Raising a Distressed Single Family Fund
Monkeys,
Longtime user on a throw away. I am thinking of raising $5-20m to buy foreclosed single family throughout the southeast. Can anyone speak to being a mid-level (associate/senior associate) with 6 years of REPE experience and trying to raise a fund?
My thoughts are to create a pitchbook explaining my investment strategy and potential returns and send it around to HNW offices and funds to maybe spark interest. I would go on to use the capital to purchase foreclosed homes in strong areas at auction using cash, generally put a renter in, refinance, then sell or hold.
Please be critical and poke holes in this idea.... That's what you all are best at!
Do you have existing relationships with the HNW offices and funds?
If not, I recommend sending said deck through a CRM, just so you can watch open rates and click through rates. My guess is: if you are sending a cold email to people you have no relationship with, you will very likely get no responses at all.
Admittedly, there is a lot I don't know about you, and a lot of details that could be relevant in your business plan, that you simply did not outline (understandably) in an online forum, but at the end of the day, your high level plan is being done by both well capitalized individual investors AND large PE firms everyday. So, unless you have a way of creating stronger returns or mitigating risks that groups with lots of experience are not finding, you will likely fall flat very quickly.
Now, the concept, in general, is totally fine. I have bought BRRRR properties and fix and flips (although never from auction directly, and always just with my own money), and made good money. They are A LOT OF work to both source, oversee renovations and manage. This is a business plan that is VERY challenging to outsource, so I would plan on being the one at the auctions, overseeing renovations, etc. This is not a spreadsheet game until you are buying closer to 9 figures per year in real estate, where 20-30k oversight on a renovation is rounding errors.
Thanks for your well written and well thought-out response.
I am most worried about my fundraising plan. What in your mind would be the IDEAL way for a young person to fund raise? I have a construction manager family member (35 years of project management experience) who is willing to be my partner, and would oversee any renovations or construction-related issues. I believe this would provide investors with a (tiny) bit of comfort.
I would approach this two ways:
First, if you really want investors and don't have a network to tap into through friends/family/coworkers, etc, then you need to build a network. To do this, you need to start a thought leadership platform. Post on LinkedIn about what you are seeing at auction, housing trends, flips in your market that seemingly made a lot of money, renovation hacks, etc.
Second, and tangentional to your actual question: I would actually start putting some numbers in a business plan. BRRRs are hard to make with investors, because the work involved is simply not worth the effort. Flips are hard to get investor interest because successful flippers are churning capital so quickly that they often are pipeline limited vs capital limited.
Then to echo others, if you want to flip houses/own rentals, then go out and buy some. If they are as cheap as you say, and you have enough to get a couple done, do it. Once you make some money on the first couple, recycle it into more. This can be shared on social media too, in the off chance you do start needing outside capital to grow. But chances are, you will either realize you hate it and not want to keep doing it, or that you are making enough money to fund your pipeline, thereby not needing investor capital anyways.
*Deleted due to duplicate message above.*
One idea is to first have proof of concept done on a deal and then show a potential pipeline of projects to the equity so it is not just a pitch deck only.
The proof of concept can be funded with a hard money loan for the debt. Some ideas for equity are 1) doing a 401k loan or 2) hire a business credit card consultant like fund and grow they can get business credit cards up to about $150k and they can show you to send the credit card funds to title for closing using plastiq.
The challenge with distress sfh investing at scale is souring deal flow where there is a big enough discount compared to the after repair value.
Your last sentence is very true. Thanks for the insight.
I have $150k cash to throw at this, and houses are cheap where I am from, so I think I can get 1-2 under my belt before pitching. We are sadly running out of time (by the time I get the fund raised, we may be in a different environment.)
Perhaps I am dreaming too big with the $5-20m number, as I would need to spread my search far and wide. This would mean I need my renovators to be far & wide, which probably would drive up costs.
Interesting post, thank you.
Some additional thoughts:
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