How Small One-Off Real Estate Deals Keep You Limited – Natu Myers of Raises.com
Hi everyone, it’s Natu Myers. I’m back with another video. In this video, I’m going to explain why you should focus on setting up a fund instead of wasting time on one-off deals.
There’s a specific type of person who should stop doing one-off deals and move towards setting up a fund. When you’re ready to make the transition, there are a few key things you’ll start to notice. Unfortunately, many people aren’t qualified or ready to set up an investment fund, complete a private placement memorandum, and handle the necessary details. (off market real estate deals)
Then you can proceed to set everything up. However, there are some individuals who are ready for this transition. In this video, you’ll be able to determine which category you fall into. The first sign that you’re ready to set up an investment fund is when you’re feeling tired and stuck, when you realize that the half-life of your transactions is short. When I mention half-life, I’m referring to the duration of time it takes for half of the value of a transaction to disappear. I’ve talked to many people, including those who are doing fix and flips or one-off deals by the hundreds or even thousands. They often look at the stress involved in setting up one transaction and question if it’s worth it, especially when dealing with individuals they don’t control. (off market real estate deals)
They have to deal with lenders they don’t control, and also with reselling the investment into a new repeat transaction. They have to handle the origination process of each deal. The work involved is not as demanding as setting up a fund, but it still adds up over time. On the other hand, setting up a fund takes a significant amount of work initially, but the long-term benefits are worth it. The benefits of one-off deals, however, are short-lived as they are only realized after the deal is complete and the transaction has already finished. This is the key difference between the two approaches. (off market real estate deals)
On the other hand, having a pool of capital gives you more control over where the capital is invested, and you can sustain this investment over a longer period of time, reducing the need for frequent negotiations with lenders and investors. The half-life of a fund is longer compared to one-off deals. When you notice that the half-life of your transactions is too short, and you’re hitting a bottleneck, meaning that your throughput is limited, a fund may be a suitable option for you. A bottleneck is a concept in physics that refers to a limitation in the flow of a system, like water flowing through a pipe that narrows at some point. If you’re not able to complete enough transactions to meet your goals, a fund may be the answer. The half-life refers to the duration of time it takes for half of the value of a transaction to disappear. (off market real estate deals)
So the half-life is the time it takes to decay by half. When you do a one-off transaction, like an M&A transaction to acquire a gas station or car, you set up the deal, find one equity investor or lender using a promissory note, and you may benefit from getting it done quickly. However, you then have to find new lenders and new terms for each subsequent deal, which can be time-consuming, especially if you’re dealing with SBA loans in America and have to re-qualify for the same loans. You have to find new investors, make sure the debt coverage ratios make sense, and redo a lot of stuff. On the other hand, if you have your own pool of capital, you can simply deploy it into the mandate, as the capital has already been raised. (off market real estate deals)
The first thing to consider is the half-life of your deals. If it’s not up to your standards, it may be time to think about setting up a pool of capital. This is harder in the short term but in the long run, the benefits outweigh the difficulties. It’s best to set up a fund after you’ve completed a few one-off deals, ideally less than 10. This way, you can prove that you have a track record and people won’t question your ability to do this. If you’ve completed at least one deal, then consider setting up a real estate investment fund, M&A fund, or another type of fund that aligns with your mandate. (off market real estate deals)
But raises.com just focuses on those two mandates. If you have completed a few one-off deals, such as acquisitions or syndications, and have a track record, then it makes sense to set up a real estate investment fund or a mergers and acquisitions fund. This will take more effort in the short-term, but in the long-run, the benefits outweigh the difficulties. However, if you don’t think long-term and just want to be on a hamster wheel, a one-off deal may seem quicker to get done, but in the long run, you miss out on hitting the milestones you want to achieve. A fund is more self-reinforcing and follows an exponential curve, whereas a one-off deal is more like a seesaw, requiring effort each time to get done. (off market real estate deals)
Setting up a fund takes a lot of effort upfront, but once the investors are in, you have more freedom to deploy it. It requires discipline and hard work, while one-off transactions may be tempting and provide quick rewards, it’s important not to get stuck in them for too long. Doing so can cause you to miss out on the long-term benefits of compounding efforts that could have been achieved through building the fund. It’s important to be mindful of your time and not waste it, or you may be outrun by those who have made better use of it. The third benefit of setting up a fund is greater control. If you’re tired of having to comply with the underwriting criteria of others, a fund can provide more autonomy. For example, obtaining debt for transactions in the United States can be a complicated process, often requiring SBA loans and waiting for a year or two. Each deal also requires refinancing by getting an equity investor to come in. (off market real estate deals)
So, you want to be careful with your time and not let others run circles around you. That’s point number two. Point number three is about control. If you’re tired of having to conform to the underwriting criteria of others, then setting up a fund is a solution. For instance, if you need debt financing for transactions, you may need to obtain an SBA loan in the US, which can take a year or two and can get complicated. In each deal, you may also need to refinance by bringing in an equity investor. If you acquire a one-off acquisition deal or set up a real estate fund, you want to find investors. The seller may ask for proof of funds, and you have to go back and forth to find someone. It can be annoying. However, if you have a track record of similar transactions, why not have a mandate to get similar transactions instead? That’s why a fund would make sense if you’re tired of having to follow someone else’s underwriting criteria for one-off transactions. With a fund, you have control over the capital as investors will lend you money to deploy directly into projects. (off market real estate deals)
If you’re tired of being limited by the experience of lenders and want to be your own lender or investor, then a fund is for you. Setting up a fund is suitable when you notice that the benefits of your deals decrease quickly and the effort required to keep starting from scratch becomes a burden. If you’re willing to put in the work to understand the long-term benefits of establishing a fund and are committed to getting investors, then a fund is a good option. Finally, if you’re tired of having to conform to the underwriting criteria of others for one-off deals, then a fund gives you control over the capital and eliminates the need to constantly conform to others’ criteria. (off market real estate deals)
And if you prefer to have your own capital pool, but find the process of setting up a fund to be overwhelming, such as getting investors, introducing yourself to investors, and closing and funding your deal, consider visiting Raises.com. In just a matter of weeks, we can assist you in setting up your fund and provide you with the relationships to close a deal through compliant channels. To learn more, simply head to Raises.com. (off market real estate deals)