the art of the raise final - how fund structures used in re new edition mvi

The Art of The Raise

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ADVANCED

THE ART OF THE RAISE

HOW FUND STRUCTURES ARE USED IN REAL ESTATE PARTNERSHIPS


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What Does It Mean to Have a Real Estate Fund? .......... 4

Types of Structures Are Out There .................................... 5

Private Capital With A Dedicated Allocation ......................... 6

Joint Venture Fund ................................................................. 7

The Classic Limited Partnership Structure ............................ 9

Aligned Investment Agreement with Institutional Capital .... 10

Brokerage Structure ............................................................ 11

Types of Funds ...................................................................... 12

Call ing the Capital ................................................................ 13

The Three Sources .............................................................. 14

Due Diligence ...................................................................... 15

Why Investors Like Real Estate ........................................... 16

Relating to Investors ............................................................ 17

Building and Selling Your Business Model .......................... 19

Understanding Discretion .................................................... 20

Risk Sharing ......................................................................... 21

Fees and Incentives ............................................................. 22

REITs ................................................................................... 23

Clawback ............................................................................. 24

Catch Up Fees………………………………………………….24

Crossed Promotes ............................................................... 24

Leverage .............................................................................. 25

IRRs Vs Multiples ................................................................. 26

Conclusion .............................................................................. 27

About the Author ................. 28Error! Bookmark not defined.


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WHAT DOES IT MEAN TO HAVE A REAL ESTATE FUND?

A fund is essentially a pool of money investors put together to make investments.

Some funds are closed, and managers seek funds primarily through their own connections and networks. Often, these types of funds require large-scale investments, in terms of millions of dollars.

Other funds can be invested in through traditional investor's markets and may offer retirees and middle class investors the opportunity to invest.

One of the biggest advantages to investing in a fund is that your money will almost certainly be managed by a highly knowledgeable and reputable money manager. This person will likely hold years of experience in the partial investment field, and will know the ins and outs of the industry. Real estate can allow investors to make huge gains, and because it involves tangible assets that everyone is familiar with, many investors consider real estate easier to understand than other types of financial vehicles.

If you are a real estate expert looking to start a fund, you wil l gain access to more capital and potential ly important connections by bringing investors on board. Unless you are already very wealthy, you likely will not have the funds necessary to fund major real estate investments all by yourself.

And even if you have the capital to do it yourself, working with investors wil l al low you to spread risk. Of course, you will have to share part of the rewards, but the trade-offs are well worth it. Further, through management fees, you can even get paid just for running the fund.


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TYPES OF STRUCTURES ARE OUT THERE

As we mentioned earlier, there are several types of real estate funds.

Investors and fund managers can choose from a variety of options in order to create a structure that best serves the needs of both the managers and the investors.

In this section, we will outline four of the most popular types of funds, including:

1 PRIVATE CAPITAL WITH A DEDICATED ALLOCATION

2 JOINT VENTURE FUND

3 THE “CLASSIC LP” STRUCTURE

4 ALIGNED INVESTMENT AGREEMENT

We will go over each of these types of funds in the following sections and explain some of the key differences.

We will also highlight some of the strengths and weaknesses of each fund type.


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PRIVATE CAPITAL WITH A DEDICATED ALLOCATION

A private capital fund is pretty straightforward.

Capital simply refers to money, so private capital then is simply private money. This means that investors are choosing to invest their private money into a certain undertaking. Often, with this structure it will actually be investors who seek out qualified managers to handle their investments.

The strengths and weaknesses of this structure largely stem from the fact that it is usually a small group of investors and a dedicated team of managers running the fund. Usually, investors and managers will be very familiar with each other, and may even be friends.

This “coziness” has many strengths. Funding will often be private or raised through personal networks so managers don't have to “hit the road” and make sales pitches to raise capital. Often, this tight-knit group will be flexible and able to quickly adapt to rapidly changing circumstances. Given how turbulent the economy can be and how quickly opportunities and risks can develop, this may prove essential.

Still, there are sometimes conflicts over discretion, meaning how much control the fund manager has to make decisions without the approval of investors.

Further, personal relationships may come to interfere with business relationships. Also, because the group of investors is generally quite small, they will be taking on a considerable amount of risk. If the fund should fail or lose money, it will fall squarely on the shoulders of a small number of investors.

Funding is private and rel ies on personal networks and connections Ability to quickly respond to changing market conditions

STRENGTHS

Personal re lationships can complicate business Rel iant on a small group of people High levels of risk for investors

WEAKNESSES


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JOINT VENTURE FUND Sometimes fund managers and investors may reach out to people outside of their own fund or company to come on board and do investments together.

This is referred to as a Joint Venture (JV). In this situation they may opt to do a join investment with another investor or property group. This helps to spread risks and leverages the skills and networks of everyone who joins up with the joint venture.

Let's say you are running a 20 million-dollar real estate fund and are approached by a local real estate developer, John. John a smaller player, managing only 5 million dollars’ worth of capital and assets, but he has a good reputation, and his investments are paying off. John specializes in an area you are familiar with, but don't count yourself as an expert, say hotels.

John knows of a great investment opportunity for an older hotel located on a prime beach. It's selling for 5 million dollars, but he thinks he can negotiate down to 4.5 million dollars. Not only that, but John is confident that with a million dollars’ worth of remodeling and rehabbing, he will be able to sell the hotel for at least 10 million dollars.

The problem is that John does not have the 5.5 million dollars to buy and remodel the hotel and has only 2 million dollars to invest. John decides to approach you and your fund with a deal. He will put in 1.5 million dollars of his money, and your fund will put in the additional 4 million dollars.

Then, John will help oversee the remodeling of the hotel and within two years sell the hotel off to the appropriate party. John will then split the profits accordingly.

Have to manage fund-to-fund rela tionships Have to share in prof i ts Potential for more poli t ics and infighting

WEAKNESSES

Able to leverage assets and ski l ls of mult ip le companies/ funds Spread risk among several companies/funds Increased networking potential

STRENGTHS


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As we can see, a joint venture can be a great option because it spreads risk and can also allow you to tap into skills that you yourself do not necessarily have. In this case, you don't have hotel real estate development skills but John does.

John, on the other hand, doesn't have the capital necessary to complete the deal, but you do. By teaming up, both parties benefit and if all goes well, both parties will profit.

One of the most difficult things with a joint venture is mediating differences between investors.

If the deal is 75-25 with your company putting up 75 percent of the investment, most likely you will have the most say in any investments. If it's 50-50, however, you may need a unanimous decision between both parties, and that can sometimes be difficult to arrange. Learning to deal with and mediate differences in investment philosophies and points of view may be essential for a joint venture, so always keep that in mind.


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THE CLASSIC LIMITED PARTNERSHIP STRUCTURE

This structure is perhaps the most common type of structure for a real estate fund.

Usually, this structure works best for smaller funds with a more limited number of partners. While the actual dollar amount of the fund may grow to become quite large, often a classic LP will have a limited number of partners.

An LP simply refers to two or more partners who join together to pool money and make investments. Each partner is liable only for what they have invested. Partners do not receive funding through dividends, but instead direct cash access.

Generally speaking, one member will take charge as the lead LP and invest the largest single portion of the LP. After a person comes on board as the lead LP, it's quite common to continue to raise funds through successive rounds of fund raising.

Like other partnerships, LPs depend on high degrees of trust. The better the partners are at working with each other, generally the better the fund will function. For an LP to work, the group of friends or partners must have direct access to a considerable amount of cash. This is especially true in real estate investing where investments can be quite costly.

In other words, a few thousand dollars might be enough to start up a small stock portfolio, but it's not going to be enough in most cases to facilitate investing in real estate.

Often easier to manage personal relationships Quick and responsive Small group of investors means increased rewards of profits

STRENGTHS

Can complicate personal relationships Need to establish clear authority and decision-making structure Limited capital Small group of investors assume all risk

RISKS


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ALIGNED INVESTMENT AGREEMENT WITH INSTITUTIONAL CAPITAL

An Aligned Investment Agreement with Institutional Capital is another important fund type worth considering.

For the sake of space, we will refer to this simply as “aligned investment” from here on out. With this type of fund, money is generally provided by an institutional investor, such as a hedge fund.

Institutional investors are in the game to make money, and if it happens that they believe that investing in you and your real estate investors will result in strong profits, they may choose to provide you with the capital you need to invest.

With this type of investment, the institutional investor generally controls the assets and usually has the final say on any investments made. In this sense, the fund isn't yours and the investments are not yours.

As a manager, you will earn your money through fees and other forms of income. For many people, this set-up probably doesn't sound as enticing as other investment set-ups that let you maintain more discretion and ownership of the fund.

Of course, on the other hand, there will be less direct risk to you. If the fund suffers losses, ultimately the institutional investor will have to suck them up.

Institution firms may have a lot of power and demand a lot of say Must work to please and reassure investors May have to defer to larger organization's wishes

WEAKNESSES

Access to large amounts of capital Pooled resources of larger organizations

Risk is assumed by large firms that can handle risk

STRENGTHS


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BROKERAGE STRUCTURE

For many people who are familiar with the real estate market, but don't have a lot of experience in running real estate funds, the brokerage structure is a great starting point.

In this situation, you basically act as a broker for deals. Let's say you are a commercial real estate broker for Sunshine City and through your daily work, you come across an office building for sale that looks like a really good deal. You know the owner is going through some financial difficulties and is looking to offload the property quickly, and so has priced the property to sell.

As soon as you see the property go up for sale you realize that it's a great investment but don't have the funds to invest yourself. You happen to have a local friend; however, who is handling an investment fund and would have the cash to purchase the building. You could approach your friend and see if he wants to do the deal and make the necessary investment. In exchange, you could receive a set fee or a part of the investment.

This type of arrangement is great for people who are familiar with a given field, such as real estate, but don't have the funds yet to invest. With this structure, you don't need funds to invest, but simply knowledge to leverage or sell. Best of all, a brokerage arrangement will allow you to get a feel for the investing side of real estate and help you get your foot in the door.

No commit ted capital Rel ies on sel l ing deals May not have direct contro l over investments

WEAKNESSES

Minimal r isk for investors Good for networks Can leverage a lot o f money

STRENGTHS


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TYPES OF FUNDS

Not much discretion. Investors can walk from the deal Incentives are not great . Deal-by-deal

FRACTIONALIZED

TRUST DEEDS OR

NOTES You go out chasing folks with small money invest in part of a trust deed

Lots of heavy l if t ing. Very inefficient. Constantly pounding the pavement for Deal Flow and Investor

INSTITUTIONAL

CAPITAL ALIGNMENT

“Approval in a box”

Deal by deal approval.

Allows you to build a track record with a larger player’s balance sheet

REG D FUND “CLASSIC

LP” STRUCTURE

Capital is already pooled,

Ready to pe deployed.

Capture Management Fees, and other

performance incentives (splits”)

DISCRETION AND FEES

Has sl ightly better discretion and fees but th is model al lows you to bui ld your brand. This is the “gateway drug” to a fu lly funded fund

Most discret ion, best economics. Most money made here. Prestige! The “Promised Land” Can add leverage to juice your fees.


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CALLING THE CAPITAL

For any fund to run, the fund manager must put together the capital necessary to make investments.

Or in other situations, investors may actually put money together, and then approach qualified people who they think will be able to manage their investments and record strong returns.

A fund may be open, or it may be closed. A closed fund means they are not accepting funding, and fund managers only work through their close networks in order to raise capital.

Often, once a certain milestone is reached, say 50 million dollars, the manager stops accepting funding altogether. This allows him or her to focus on actually putting the money to work. After all, while raising capital is important, actually making money off of investments is the real aim of the fund manager.

There are three primary sources for funding. Your personal network, brokers, and placement agents. Each one of these sources is unique and has its own advantages and drawbacks. As such, we will go over them separately and in detail in the next section.

You should consider all of them closely. Often, it is best to use a mix of the three funding sources. This helps you maximize the amount of money you receive, while also ensuring that risk is spread around.


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THE THREE SOURCES:

1 FAMILY, FRIENDS, AND PERSONAL NETWORK. Family, friends, and other associates you find through your personal network can be a great resource for funding. With this type of funding, you are often granted a high amount of discretion. As you start pitching your fund, your network may begin to grow. For example, you might pitch the idea to a friend, who then in turn introduces you to another friend who might be interested. You should be warned, however, that business relations often stress personal relationships.

2 BROKERS. Do you know someone who is managing over an investment fund? If so, they might be interested in acting as a broker for your investment ideas. Basically, if you see a good real estate investment in the market, you could turn to your broker and pitch the idea to them. If the broker closes on the deal, they can pay you a fee, give you a piece of the investment, or compensate you in some other mutually agreeable way. Often, however, the broker prefers to act as a capital broker. In this case, the broker will help arrange capital for its clients. The reason brokers prefer to work with this model is because they often lack the skills and knowledge to properly manage real estate investments. After all, that's actually your area of expertise, so why not benefit from it?

3 PLACEMENT AGENTS. Placement agents will introduce you to investors and help you find investment capital. Their services don't come free, of course, and they will likely charge you a fee. They may also charge the investor a fee. Placement agents are a great resource because they often have extensive personal networks that can be leveraged to drum up investments.


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DUE DILIGENCE

Of course, investors are not going to simply give you money. They are going to perform due diligence and inspect your personal background and investment vision, among other things, to make sure that you deserve this funding. If you have an established track record, they will look at this very closely. If you are new to managing investments, investors will look at your overall skill sets to try to figure out how good of an investment manager you will make.

Your investors will also want to know about your team. How many people will be working with you? Who will handle what? Do you guys have a track record of working together? All of these questions and more will be asked. Basically, investors will want to make sure that the appropriate skills are present and that your team will have the necessary chemistry to work together.

Trust and credibility will also be major issues. Often, emotions can have as big of a role in investments as logic. Investors want to feel that they can trust you and your team. Trust is important both for securing an initial investment and also for increasing the amount of discretion you have as the fund manager. And, if an investor doesn't trust you, they probably won't make an investment, no matter how good your pitch is.


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WHY INVESTORS LIKE REAL ESTATE While securing investors may require a lot of time and patience, there are some advantages to real estate investing vs. other assets. For one, just about everyone can come to understand real estate investing. Real estate isn't some intangible and hard to explain derivative or other difficult-to-explain asset. Instead, people get to invest in something they can see and touch.

Not only that, but also just about every adult has experience working with real estate. For example, the vast majority of us have bought or renting housing. Many people have also had to rent, lease, purchase, or build office and commercial space. While not everyone is an expert, just about everyone can understand the value of real estate.

Further, in spite of the 2009 Financial Crisis, real estate has a very strong track record. While prices did develop into a market pre-2009, real estate had grown steadily for decades beforehand. Many people made huge amounts of money. And, in the future, many people will again make huge amounts of money off real estate. Yes, real estate investing has suffered some brand damage in recent years, but many people still believe in it. And rightly so, real estate markets may have bottomed out and now might be the perfect time to invest!


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RELATING TO INVESTORS

So there are many reasons that investors prefer real estate to other investments. Now you have to relate these reasons to investors, and also sell the particular investments you want to make.

While people often think of the capital raising stage as the primary time to sell investments, it is often important to sell your investments at later stages. At the very least, constantly updating investors to the investments you are making, and explaining why you are doing so, will build trust and credibility. This could come in handy if you decide to launch another fund later on.

At both the initial capital stage and later on in the investment stage, you will need to explain to investors why you are investing in particular properties. Explain to investors what types of properties you look for and why you like them.

What are the particular attributes you look for in a property? Details in the construction, such as the type of wood used or concrete poured, so long as these details actually add value, can go a long way in building credibility. For example, let's say you are investing in an area with known termite problems, but the building you are looking at investing was actually constructed of termite repellent wood. Small details like this can go a long way in making you look professional.

There are numerous other ways you can add details to your explanations. Market conditions, urban development projections, crime rates, and all sorts of other details can add value to your investment and thus also your pitch.

You should be working constantly to redistribute money to your investors. At first, this might seem like common sense. Still, if you think about it, redistributing money may occasionally come at the cost of making great investments. For example, you might turn down an opportunity to invest in a great long-term deal and instead choose to invest in a short-term deal, simply so you can quickly return money to your investors.

In fact, securing some short-term deals that you can make some profits off of, and then distributing money is a great way to build trust among your investors. This little trick is known among many professional investors. In short, fund managers will look for a few very short-term deals to invest in, just so they can send checks to investors' mailboxes.


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Why? Money talks and in the investing world, checks are probably the greatest form of communication you can use.

Besides checks, you should also consider regular newsletters and also impromptu letters to investors to update them on events. Whether to use email or mail will likely depend on your clients and their preferences, so give them options. With some of your largest investors, you should also consider holding lunches or dinners, and other social events. This will keep the atmosphere friendly, but also ensure that everyone stays updated.

It is especially important to explain yourself to your core group of investors. These are the people who are providing the most funds and most connections. A solid group of core investors can be the difference between a successful and unsuccessful fund.

If all of this sounds like a lot of work, take solace in the fact that over time it will become easier. For one, you will grow better at pitching and relating to investors. Also, if you perform well, your track record will grow, and investors will come to trust you more. The more trust you build, the less explaining you will have to do.


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BUILDING AND SELLING YOUR BUSINESS MODEL Once you have caught an investor's interest, he or she is going to be very interested in seeing your business model. Most potential investors will want to know all of the details behind how you will conduct business and whom you will deal with. This is especially true for people who are new to the market. If you have a long track record, investors may be more willing to invest without going over all the details.

Investors are going to want to know about your basic business vision. What are you investing in and why? What skills related to this field will you bring to the table? For example, if you spent ten years as a commercial real estate broker and now see a lot of opportunities in the market, you should explain all of the details to your investors.

Also, investors will want to know how potential investments will come to you. Do you have a large personal network in the field? Going back to our example, if you are a former commercial real estate broker, you probably know a large number of property developers and other parties who are selling real estate. Make sure you sell any connections you might have. And if you are setting up a brokerage system where people will come to you with potential leads, let your investors know.

Also, how are you going to source various aspects of your business? For example, if you specialize in purchasing houses in bankruptcy and then remodeling them before flipping for a profit, who is going to handle the remodeling? Will it be in-house? If so, what experience do you have in this area? If you are outsourcing, what is the arrangement, and why is this arrangement the best possible option?


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UNDERSTANDING DISCRETION Discretion is an important concept for many fund managers and investors. Basically, discretion refers to how much control an investor has over making investments. If the manager has 100 percent discretion, that means s/he can make whatever investment s/he wants.

Obviously, many fund managers prefer this set up as it gives them the most flexibility and allows them to act as quickly as possible.

If a manager is running a closed fund with only 5 investors, these investors may ask to have greater oversight and control over their investments. In a certain sense, the investors may ask to act of a sort of board of directors and actually require that their fund manager obtain approval before making a specific investment. In this case, the fund manager has no discretion.

Investors might also decide to allow discretion for small dealers. This can be thought of as “stepping up” discretion. For example, let's say a fund manager is managing over 20 million dollars in assets with contributions from 10 investors. These investors may opt to give the manager 100 percent discretion for all deals under $500,000 dollars.

If you are just starting a fund, you may not be given full discretion. Still, over time, many managers have found that with repeated strong performances, investors become more trusting and are often very willing to increase discretion. Trust is very important. And over time, many fund managers find themselves with 100 percent discretion.


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RISK SHARING While individual circumstances may vary, risk is generally shared in portion to the amount of money invested. Most fund types, including limited partnerships, try to limit total risk to the amount of money that is invested. This means that if a fund goes bankrupt, usually investors will not be asked to pay up more money than they have already invested. And if this is the case, those who invest the most will lose the most. Those who invest the least will lose the least.

Risk sharing is one of the most important reasons why people invest in funds. Even a wealthy person who has enough money to facilitate all of the trading on his or her own may opt to start or participate in a fund, instead of going it alone. Why? Most of the time the investor will be looking forward to sharing risk. The simple fact is that no matter how good an investment looks, it will come with risk. By sharing risk, an investor limits liabilities and potential losses.

Of course, with shared risk there also come shared profits. After all, people don't want to share the risks if they also don't get to share the rewards. Generally, people are rewarded in proportion to how much they invest. Of course, the people who manage the fund and actually direct trading, will likely stand to earn more through fees and performance bonuses.


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FEES AND INCENTIVES

Managers do not manage over investments free. Managers are highly-skilled and expect to be well compensated. As such, they usually charge a variety of fees. These fees and incentives add up to the rewards that a manager makes for managing the fund, and most importantly producing profits. The manager of the fund expects an extra cut of the profits, extra earnings, or a combination of both for managing over the fund.

Profit splits are probably the most widely known type of the incentive. With a profit split, the fund manager essentially takes a share of any profits made. So a manager might have a 20 percent profit split fee. Then if the fund makes 1 million dollars in profit, the manager will earn 200 thousand dollars.

Fees are generally designed to align the interest of the manager and the investors. In short, this means that the more profits the manager produces, the more money he or she is paid. By providing incentives for performance, investors can ensure that they maximize profits. This way, investors and the fund manager(s) both benefit from each other’s mutual prosperity.

Managers also charge fees, usually on an annual basis. With a fee, money is awarded no matter what. Usually, the fee is based on either the amount of money invested in a fund, or the amount committed to a fund. There are advantages and disadvantages to both.

If fees are charged on the amount of funding invested, then you encourage the manager to invest all of your funds, instead of sitting on them. On the other hand, this could encourage the manager to invest the funds quickly and without as much prudence, simply in order to collect fees for investing the money. Of course, proponents of the invested fee argue that otherwise investors will have no incentive; managers could simply sit on the funds in order to produce profits. This is unlikely; however, as fund managers are very careful while managing their reputations and collect a large portion of their income from profit sharing.


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REITs A REIT, or Real Estate Investment Trust, is an investment security. Usually when people think of investing in real estate, they think of people investing in actual houses or buildings. A REIT is more similar to a stock investment. Instead of buying a house, you invest in a REIT. The company or person who manages the REIT then invests the money.

REITs can be set up as an equity REIT in which the value of the financial instrument is based upon the value of the portfolio. Revenues will come from rent or profits made off of the sale of a real estate venture. REITs can also be set up based on mortgages, in which the value of the financial instrument is based on mortgages. With this type of REIT, profits will be made off of interest rates.

Many investors like to invest in REITs because they are highly liquid assets that can be sold quickly on financial markets. If an individual chooses to invest in actual properties, they might have to wait months, or even years, before they can sell the property or produce profits from rent. With a REIT, if a person must liquidate their investment to raise cash, it can usually be done in a short amount of time.

As an investment manager, you could choose to set up a REIT. While this may be difficult for smaller investors, if you build up a strong reputation, this could be a great way to raise money. Some investment managers prefer running REITs because they are less dependent and beholden to a core group of investors. Instead, the larger market can be used to raise capital. Of course, actually reaching the stage where your reputation and performance are so strong that it justifies a REIT can be very difficult.

Running a REIT may also give you access to corporate level debt structures. This means that you can sell bonds and raise money as a corporation, a benefit denied to many traditional real estate investors. REITs also feature some tax benefits. For example, the profits from REITs are taxed as capital gains, which are currently lower than corporate, and in many cases personal, interest rates.


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CLAWBACK A Clawback is a special circumstance when money is distributed and then “clawed back” for various reasons. Clawbacks are becoming increasingly popular among companies for various reasons. Most importantly, clawing back money allows companies to reinvest and potentially produce more profits.

You should be careful if you decide to use a clawback. Make sure you properly convey your message to investors, as they may get upset. You will need to stress that the short-term clawback will result in long-term gains for investors. Indeed, a well-conducted clawback will benefit investors more than anyone else, so make sure you stress this. Most investors are looking for stable, long-term growth, so they may even appreciate the clawback, so long as it is properly conducted.

CATCH UP FEES Catch up fees allow fund managers to receive an extra cut of the profits once a certain profit threshold is reached. In short, this type of provision gives managers extra incentives for high performance, while also limiting risk for investors to a certain extent. Risk is limited because investors only pay catch up for performance.

This type of fee also gives the fund manager a strong incentive to maximize returns. The better a fund performs, the more money the fund manager will make. Balancing between the interests of investors and fund managers is always a tricky but essential balancing act. Catch up fees offer a great way to balance these needs.

CROSSED PROMOTES Another important term to understand is cross promotes. This basically refers to cross-promotional deals. In this situation, a manager from Fund X may decide to back the manager of Fund Y by transferring some capital from Fund X to Fund Y. Money often changes hands quickly and fluidly as managers look to maximize returns by hopping on board for the best investments. Cross-promotes allows funds to take on increasingly large projections and make bigger investments.

You should be careful; however, because the management fees for both funds can quickly add up. Some investors may even question if being charged fees two or more


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times by two separate funds is fair. Make sure you explain clearly to investors how you will handle fees and also why the cross-promote will benefit them in the long run.

LEVERAGE Leverage is one of the most simple and at the same time most complex terms you will ever come across. At its most basic level, it simply means any technique to increase gains or losses. You might leverage the value of your home to start a business, and thus produce profit. You could do this by taking out a (second) mortgage on your home and then investing your money.

A corporation might leverage the value of its stock, profits, or whatever to borrow money to reinvest and thus increase profits. On and on the list goes. Of course, in the complicated world of finance, things are much more complicated.

When approaching real estate, you may ultimately have to choose between leveraging your resources at the fund or asset levels. Each has its own unique advantages and disadvantages. In general, asset leveraging is probably most effective when you already have a lot of assets, such as property, to leverage. Fund level leveraging relies more on your company's performance and reputation, so if you have good “street cred” you may be able to leverage that.

Asset based leveraging means you are using your assets to gain additional funding. One simple way to think of this is mortgaging your property. In essence, you are putting up the value of your assets to gain additional funding. Banks and other companies that may be looking to loan you money or give you access to capital will be reassured by the knowledge that you are staking your assets.

Of course, if you have not yet bought a lot of property, you may not have any assets to leverage.

At the fund level, you are leveraging your fund's reputation and performance. This may be a bit more speculative than asset based leveraging, so there are often higher risks.


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IRRs vs. MULTIPLES There are two primary ways to measure the performance of a fund. The first way is called the internal rate of return (IRR), while the second is referred to as “multiples.” Both methods are used to measure performance, and both have their own distinct advantages and disadvantages.

With an IRR, the present value of an investment is set at zero. Then all income and earnings are either measured or projected from this starting point of zero. This way, you can show the internal growth of the project. This allows you to easily show investors how much money the investment is earning over a period of time. An IRR can be difficult to calculate, however, and is often based on projected or assumed numbers.

A multiple actually refers to dividing one performance measure by another. A simple and well-known multiple is a Price per Earnings Ratio. You could set up a multiple to help investors understand how you are performing. For example, you could set up a measure that shows how much profit you produce off of each dollar invested. If you turn every dollar investment into 1.2 dollars, then you can show a ratio of 1.2/1.


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CONCLUSION

When a real estate fund is done right, everyone benefits. Investors benefit by seeing strong returns and maximizing their investments. Fund managers benefit from collecting fees, sharing profits, and gaining access to the capital they need to purchase properties and other assets. Even local communities can benefit from an increased inflow of capital!

Of course, a real estate fund does not come without its risks. Right now, real estate markets seem to be stuck on a roller coaster. From Shanghai to Boston, property values are oscillating up and down. This creates a lot of opportunity for money to be made. By when the properties are cheap, sell when the properties are expensive. Still, such turbulent conditions require close and professional monitoring.

Either way, remember to always assess risk when investing in real estate. It's rarely a good idea to put all of your eggs in one basket, so make sure you consider diversifying. Monitor markets closely, and stay in touch with stakeholders, such as investors and brokers. Make sure you communicate effectively, and always be straightforward and honest.

And one final piece of wisdom: do not underestimate the value of personal networks. Whether it means attracting capital, or finding deals, personal relationships and networks are essential. As you try to grow your portfolio, you should also try to grow your network. Make sure you develop strong working relationships with other managers, investors, property owners, and others. At the end of the day, these personal relationships can be as valuable as industry insight and financial capital.


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ABOUT ROBB KRAUTBAUER

Mountain View Capital Investments offers many strategies for real estate investors to grow their businesses and careers through fundraising, capital formation and capital placement strategies.

You’ll discover closely held institutional secrets how to participate in larger bigger ticket deal that you probably wouldn’t be able to get into by yourself. These strategies are revealed every month to our

For many real estate investors that have been shut out of the market due to their inability to get bank financing, we offer the opportunity to get the strategies you need to have the real estate portfolio and / or financing businesses you dream of.

If you value every dollar you spend accountable for multiplying itself then Mountain View Capital Investments is the place for you.

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• Learn how to raise capital thoughtfully, meaningfully, and credibly.

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Disclaimer: This handbook is being provided for educational purposes only. Any investment comes with inherent risk. The reader takes full responsibility for their investment decisions. It’s up to the reader, consumer, or investor to do their own due diligence prior to selecting any investment vehicle or entrusting their capital with any individual, fund, company, or entity.

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