The 7 Most Commonly Used Fund Structures in Real Estate

real estate fund structure
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At some point in a real estate investors’ career, they attract notoriety.

And with that notoriety comes the ask…

“How can I invest with you?”

Today we’re breaking down the types of fund strategies that a real estate investor can use to transition into becoming a real estate fund manager.

Let’s get right to it.

1. Private Hard-Money (Short-Term)

6-12 month loans secured against rehab real estate deals.

High capital churn allows for Fund Manager to make points and fees on # of loans made in a shorter period of time.

Structure: Preferred Equity.

Investors receive a pref coupon inclusive of all fees quarterly.

Speed: Fast

Term: 2-3 Years

Capital Structure: Equity

Investor Profile: Retail

Works Best With: Residential

How Investors Are Paid: Management Fee (1-1.5%) + Promote (Splits)

This is the gateway drug for real estate investors looking to manage other people’s money in real estate. Retail investors are comfortable with these are they are smaller and they understand the residential product.

2. Private Hard-Money (Medium-Term)

1-5 year loans.

Ideal for Fund Managers to make longer duration loans to experienced real estate investors who can buy rentals at low basis and hold for a while.

Real estate investors should have a property management company in place.

Structure: Debt

Investors receive a monthly coupon.

Speed: Medium

Term: 3-6 Years

Capital Structure: Debt

Investor Profile: Retail

Works Best With: Residential/Small Balance Commercial

How Investors Are Paid: Monthly Interest Payment via Servicing Company

How You Are Paid: Origination Fee, Interest Spread

Banks do not lend on rental real estate. This is a great way to start a private bank for experienced landlords to raise money for their deals.

3. Syndicated Equity

Syndicated / Tenants-in-Common (“TIC”).

This is a longer-term equity that is raised on smaller balance commercial income-producing, stabilized real estate assets that is placed on top of either…

  1. Newly originated bank debt, or
  2. CMBS (“conduit”) loans that are assumed.

These equity investors will benefit from any increase in market value when the asset is sold or refinanced.

Structure: Equity on top of new or assumed debt.

Speed: Slow

Term: 3-10 Years

Capital Structure: Equity

Investor Profile: Retail

Over $30mm, Institutional

Works Best With: Commercial

How Investors Are Paid: Preferred Return + Promote (Splits)

How You Are Paid: Management Fee (1-1.5%) + Promote (Splits)

This strategy is a slow, time-tested wealth creator. This can go high on the capital stack if using retail money.

(NOTE: Want access to my business vault? Right now I’m offering access to my systems, strategies, templates, trainings, and recordings. It’s all included in The Investor’s Syndicate, and all available to you here.)

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4. Velocity (Non-Rehab Wholesale, Short Sales, Tax & HOA Liens)

Ideal for a Fund Manager purchasing residential assets from a lender at a deep discount to replacement value with the sole purpose of reselling or flipping to an identified buyer.

Like transactional funding, but much larger.

Assets should never be help more than 6 months at most.

Structure: Preferred Equity

Investors receive a pref coupon inclusive of all fees quarterly.

Speed: Fast

Term: 2-3 Years

Capital Structure: Equity

Investor Profile: Retail

Works Best With: Residential/ Small Balance Commercial

How Investors Are Paid: Preferred Return + Promote (Splits)

How You Are Paid: Management Fee (1-1.5%) + Promote (Splits)

A Fund Manager should never take anything down that can’t be readily sold to an identified buyer.

Time is money as the IRR clock is ticking on capital deployed.

5. Syndicated Debt

This is ideal for a Fund Manager looking to purchase commercial assets using private debt in lieu of having to qualify for bank loans.

Great for income-producing, stabilized assets, or for taking out an existing-bridge loan after a rehab has been completed.

Investors will want duration, meaning their money isn’t going to be paid off too soon.

Structure: Debt

Investors are paid as a convention lender.

Investors hold their pro-rata interests in an LLC.

Speed: Slow

Term: 3-10 Years

Capital Structure: Debt

Investor Profile: Retail

Works Best With: Commercial

How Investors Are Paid: Monthly Interest Payment via Servicing Company

How You Are Paid: Origination Fee, Interest Spread

Can be used to finance stabilized, income-producing assets at higher LTVs.

6. New Development

Project-specific with a key event identified, such as pre-development lease-up, or pre-construction sales.

Structure: Equity on top of new or assumed bank debt (developmental loans)

Speed: Slow

Term: 3-10 Years

Capital Structure: Equity

Investor Profile: Retail

Over $30mm, Institutional

Works Best With: Commercial

How Investors Are Paid: Preferred Return + Promote (Splits)

How You Are Paid: Promote (Splits)

This is huge wealth generator.

Must rely on many key events for a project to be a success and must be identified prior to soliciting capital.

7. Special Situations

Distressed-to-Control or “Loan-to-Own” strategies where a Fund Manager acquires the debt, or a mezz piece of a failed commercial real estate project in the hopes of adding value via controlling the asset, or “turnaround” strategies where a Fund Manager will provide debt and equity investments.

Often “rescue financing” to deals undergoing operational or financial challenges, such as Debtor-in-Possession financing.

Structure: Preferred Equity

Investors receive a pref coupon inclusive of all fees quarterly.

Speed: Medium

Term: 2-5 Years

Capital Structure: Equity

Investor Profile: Institutional Only (Over $15mm Invested)

Works Best With:

  • Partnership Blowups
  • Fractured Deals
  • Failing Funds

How Investors Are Paid: Preferred Return + Promote (Splits)

How You Are Paid: Management Fee (1-1.5%) + Promote (Splits)

This strategy is geared for larger-strategy, opportunity-specific events or circumstance might lead to value.

For example, buying out a GP of a poorly performing fund or buying majority interests in a LP secondary transaction.

There you have it… next time someone serves you “the ask”, you’ll be ready with the best solution.

Want More Resources?

We’ve grown a lot since this post was originally published in March 2016. A full year later and we’ve launched a podcast where we’re able to share even more great information with—ahem—even more coloring.

Check out the resources below to get even more information to aid your capital raising.

Episode 11: How to Raise Commercial Real Estate Capital [Part 1]

Too many commercial investors believe that if they raise capital for their deals, they’ll automatically be profitable. It’s a nice idea but, in reality, it’s not the least bit true. Raising capital and providing returns on that capital aren’t the same thing.

Sorry, wishful investors.

So what does work? Rock solid fund structures—THIS is the foundation of raising capital. You can’t successfully raise capital and maximize your profits if you don’t understand the different types of fund structures.

That’s exactly what Sal and AJ are unpacking in part one of this multi-part mini series about capital raising. So whether you want to start your own fund or are just looking for creative ways to get your deals up and running, this episode’s for you.

Here’s what you’ll learn…

  • The seven most commonly fund structures in commercial real estate, and how to use them to your advantage
  • The motivations for starting a fund—why you just might want to consider getting in on the action
  • Why real estate is inefficient—and why that’s a really good thing for YOU
  • How even the dullest crayon in the box can outsmart the market (so really, you have zero excuses)
  • Why your investors are more secured and insured with YOU than

Episode 24: Making $150,000 with $0 Down: How One Investor Successfully Structured His Commercial Development Deal

This episode of The Commercial Investor Podcast is unlike any we’ve released before. We LOVE talking about the benefits of finding and funding commercial deals, and you know (as well as we do) that, even more than that, we LOVE bragging about our students’ success stories.

In this episode we’re going to do both. You’re going to hear Baird Hawkin’s tell his own account of how he earned a $150,000 payday in a commercial real estate deal with no money down. He’s going to tell you how he sourced the deal, who he invested with, and why he didn’t listen to the people who told him this deal wasn’t worth his time.

What’s more: you’ll see from a seasoned investor’s perspective why commercial investments really are worth it. The stakes are much higher, as are the paydays (Baird can attest to this). Watch now to see how the small skills you’re learning today will help you source and fund enormously profitable commercial deals — just like investor Baird Hawkins was able to do just this last month.

Here’s what you’ll learn…

  • How you can make over six figures in a single commercial deal (so long as you play your cards right)
  • Where opportunities can be found in development deals throughout the United States (and how to best take advantage of those opportunities)
  • The step-by-step process to finding and successfully structuring a highly profitable commercial real estate deal (we’ve said it before and we’ll say it again: it really is MUCH more straightforward than you think)

(NOTE: Want access to my business vault? Right now I’m offering access to my systems, strategies, templates, trainings, and recordings. It’s all included in The Investor’s Syndicate, and all available to you here.)

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Salvatore M. Buscemi
A former investment banker for Goldman Sachs in NYC, Sal is one of the nation’s leading authorities when it comes to investing in residential and commercial real estate. He’s raised over $50 Million in capital for his real estate hedge funds.

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Salvatore M. Buscemi

About Salvatore M. Buscemi

A former investment banker for Goldman Sachs in NYC, Sal is one of the nation’s leading authorities when it comes to investing in residential and commercial real estate. He’s raised over $50 Million in capital for his real estate hedge funds.
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