Thursday, February 21, 2013

Private Money and Private Funds

4:30 PM
Next up on the NAREIA winter cruise was a panel of experts in raising private funds for real estate investment. The panel included Carl Fischer, self-directed IRA administrator with CAMA plans; Tom Hennigan, NAREIA founder, and former owner of a private mortgage servicing company since 1980; Jillian Sidoti, SEC Attorney; and Scott Whaley, private money association and NAREIA. Panelists felt that private money gave power to the investor, private money is less expensive than hard money. Hard money is a serious legal obligation; but it is possible to structure a private money deal differently so that a loss is not personal. In Private Money, the investor is dealing with an individual vs. an entity, thus offering greater flexibility in terms. The interest rates vary, depending on the deal; and are influenced by recent legislation such as the SAFE Act and Dodd Frank Act. The panel warned against using private money on owner-occupied primary residences; including seller financing on primary residences. They also warned to avoid advertising as investors looking for private monies. This is not allowed without SEC registration. Private lending has grown in last year - It is estimated that 40% comes from IRAs, 40% from HELOCs and 20% from savings accounts. Equity in the home, or in a 401K may be used to finance real estate investment. In a private money fund, the investor is diversified across many properties; their money works continuously; and they are in a fund with other investors. A private money lender needs to do due diligence on both the fund and the fund manager(s)....Ask other professionals for advice or guidance. Check the underlying asset(s). There was some discussion of how to underwrite your own loans. will do complete set of terms for loan guaranteed to be state compliant for $35. You may limit risk by going through a due diligence checklist: appraisal, title work, exit strategy, taxes, HOA, mechanic's liens. Do title search and pay for title insurance. Property location and condition or appraisal, previous history w lender, escrow account at bank, life insurance, these are all part of a thorough due diligence. Jillian Sidoti has a personal investment motto for her own investing: Do not invest more than 10% of your net worth in any one deal. Larry Goins, shared his thoughts on how to qualify the person and qualify the property. Larry likes to be sure that person can get a take-out loan, if necessary. Anthony Chara, uses equity groups to come up with the funds. His funds include a PPM, operating agreement for syndications, preferred rate of return, minimum annual return, etc. He has raised up to 2.3M dollars this way. The SEC requires that the fund manager prequalify investors; talk about previous deals to see if they are interested in this particular fund. If so, they fill out the investor qualification form to determine eligibility. Both Anthony's fund and my REI Capital fund can work with up to 35 unaccredited investors. The panel talked about ways to generate interest in private lending: Steak dinner invitations; talk to people that you know and trust; address why is this fund better than a hedge fund?; offer a minimum investment level;etc. Of the clients at CAMA plans, half are being sent by a fund manager; half are looking for investments, and taking classes. It may be possible to get personal loans through crowdsourcing: and are two crowd-sourced lending sites that may be of interest. kickstarter and indiegogo are donation sites, not for-profit making. As of yet, there is no crowdfunding website for real estate; portal facilitates selling of notes; sell notes to individual investors; JOBS act rulemaking on SEC crowdsourcing is still not done, so no clear guidance on being able to advertise for private money more broadly. IRA contribution limits have gone up to $5500; an investor can contribute by 4/15; if you are over 50 years old, you can put in an extra $1000 to your retirement account for a total of $6500 annually. Millions of dollars are sitting idle on the sidelines; IRA custodians cannot introduce funders to lenders, but can offer education. The panel recommended writing articles about investing with your self-directed IRA; become an authority on how to invest in real estate. Become a big fish in your pool; volunteer for REIA; speak on stage; become authority on your real estate subject. You do not need to be an expert in SDIRAs to work w qualified plans, and have your own private lending classes; teach a class or partner with SDIRA people to have them handle this portion. Anthony Chara has always put his own money in deals; while some investors put in just a little depending on the number of other investors. His biggest breakthroughs have come with the mindset that I have all the money I need. Hedge funds are getting into real estate; and the competition for the individual investor may be challenging. Full-time employees don't have time to invest against the "big boys", so an investment fund makes it easier for them. The speed and the flow of money is the one big advantage of pools over syndication. Cash offers get the best discounts, and the best prices. Tom Hennigan was retired for eleven years, started NAREIA 27 years ago; was in note business and tax deeds for 31 years. Today he is starting a fund to purchase notes and distressed properties to wholesale to other NAREIA chapters and members.


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