Looking for somebody who has nothing better to do than help answer an equity question....
I'm a commercial broker - the kind everybody loves to hate. I make good money doing brokerage, but for past few years I've been buying and selling 1-2 properties a year. I'd say I have a track record of 10 deals now, and while I don't tend to hold very long (<36 months), my IRRs on a levered basis are on average north of 100%. My secret sauce is I can figure out what a building is worth in less than a minute, so makes it easier for me to spot deals.
These aren't big deals ($1-4M typically). I'm thinking about raising money, and figured I'd come here to see if some of you may be able to share some knowledge on where I should focus, and if what I'm thinking is realistic. I don't want to do friends and family because of all the handholding and questions. My ideal situation is one or a few investors who can cut small checks, but can also scale to $30-40M or so worth of deals (multiple smaller deals) since I'm pretty confident I can buy 6-8 of these deals a year if I focus on it rather than brokerage. I'm guessing a typical capital stack would be 60% LTV IO bridge, and the rest would come from the investors as LP, and myself. Question I have is:
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What is realistic in terms of return expectations from such an investor, if they were to exist. Would a Preferred return in the 6-7 range with a promote of 50/50 on anything above say a 12-15% IRR, and 80/20 above a 25% IRR, get any traction? These are opportunistic deals, usually empty with deferred maintenance.
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Where and how would be the most efficient way to go about finding this capital since they are small deals and most people don't want to deal with equity raise for these small deals. I want an investor that won't require a lot of reporting, and instead can look to my track record, references, personal balance sheet, the fact that I'll put money into each deal, and just fork the money over like a line of credit when I need it, and when I bounce out of the deal, give them their proceeds and move onto the next deal (another reason why I'd rather just have a single or very few investors).
If anybody is willing to help with this, it would be appreciated. If not, I'll take it as being a sign of endearment to real estate brokers.
Maybe I missed it, but what asset class? I'm assuming multifamily if you've been doing the deals on your own?
I think you're going to have a very hard time raising from an investor that can scale to $30-$40M deals with no prior investment management experience. You're far better off raising from friends and family to start, while maybe trying to bring in some capital from current/former clients that fit the profile. Once you've got a few deals using other people's money under your belt you can start looking bigger.
That being said...
1. Depends on asset class - for multifamily a 6-7% pref with a promote over 12-15% will fly, might be able to sneak in the 80/20 but probably not with early investors. More likely need an 8% pref for commercial.
2. Any serious investor will require a lot of reporting. Your best bet, again, is going to be friends and family or alternatively HNW indivs if you have the network.
commercial (office, retail, and light industrial). A few of the deals I've had partners (that I've brought in) on, but they're only good for a few million, and they're pari passu which isn't ideal. I'm trying to find one trough I can keep going back to that isn't going to ask a lot of questions because the trouble is the deals are hard to underwrite but I know they pencil. I'm not opposed to giving the investor ownership of the property as long as I can make the decision on selling and who to use to sell it, and then take my profit solely on the sale, but I'm not sure if that would be something that would make me different enough to offer up.
Syndication terms and splits are market driven. What are syndicators in your universe charging - that is probably what you need to charge. You may need to charge less on your first few to raise the capital.
As it relates to not wanting to report-your best bet is probably friends and family..exactly what you said you don’t want. Why would a rich person write you a check and say, I barely know you, but your track record is great, so here’s your money and I’ll talk to your in 3 years. People like to monitor their money, even if it’s a mid year and year end update. The investment management business is buying, managing and exit deals plus raising capital, managing the relationship, and reporting.
Also, what you’ll probably notice really quickly is that small deals can’t throw off the fees to keep the lights on. You’ll probably need to scale to larger equity checks, which means your returns will come down (highest returns are in the lower middle market where you invest now). A $3MM deal just can’t throw fees off to support staff etc like a $20MM deal or a $50MM deal. That’s half the reason people scale up - you make more nominal dollars as deals get bigger, plus they get easier because it’s easier to buy and sell to a professional buyer / seller than an individual HNW.
OK thanks. I can do larger deals as well, the returns aren't as great, but I definitely have it in me. I just think it's easier if I start small with somebody that can scale. I'm not opposed to reporting, but I certainly don't want an investment committee asking a lot of questions. If you can easily plop a deal into Argus or some other underwriting spreadsheet, so can every other a-hole, and then it's a race to the bottom in terms of aggressiveness of underwriting and capital. I like deals that you can't capture in Argus, or have outcomes that a typical investor would put a very low probability on but that I know is actually higher because of some specific market knowledge I have.
Anyhow, based on what I've heard, it sounds like I need to tap a UHNW investor or family office. Friends and family I'll skirt since mixing money with friendships and family is not something I want to do. I don't want to talk about real estate or deals every time I see somebody I know.
You ability to spot deals is honestly no different than anyone who has spent time doing valuations on properties for a few years. Where your advantage really comes in is the deal size. That just isn't an attractive area for most firms to transact in becuase of the time and costs it takes to do so vs the capital outlay they can do. If you have 10m to deploy you would need to buy 40 1M buildings if you do a 25/75 equity to debt ratio on the deal. That is a huge amount of work for anyone with a decent capital pool to do.
As for your hurdle questions, no. Hurdle rates for deals in this size would be at a bare minimum of 8 more likely 10% for pref. Your step up hurdle rate splits are a joke. 50/50 on a 12% IRR is never going to happen with anyone who isn't a complete moron. I can get a 12% on pretty much any deal by simply using creative financial engineering and doing pretty much nothing else.
Appraisers do valuations all day long, and they generally have no idea what anything is actually worth. It only looks like they do because the banks hand them the purchase agreements - a completely asinine practice imo. Analysts at investment firms are better, but they only get there after opening argus or excel and asking a million questions. My edge is cold calling and relationships with other brokers, and knowing very quickly what has some fat on it.
That being said, I do appreciate the feedback and is what I came here for. The deals are not all $1M, but they do generally range in the $1-5M arena. Sounds like I may be better off just using some friends & family money for some cheap equity, and cultivating a solid bridge lending relationship instead, since I have a lot of conviction in my deals. On a similar note, are there real estate debt funds that do participating debt? Is that a thing that they do? Just curious if that's another avenue to explore, but not sure if anybody is out there doing that.
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