that, I'm like, I don't wanna work with these people anymore. I sure as I don't wanna be in a fund, I don't wanna be married to them. Cause that's what you think. You gotta realize you start a fund, you've got partners on things like that. You gotta have some steps in line. Hey, what happens when things go wrong? If somebody wants to leave the fund, what happens? Somebody wants to leave the company, what's the payout? What's the buyout? How's that work out? You've got to literally put those things in place to keep in mind and things. That's why you may not want to bring on partners, you may want to bring on staff that are just paid salary. And then you've got to figure out payroll. Then you've got all that good stuff that you have to do with the workforce, commissions and things like that, which is kind of a pain in the ass too. But it has to be done. Welcome to being an employer at that point versus just entrepreneur. Good guy. Anyway, that's what I would tell you guys looking to start a fund. Let's look at where you're at. You've raised a million dollars in capital. Maybe something to look at. I would highly encourage you to talk to somebody before making that decision. And you know, one of the great things about Julian, Julian will sit down and say, hey, you're not ready for this. You're not ready for this. You need to get some training, you need to go through, you need to close some more deals before you look at doing things in the big picture. So other than that, guys, that's all I've got for you today. Go out, make something happen. And enjoy your hump day and we'll see you all at the top. Bye.