This content explains the structure, benefits, and launch process of real estate funds, differentiating them from syndications and highlighting how they enable significant scaling and wealth creation for fund managers.
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in this video we're going to talk all
things what real estate funds are how to
actually build one and launch one what's
the difference between a fund and a
syndication even what even is a fund or
a syndication how they work together in
this video we're also going to talk
about what licenses you may or may not
need to run a real estate fund
especially in the United States also how
real estate fund managers are paid and
paid really freaking well real estate
fund managers are some of the wealthiest
people on planet Earth
so with that let's dive in today's video
now just so you know I know what I'm
talking about over the last three years
I have helped over 210 people launch
their very own fund about half of them
were real estate fund we have multiple
people that have come through our
community they've launched funds over a
hundred million for their own real
estate funds additionally my brother is
an investment funds attorney at the
largest law firm in the world for funds
and former Chief compliance officer at a
$800 million fund and my dad Co founded
a decillion doll family of real estate
funds whole story there never invested
in any of my funds but has been a great
mentor and Coach through this whole
process and now we've brought together
dozens and even I guess you could call
it even hundreds of people together to
talk and share about funds how to build
them how to structure them so and we've
developed a pretty cool process an
efficient process to building and
scaling funds let's talk about the path
of a house flipper this is what a house
flipper does I'm going to summarize your
job in about 20 seconds a house flipper
finds a house here they are Tada they go
and they get hard money their own money
bank money or investor money they then
put that into an entity or an LLC if
United States they then go flip the
house make some money and then they
start over how' I do it pretty good
right I had a guy join our group he was
flipping about four houses per year
doing this model which was a good model
I think the average house flip according
to google makes roughly
$58,000 not too bad so he's making
roughly $200,000 a year doing this but
he asked me Bridger I want to scale I
want to go to the next level like what
should I do and I said well we could
launch a fund what happened instead of
flipping four houses we launched a fund
with him the next year he flipped 702
702
homes and in today's video I want to
show you how he went from here to here
so how did he go from four house a year
to 72 house well what happened was
instead of every time doing a
syndication and raising new money
calling up investors on a Friday hey I
got to get money and wires are due he
raised the money once he set up the fund
once and out of that fund over here I'm
G to draw a new line he could go flip
these all these little box represent
houses he could flip as many houses as
he wanted I think we raised he raised
roughly $5
million and set up the entities once and
this allowed him to do a couple of very
very cool things with this fund to scale
now additionally because he had a fund
behind him do you think he could close
on a deal if he found a deal faster or
slower probably faster right so he could
close on a deal faster because he had a
fund do you think a bank would give him
better or worse interest rates better
debt or Worse debt because he had a fund
probably better more favorable or lower
interest rates right because he's a
repeat client he's a volume cust
customer so he gets lower interest rates
additionally his investors are now more
Diversified across a
portfolio of houses rather than just one
because if you do 72 houses well guess
what three are probably going to go bad
three are going to go bad maybe three
are going to do amazing and crush it and
the other you know 60 plus houses are
going to have a blended return of let's
call it 18%
and what happens is as an investor
you're now Diversified across this
portfolio Additionally the final thing
that he shared with me after he said my
average cost to flip one of these houses
went down because he had a volume play
he could have the same painting guy or
carpet guy or electrician go from house
to house and because he's a volume
player he got a volume discount so H his
average cost to do a house and flip a
house was significantly less than a
syndicator this is why sometimes me and
you will go to an auction and we'll bid
on a property and someone will bid up
and over bid and you and me and you go
ah they're such idiots they overpaid
there's no way that pencils you ever
done that before I was speaking in a
crowd of like 300 Real Estate Investors
and everyone raised their hand like yeah
I've done that I'm like I've done that
too and I said but what if maybe they
did overpay that could be true but what
if they're not playing the same game
that me and you were playing and the
whole room went like quiet and I said
well yeah maybe it didn't pencil for you
because you're syndicating and your cost
of capital is here and your average cost
to flip is here but what if the person
bidding against you has a fund behind
them they can close faster they get
better interest rates their average cost
per flip is cheaper than
yours they can probably bid more than
you and still pencil the same return
that you pencil I said additionally what
if they're buying their goal is to buy
up a hundred Mill million do of single
family homes and they're going to pull
that together and sell it to somebody
else for $122 million they're playing a
way different game than me and you and
Joe down the street are putting some
money together to buy a $200,000 duplex
and flip it and renovate it that's a
different game this is the game where we
want to get to and this is where we've
now helped dozens and dozens of people
actually go from the syndication person
to the fund person now before I move on
syndications are are good they're a
great way to build a track record if
you're starting if you're watching this
video this is your first time getting
real estate syndications are an awesome
way to go we have other videos on our
channel that talk about this but this
video specifically is talking about
scaling to the next level fund so let's
talk about what even is a fund and how
to start and structure them so this is
how 99% of private capital is raised
around the world through the gplp
structure if you're building a fund this
is the pretty much like 99% way that
you're going to do is let's talk through
this this over here is you General
partner management company I'm put you
right here this is the fund manager this
is me and you the people that are
running the actual investment product
over here the limited partnership this
is your fund this is your pool of money
and what you're doing is you're having
investors or limited partners are
putting money into this fund or pool
okay and this pool is again managed by
the general partner and the management
company we'll explain those in just a
second okay so again to review General
partner manages a limited partnership
which is the pool which has investors or
limited partners that put money into it
okay again this is how 99% of private
capital in the world is raised if we're
going to the fund model so bigger
question is like Bridger what licenses
do I need how are these groups paid
we're going to dive into all that right
now now this structure is governed by
two main documents those documents are
called your l PA and your
PPM that stands for a limited
partnership agreement and private
placement memorandum big long huge thick
documents that are 200 pages each that
are very expensive documents that govern
this whole relationship now I get this
question all the time Bridger can my
fund do X or can it do y 90% of the time
the answer is yes Bridger can my fund I
want to go buy I'm going to put it down
here so your fund is going to go by
commercial and we're going to do value
ad and we're going to do Residential
something Bridger can I do that in my
fund yes you just write it in your LPM
PPM we lovingly call this the Bible it's
called the Bible because it's all the
laws and Covenants of your fund the cool
thing about funds is you get to write
the Bible me and you get to decide
what's in the now once it's written
though it's written can't change it
later Bridger can I do a commercial and
a value ad multif family and residential
yes the bigger question is do you want
to though we'll talk about that in a few
minutes building a fund that investors
want but the answer is yes Bridger I
want my minimum commitment to be
$100,000 in my fund great let's write it
we write it down in our LPM PPM $100,000
minimum commitment great and your
limited partners invest in there with a
minimum commitment of
$100,000 these documents will probably
run you right roughly
$30,000 to get done okay so one of the
cons of a fund is it's a little bit more
expensive than a syndication okay just
but again the liability goes down the
diversification all the kind of
scalability of doing a fund but again 30
grand is a rough cost I think you could
have for your first fund for doing this
now down here as well a lot of funds
will set up underneath so this is your
pool of money this is your fund your
fund is the one actually buying the
properties sometimes funds will set up
like a holding Cod which is a pass
through entity so I'll put like hold
here I'm going over this one and then
you'll go buy the property but it's
still the same thing and what happens is
when the property makes money it flows
back to the hold Co and then flows back
to the limited partnership and it gets
split between the general partner and
the limited partners that split is
what's called a waterfall distribution
actually we're going to talk about that
right now we'll come back to this page
in one second but how do fund managers
get paid what's the split how does it
all work out we'll come back to licenses
in in a couple things in a minute so let
me flip to the next page on here let's
talk about how much you can get paid
inside of a fund all right so how does
everyone get paid in a fund so what we
have here is what's called a waterfall
distribution I've got a nice beautiful
timeline here that I drew myself okay we
got 0% returns these are your returns in
your fund 10% return 20% return let's
say your fund got a 22% return and I'm
going to put after fees like after a
management fee we'll talk about what
that is in a minute a lot of funds that
you'll hear about they people will say
like two and 20 fund we'll unpack that a
little bit and kind of walk through how
this would look in a fund many funds
start with something like this they say
we're going to charge a 2% management
fee so I'm I'm my zero I'm doing this
before the zero we're taking 2% as a
management fee just to manage the fun
I'm put that here on the GP side it's
going to be a 2% fee okay and then from zero
zero
many funds will do what's called a pref
or preferential rate of return so what
they'll say is the first
8% of returns all go to the investor to
the lp so for example if this year after
fees we got a 7% return well guess what
all 7% goes to the limited partners the
investors okay now after 8% so I'm going
to put pref right here hope you guys can
see that right pref this is your
preferential rate of return it somewhat
of a little guarantee that you got to at
least get over this hurdle of 8% here
after pref many funds will do what's
called a catchup to catch the general
partner back up in this example let's do
a 2% catch up so the general partner is
going to take the ninth and 10th
percentile here or the eighth and n9th
percentile to get us to 10 so that's two
percentiles there to catch up so for example
example
if the fund only did 9% this year right
here the first 8% would go to the
limited partners and then that only that
one percentile would go to the general
Partners the GP here okay this is what's
called a catchup so I'm going to put
here for LPS we got 8% and then we're
going to do a 2% catch up now a lot of
funds above now 10% if our fund does
better than in this case went to 22
we're going to do an [Music]
[Music]
802 split so from the 10th percentile
until 22 we're going to split 8020 so we
have 12 percentiles here follow the math
99.8% would go to the LPS excuse me
sorry the Math's wrong here 9.6 okay
it's hard to do math in front of a
camera okay 9.6 would go to LPS and then 2.4
2.4
would go to the general partner okay so
you see how that worked we had 12
percentiles here 9.6 not 9.8 9.6 goes to
the LPS and then
9.4 goes to the general partner which
totals 12 percentiles so if we add these
up the LPS got another 9.6 and the GP got
got
2.4 so if we add these up your fund
after fees got a 22% return the entire
fund great gross rate of return your LPS
are going to take home or your limited
partners or your investors are going to
17.6% net rate of return that's what
they're netting and taking home the fund
manager me and you are taking 2 plus 2
6.4% we are taking home running the fund
now again this does not add up to 22 it
adds up to 24 because it's 22 after fee
so it' be 22 plus this two here okay now
you might be sitting there and being
like okay Bridger that sounds cool but
I'm not in this game to make 6.4% that
sounds awful you know that sounds like
not a good gig no yes you are because
guess what you're not making 6.4% on
your own money you are making 6.4% on
the entire fund and you're making that
this isn't annualized this is every year
you're making that every year so for
example if you had
aund million fund that's $6.4 million a
year about a half a million a month
you're making with a $100 million fund
if you and by the way it scales one of
the coolest things about the fund model
is the numbers just scale if you're
running a billion fund that is $64
million if you're running A1 billion
doll fund that's
$640 million that you are making in this
Venture this is why funds have created
some of the wealthiest people on planet
Earth following this little thing
because funds can scale and a lot of
times you don't have to add additional
headcount to scale which is pretty darn
cool hopefully that makes sense go
rewind and watch that back if it didn't
let's go back to uh our gplp structure
here okay so now we've talked about our
properties come back to our investments
we split that between a waterfall
distribution let's talk about
the difference of management company and
property managers and how those all play
into a real estate fund now the cool
thing is you can decide you run the LPM
PPM a lot of funds will have a
investment management company right here
this company actually gets the 2%
management fee and the other additional
in our other example
4.6% would go to the general partner
that's how some funds right you don't
have to do this additionally Property
Management how does that
work you can actually do a couple of
things you could have a third-party
property manager and you pay them a fair
market rate and so the fund pays the
property manager a fair market rate to
manage the properties like to get rents
and Lease ups and all that kind of stuff
additionally some funds bring that inh
house so that's why I put it down here
you can do it third party or in house if
you're going to do it in house make sure
it's done at fair market rates so now
you have a property manager and let's
say you own this as well the fund is
paying the general partner for carried
interest the fund is paying a 2%
management fee the fund is also paying a
property manager to manage the
properties and guess what you and me own
all three of these this is how fund
managers become some of the wealthiest
people on planet Earth okay additionally
most fund managers I would you need to
also invest in your fund you should also
be an LP so you're making money now in
four different ways you're making money
as a limited partner inve you're an
investor in your own fund you're making
money as a general partner you're making
money as a manager investment manager
and a property manager isn't that kind
of crazy now we can I have other videos
that unpack all this and still with all
this and these little fees investors
take home usually pretty good rates of
return they're making above Market rates
of return they're making a 17 18 19 20
21 22% per year return in these funds
I'm an investor in two investment funds
and yeah they take fees here and here
and I'm still happy I still make plenty
money I don't have to worry about tenets
and termites and twits I love being an
investor in real estate funds it's
awesome yeah take some fees sure I but
I'm still getting a great rate of return
and I don't have to deal with any of the
crap I just get a K1 at the end of the
year boom bada bing it's awesome now
last question on this section Bridger
what licenses would I need to run this
fund now real estate is kind of cool you
guys get a very couple very cool things
things real estate has a few different
exemptions that you can qualify for to
actually run all this without a license
which is kind of cool the first one is
under I have other videos that go into
this but you go look into it it's called The
The
3c5 exemption it's under
regd so if you're on a regd 506b or 506c
fund you then run uh beneath that you
would select the 3c5 exemption you have
to have over 80% real estate in your
portfolio to qualify for this exemption
and it's actually pretty cool in a lot
of states in the United States you can
actually run a fund without a license so
again confirm that with the legal team
I'm not giving you legal advice but this
is just what I've seen in my opinion
okay the second thing is underneath this
management company what's going on here
is you're getting paid for investment
advice and if you're going to get paid
for investment advice you have to have a
license and usually that license is
what's called a series 65 that's the
same license that your cousin has that
works at maril Lynch that's like hey let
me help you with your Investments right
and you pay him a fee that's the same
license you're getting paid for
investment advice right here now because
you're doing a real estate fund and real
estate's technically not a security
there has been a lot of groups that have qualified
qualified
for a couple different things here
number one you can notot have a
management company and roll your fees
another place you can do a 3c5 exemption
or you can qualify as an exemp
exempt reporting
advisor you're actually exempt from
reporting you still have to file with
finra but you can run an erra on your
manag company still collect 2%
management fees without having a series
65 we have a lot of people in our group
and actually my fund I currently run we
have a we have a hedge fund and we
qualify as an exempt reporting adviser
which means our team does not have to
have series 65s and we can run a full
out hedge fund doing that so two things
you guys can look up on our other videos
3c5 and exempt reporting advisor on
licenses okay now let's go forward to
the actual launch of a fund like what
are you going to do to actually launch
and scale your fund with now launching
210 funds we' we've got through a pretty
cool process of building and launching
funds and it's more a process that we
discovered rather than invented what we
saw was just all these funds they follow
the same pattern for launching and we
started to formalize we finally put
words behind it and kind of made it a
stepbystep process so what I want to
share with you next is What's called the
fund launch formula now most people when
they want to start a fund if they come
talk to me I've talked to now thousands
of people about funds they always want
to start with legal okay Bridger give me
the lawyers let's talk to the lawyers
let's get going let's start building out
the legal process and I always go hold
on before you build legal actually legal
is on the we have a four-step formula
here you can see legal is actually number
number
four and it always shocks them they're
like wait why and I go we've helped and
and now I've interviewed hundreds of
fund managers they all say the same
thing this is the most best efficient
way to launch a fund legal is actually
last it's the last step in this formula
so what do you do first the goal of this
whole thing as I wrote down below you
want to build a fund investors want
anybody can just go hire a lawyer and
build a fund you guys can do that right
now it's kind of like going to the store
anybody can go to theore and buy a plate
like a plattered dish I could just buy a
dish does not guarantee that on that
dish will be yummy amazing awesome food
gourmet food anybody can buy the dish or
the wrapper or the covering whatever
analogy you want to use I like the dish
example but there's a big difference
between Gordon Ramsay presenting you
that dish or you know me cooking you
know salmon on the weekends like it's a
a little bit different experience right
anybody can pay for legal the bigger
question is can you build a fund or a
meal that in investors want that people
are dying to have that's the Crux of
this whole game that we're in so let's
go back a few steps Crux number one on
this starting with step one is find an
incredible and I put deal in quotes deal
could be literally just a single deal
that you're going to lead with it's like
a dream come true sweetheart deal and
what you're going to do is run through
that and you're going to say hey
investors we found this amazing deal
it's on South Beach it's we're getting
it for a discount it's off Market it's
amazing and in our fund we want to do 13
other deals just like this one okay it
could be actually a deal but more
importantly it's a
process what you are showing investors
is that we have found what's called asymmetrical
asymmetrical
risk what asymmetrical risk is that's a
financial term of we have found
something with you know how investment
advisor tell you hey this has you know
medium risk medium reward or high risk
High reward or low risk low reward you
probably heard that before right what we
paid big money to do is find
asymmetrical risk or things that have
relatively low risk with high return
another term for this is called Alpha
finding something that you can minimize
risk to have high return I was with Ray
doio just a few months ago and Ray doio
king of Wall Street and he he was
actually talking to us he said I can
minimize 80% of my risk without losing
any of my upside essentially I can lower
my Risk by 80% without losing my turn in
my that's what we always look for in our
funds and we've done that a number of
our funds and I was like wow that's
awesome you guys can do this especially
in real estate and small funds there are
very inefficient markets you guys know
this better than anybody there are
buildings that are inefficient that
people have not spent time or money you
guys come in and say our team our
expertise minimizes the risk and we keep
the return the same because we've done
this for 30 plus years we've did a
building just like this down the street
we minimize the
variables and we can keep the same
return you guys know what I'm talking
about does this kind of make sense this
is what you're trying to show in step
one we have other videos on our channel
that talk more about this now once
you've done this you actually show we
have found a RIS and by the way don't
move on until you've done this I have
some people like bridg I just want to do
legal but they haven't found something
that has a metal risk or alpha or
lowrisk high reward things and invest no
one wants to invest and they come to me
later Bridger no one will invest in my
fund I can't raise money not raising
money is a symptom of not having good
Alpha that's the deeper problem there's
plenty of money in the world you just
don't have a good enough offering that
investors want does that kind of make
sense so step number two found a great
deal now you got an awesome deal you're
okay I'm excited I'm ready to go I go
hold on hold on before you move on step
two is go and actually frame the fund
frame how everything will play out today
we don't have time to go on this we have
other videos to talk about open versus
close-ended funds do you want to do an
American or european waterfall 3c1 3c5 3
C7 fund how uh what's your lockup
periods on your fund all the different
intricacies of your fund our Channel
talks all about this how your fund is
going to get framed out you drive all
this down to usually a PowerPoint
presentation or some kind of
presentation pitch deck so you got the
deal but now it's frame out how the fund
will work with investors the LPA
PM now step three let's actually
go and raise Capital but wait Bridger I
don't have it done the legal yet I can't
raise Capital yes you can see what I do
with people is say go and actually test
the market go take this potential fund
with this potential frame and go pitch
five seven 10 people that are mentors or
people in your space and what happens is
they're going to give you feedback and
I'd pitch them just like this I'd say
hey I got this fund idea do you have 11
minutes I can run it by you great let's
sit down we run it by him for 11 minutes
and I say hey the legal is not done yet
we're working on it right now now but
this I'm just floating this around if
everything checks out everything I've
said today we all we can we and you can
have your legal team look through it but
let's just say it all checks out could
we put you down for $100,000 investment
in this fund and they go well yeah maybe
and I go really what can I put you down
they go ah probably not right now they
go well why can you give me some
feedback and what happens is step three
they give you a lot of good feedback and
they say well you know I love you
Bridger but man this Frame is a little
wonky I don't want to have my money
locked up for 5 years can we lock it up
for three years well let me see what I
can do or I don't feel like you guys
have a really good process for deal flow
and what happens is they're going to
send you back to step two or step one
and you're going to come and iterate on
your fund and you're say okay thanks for
the feedback you know let me go back to
the team let's fix a few things can I
come back in a couple weeks and see what
we come up with sure Bridger that's
great or maybe not you go find somebody
else but what happens is this is you
testing the market to see if they like
your offering our goal with black card
which is our our top group we try to get
everyone in here about $2 million of
verbal commitments of people saying yeah
you know what if it checks out yeah I'd
put in I'd put in a quarter million i'
put in half a million I'd put in 100
Grand then and only then so once you've
done step one two three and you've
gotten a few million or whatever your
raise goal is of verbal commitments then
and only
then we go to legal and you walk into a
lawyer's office and you go hey I want
XYZ with a drink and a side of fries
like boom when they just build your
docks and it's done it's way more
efficient now you might be sitting there
like Bridger I don't believe you on this
let me give you another example I had a
friend he did not follow this process he
went and did legal
first uh on his first fund they spent
$500,000 on legal docs for their first
fund I spend 20 to 30 grand on the same
docks why because they went to legal and
then as they they still had to iterate
and guess what lawyers they love
iterations yeah they bill you 1,200
bucks an hour hey lawyer they they walk
in you and they say well do you want to
do a PR a catch up carried interest
what's your split you go I don't know
what that means the stuff we just talked
about and they go well let me teach you
and a lawyer will sit down and teach you
for $1200 an hour what's a waterfall
structure and how a pref and they
usually talk very slow and they you know
they go long that's they're just trained
to Go long because they're paid by the
hour you don't want your lawyer to also
be your teacher it's a very expensive
teacher to have and very inefficient
teacher to have
additionally another thing I say about
this specific to funds there is a lot of
strategy built into how you write your
documents it's kind of like uh let's
take American football for example
American football so we have our field
right here here's our field right and we
got end zones and field goals and stuff
could you go talk to a referee and learn
the rules of football 100% a referee for
the NFL could come and tell you all
about what's a first down a fourth and
what's a fourth and long a punt a field
goal an extra point how do these all
work how many timeouts in a quarter or
half they could tell you the rules and
help you with the rules but there's a
big difference between talking to a
referee and Bill bich former coach of
the Patriots won all the Super Bowl
titles a little bit different Bill bich
also knows the rules but he knows the
strategy within the rules see the
difference a lawyer will tell you yeah
this is the sideline the sideline is
here and great and by the way you should
play in the rules every this game you
have There Are Rules there's very
defined rules for funds make sure you
play in the rules but within the rules
there's a lot of strategy what to do on
a third and long or first and 10 or a
Red Zone situation or clocks running
down two-minute drill like how how do
you actually perform in those scenarios
with your team that's a little bit
different and that's why just just going
and yeah I'm just going to pay a lawyer
to do this is kind of like getting a
plate with nothing on it and there's a
big difference between Gordon Ramsey
making a you know cordon blue and
Bridger Pennington making a cordon blue
on the weekends it's a big difference
right so that's why I that's why the
fund launch formula exists is because
I've seen so many people do this
opposite and do it the wrong way and
they waste a ton of time and money and
effort and then finally some funds by
the way you're going to come through
this process you might come to step
three and no one likes your idea or fund
or pokes some really good holes and you
might say you know what they're actually
right this fund idea we're going to take
shipping containers and we're going to
go and build mobile homes out of shipping
shipping
containers just isn't the idea and we
tested the market we're not it's not
fitting let's tweak it a little bit
maybe it's not shiing containers maybe
it's some other module or home I'm I'm
speaking from experience by the way we
were going to do a fund on this and it
it just didn't land this was a few years
ago and thankfully we didn't spend the
30 40 50 Grand to learn the market
didn't like this product there were
other products that were cheaper more
efficient than shipping container homes
at least in the region that market that
we were looking at it actually didn't
have asymmetrical risk we didn't realize
that until we got to step three and
started talking to investors then we
realized oh crap there actually is an
asymmetrical risk here we're just
gambling so we shouldn't do this fund
and we backed out of that whole idea and
then we guess what we did we went back
to the drawing board we found something
new and we tested through this process
and it itated till we found a product
that investors want that is the Crux of
this whole thing so there you are
there's waterfall gplp we have a ton of
more videos on this channel today I can
only share a fraction I could go for
five hours on this stuff I could talk
all day that's why we do events and
other stuff you guys are amazing drop a
comment down below let me know what you
think other questions you have to make
follow-up videos to this today thank you
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