By Datta Khalsa, Broker
About a decade ago, my colleague Ron came to me with the proposal to start a real estate investment fund. At that time, I had 20 years’ experience handling real estate transactions along with 15 years of owning and managing my own pool of investment properties, but I didn’t have the first bit of a clue of how to form a fund.
On the bright side, I could recall that during my days as a fledgling agent at Sherman & Boone, my mentor Martin Boone had run multiple funds and investment groups from his offices upstairs. After leaving to start up my own brokerage, I had often regretted having not learned more about the practice of forming pools to participate in larger investment opportunities, so I reached out to Martin to see if we get his guidance on setting up and running a fund.
Martin and I picked up our close relationship right where we had left off, and he shared invaluable perspective from 30-plus years of forming partnerships and investment pools with his characteristic matter-of-fact style. My key takeaway was that there were multiple challenges to manage, not the least of which was the accounting and record-keeping. We also wanted to have the flexibility to take on a broader investment mix than Martin’s previous pools which focused exclusively on trust deeds, so we decided to form a new type of fund, together with his partner Chris to strengthen our management team with their sophisticated systems of oversight and operation.
Setting the fund up involved forming an LLC with an Operating Agreement, Private Placement Memorandum and Subscription Agreement to define the operations and membership in the fund, and then it was on to identifying opportunities to attract investors. We found ourselves focusing on out-of-state investments to achieve the types of returns that would hit the kinds of goals we needed to meet our investment objectives, and over the course of the next few years we grew our pool with investments in multiple properties, partnerships and deeds of trust spanning multiple areas across the country.
During the course of managing the fund, we have encountered both triumphs and challenges, with mixed levels of happiness not only with each investment, but also with the different partners we collaborate with. And in the meantime, we have brought average annualized returns in excess of 12% to our investors during our first 9 years and are projecting an IRR of 10.4% for this year once our large project in Phoenix closes later this month.
Running a fund has been a very educational process in being selective about both the quality of the investment but also the quality of the legal agreements we use to define the relationships involved in each investment. It has been invaluable to have access to a strong legal team when a partnership or investment doesn’t perform according to our expectations, and I can say with certainty, after 10 years of navigating and negotiating these deals, that it takes a lot more oversight than just setting up a deal and waiting for the returns to simply pour in.
Above all, it has been 100% worth it to be able to look our investors in the eye and be proud of the returns we have been able to help them achieve.