How to Invest in Commercial Real Estate

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Episode #011 - The three EASIEST ways to raise money and STRUCTURE your Commercial Real Estate Deal!

by Criterion, Braden Cheek, Brian Duck
January 12th 2021

One of the biggest questions we get is how to raise the money and structure your entity for your commercial real estate investment. In today's we go over the THREE EASIEST WAYS TO RAISE MONEY and s... More

So it's a generally speaking if you know all of your investors, 506 b. is super easy master. Hey guys, welcome back to how to invest in commercial real estate. My name is Brandon cheek with the criterion fund and I am joined by brian duck with criterion fund and Joel Thompson with precision equity. What's up, what's happening Episode 11? Um and you know we kind of got into offering on a property but now that we're in it, I think we need to have some money. So where how are people raising the money and kind of forming their entities so to speak. Um when they're just starting out, you know, a lot of people listening are probably you know flipping houses or have some rentals. They're probably using, you know their own money or or close friends or something. So you know what are people doing if that's the case, if you just have um yourself and maybe a family member, a son or daughter or something and you guys want to pull your money and maybe you want to go out and buy a rent house or flip a house or something. Uh In that case you're probably pulling out uh an L.

L. C. At least what I did is I formed an LLC. I went to the state of Oklahoma and um made an LLC. I wrote it up myself uh Maybe people want to use an attorney. Attorney for just a simple LLC wouldn't cost much money. Then I went to the I. R. S. And got my E. I. N. Number and and away I went. So it was really it was really simple. Yeah. You don't you don't need any anything. You know, I would highly advise getting an operating agreement just saying hey who who owns what and who put in what money and everything. But as long as you guys are working together um for profits and you're you're both working um and one person isn't getting, you know, a disproportionate disproportionate the higher share of profits for a disproportionately higher share of work then. Yeah an operating agreement, you put the money in, you go by the house, you flip it, you fix it. It's fine. I found an operating agreement online and and um went through and modified it myself and we all signed it and and away we went super easy. You know. No no sec. No no governing board. I mean it's just super easy but this is how to invest in commercial real estate, not how to flip houses.

So um we're getting into the next phase, we need more money. We probably need more investors. We may need bigger checks than um, you know, our cousin joe who's helping us, you know, flip this house. Um you know Joel, how are we going about that? That seems like it's gotta be, you know, regulated more. Maybe you're getting a lot of investors. You may be getting a lot of money. How are you doing that? Yeah. So let's um let's talk about What security is because when you start taking money from 3rd party people uh you are at risk of forming a security and those have to be regulated by the sec. So little background. In 1946 Supreme Court case is called the Howey test. And it basically says if if someone invests money with an expectation of profit in a common enterprise where a third party is doing the work for them, they're the investor right there, passive that they're passive. That's a security and has to be registered with the sec and comes with a ton of regulation weight.

So a security has to be registered with the sec. The sec is the Securities and Exchange Commission. Okay, it's making sense. Yeah. So uh and in 192012 the jobs act uh kind of changed the game for raising equity with regard to that and has to two big caveats in the regulation D which kind of handles this. There's the 506 B. And the 506 C. Right? Go ahead. Well, I think in 2012 the jobs act, you know, I don't I don't want to just pass over that. That was a big, big thing for our industry. And and, you know, fund managers, hedge funds, real estate funds, um Real estate syndicators. Um What we do. I mean, it's a big, big thing because the job act went and said you can go solicit for investments, you can go generally solicit, Right, Advertise your deals to the general public, wow. Yeah, I mean that's, that's massive when you think that before 2012, you couldn't do that right. It was a relationship game. You were setting up a meeting with an investor or you know, however institutional there or are you were setting up a meeting, you were pitching your deal to them in person.

There was no instagram ads. Facebook ads that, I mean, there was no advertising. You didn't put this deal on a billboard. Hey, invest in my new apartment complex in buying. I don't care if I know you just invest. That couldn't happen before 2012 and now it happens all the time. So I don't want to pass over because 2012 that, that allowed people to go and just spam the general world and say, hey, give me your money, I buy things and I'm going to give you a return. Yeah, I did one other thing. It also opened the door for non accredited investors for the first time to have access to these types of investment investments. So now under 506 B you can have up to 35 non accredited investors, not accredited, meaning what? So accreditation is 200,000 and income if you're single, if you're single, 300,000 married and at least $1 million dollars in uh, net assets apart from your house. That means your credit and you can take part in these types of investments because they're generally deemed as riskier.

Uh and you need some knowledge and you need to be able to take a financial hit if it doesn't go well. So now you can take up to 35 what are called sophisticated investors. Uh don't have to be accredited, but maybe there they can prove that they have the wherewithal to understand the investment, they're educated. Uh you know them personally and they can come in on investment like this. And you said, you could take 35 of those with a five or six B. So yeah, let's talk about five or 6 b. 1st. It's because hold, hold on, you can't do both. You can't do both. You can't do A B. And C. You can't say, hey, we're gonna do both. These, you have to pick either or so we're going to dive into B. Yeah. And and just so the people listening, no, the if you get into commercial real estate or you start raising capital, um There are other avenues, but but these are gonna be the two most popular. That's indicators and purchases of commercial real estate used to raise capital. So uh the five or six B. You can take unlimited accredited investors up to 35 sophisticated investors. That's number one. Gotcha. So if they've got a net worth of a Million dollars.

You can take as many of them as you want. But if you don't have a net worth of a million, you can only take 35. Right? And Another big thing is that under five or 6B, you cannot generally advertise the investment. Yeah. So the easiest way for me to remember it is if I'm taking non accredited investors, I cannot advertise, cannot advertise the investment, You can still advertise your company. Amazing point. Yeah. So you can say, Hey, we, we've got deals. Don't talk about the deals. We got great deals, great returns, sign up for our newsletter. Come meet us, get them on your list. Uh, then generally, uh, you need to wait about 30 days. Uh, you need to at least have a phone call with them understand their financial situation. Uh, allow them time to evaluate your company before you pitch them the deal. Yeah. And, and, and kind of the hook up with that is with 506 B. Um, they talk about what's what's called the pre existing relationship. So you're not allowed to advertise.

So what the sec says is, hey, since you can advertise, you need to have a pre existing relationship with all of your investors that you allow into this 506 be offering. So this 30 days you're talking about this, this cool off period. That's just a reasonable step to prove to the sec that while you were advertising, you were only advertising your company. And then at that point, you know that 30 days was, you may be building that pre existing relationship, right? And then at that point you can say, hey, they signed up for my email list. Um At that point they got offered, you know, several deals because they were my investor. They were they signed themselves up to the email us that's not advertising, they solicited that to themselves. And then after about a month or so, then it's super easy to say, yeah, I have a pre existing relationship with this person. They're allowed into my deal. I didn't advertise my deal to them. It still fits in that 506 b uh mold. Well, it gives them time to uh do their due diligence. So if if they, you know 30 days maybe it's even, you know, 100 days that they've been on your list, receiving information uh that that now they are kind of without excuse that they did have a chance to evaluate you as a company, you as people and your deal uh kind of before they decided to invest.

Yeah. So another one brian when somebody is investing in a 506 B. You're allowed to kinda you know, prove yourself that you're certified. So you know, we just went over that. But you know, you don't have to do anything else, do you? I mean if you're in a 506 be offering. You can just say I'm good as a person. Yeah. Yeah. You can self certify, right? I mean, you, we send out a form, right, And then that people fill that out and, um, you can self certify in that manner. Yeah, but five or six be offering. You can just take their word for it, so to speak. Hey, are you are an accredited investor under these qualifications? They say yes and you can believe them. Yeah, But I think that's a really good distinguishing point because in five or 6 C you cannot do that. They've, they've got to have this third party professional to verify their accreditation status. So, you know, going back to five or six B, what we're talking about your allowed 35 sophisticated investors, you're not allowed to advertise, you have to have that pre existing relationship and they're allowed to certify themselves as an accredited investors.

So there's no extra steps. So it's a generally speaking, If you know all of your investors, 506 B is super easy. Uh, five or six B is what we've used on the last 10 deals that we've done raising equity from, from friends and family and, and people that we've met along the way. That's what I was gonna say. So when you first start out and it's your first deal, of course, you've done so many deals that you have a big list of of investors that, you know, at this point, right? But when you're doing your first deal, is it going to have to be pretty much friends and family because um, that's really, that that's who, you know, right? I mean it very well could be in the biggest test you need to make when you start, you know, changing your investment strategy and you start adding investors is you need to start asking yourself, are my investors all limited? Are they doing any of the work? Am I getting maybe a little bit more money? Because I'm the one earning all of these profits for my friends and family and they're not doing anything. But I I get a little extra chunk because I'm doing all the work then that's a security.

You really need to get an attorney and you really need to fill out some documents filing with the state and we're gonna go into that next. But that's a security. That's no longer this joint venture where you and your buddy, you're fixing this house up together, getting the same proportionate share profits proportionate to the money you put in that. You can do an operating agreement for that. But when you start getting into these 506 B and 506 C. It's a good time for disclaimer. We're not attorneys even though brian plays one on tv um, we hire attorneys and you you have to get attorneys to drop up these documents and you can recycle them. You can pay for them one time and then just have an attorney edit them. That gets it gets much cheaper from there. But I mean Joel, when, when they're doing a five or six b you're getting attorney, you're you're getting some documents made. I mean it's not a short stack of papers. Yeah, I would say um, unless you have a friend that can lend you the documents and maybe an attorney friend that will help you out for for cheap these, it is a reasonable step when you're gonna go take other people's money, They're leaning on you for that profit. I would say expect $10,000.

Um, maybe more. Yeah, I was gonna say 10-15, but that gives you the full suite of documents. They'll they'll do the LLC for you, which is super easy, but, but they'll handle it. They'll do the operating agreement. They'll do a private placement memorandum which explains the investment. What are some other ones? Subscription agreement, subscription agreement details your investment for your shares. Yeah, it's a receipt kind of, you get a joinder to the operating agreement which just says you you own shares of those operating agreement. Now you may have thought some questionnaires asking if you've ever, you know, declared bankruptcy or defaulted or lost money or, you know, Ben and jerry a lot of Rogers for the investors right. Um, but generally speaking, we didn't write those documents, we hired attorneys to write those documents because when, when you're raising money and when you're dealing with the sec under these exemptions. Um, you need to have some security and your investors want some security. And who wrote these documents that you want to make sure you're doing it right at that point, your investors want to make sure everything is done correctly to. Absolutely yeah. And the attorney will will file uh form D uh with the state that you're investing in.

Or I don't know if it's where the policy is, where all the investors are. Each investor is. But yes, you have to file a form D in the state of every and um in every state where you have investors. Gotcha. Um And you have to do that within two weeks of taking their money. But once again the attorneys will handle that um for the for the flat fee that you've negotiated with them. Exactly. And diving into that form D. And sec. You know, we said it's an exemption under the SCC so the exemption is regulation D. And then you can do either 506 C. Or or be under that exemption. But what that says is you don't have to file anything or be audited or be at the mercy of the sec. You just have to do it properly with an attorney and then file a form D. I know I just keep saying form names right? And so we'll stay out of the weeds on that. But what they need to know is we're going to do another show where we're going to have an attorney on one that we've worked with and we'll go through all this in a little bit more detail just so people can fully understand it.

So the, the other 15 oh 60 let's get into the pros and cons about that versus B. The main difference is that you get to generally advertise and solicit for investment to the general public. So you can, you can put an ad on instagram of you flexing with your Lamborghini and your jets and, and best with me by the best deals ever. Any one of those guys. I've seen those ads. Yeah, I guess you can't do that. So you can scream from the top of the mountain say, hey guys, I'm buying this apartment complex. I want, I want investors and they can just, okay, I want to buy that apartment complex I'm in. You don't need to know them. They can invest immediately, but there's one catch is they don't get to self certify. You have to have a third party certify that they are accredited. There's no non accredited investors know sophisticated investors. Everybody's got to have the financial wherewithal to take the risk with you. So how do you get somebody to do that? Who certifies these people? Yeah. So, um, you know, from my experience, I have my attorney right up a letter that just says, you know, verifies the accreditation. And then I hand that letter to my investor.

They said, hey, I'm accredited. I'm like, sweet have your attorney or C. P. A. Signed this letter that my attorney drafted for you. And then we're good to go. So you just need a verified third party. There's websites out there that do it. Like, You know, verify You pay $20, you submit your documents. They have their attorneys sign the paper. Um, but generally speaking, you need, uh, um, a financial, a certified financial adviser. Somebody's passed a series 65. You need an attorney where you need a C. P. A. To sign this letter verifying your accreditation status. Yeah. When I've invested online and some crowdfunding sites, they use those online verify investor dot com or, or whatever. It is pretty easy. And I have to upload documents. They review the documents that may even call me, uh, to make sure that the documents are in line and then they certify me. Yeah. The sec cares a lot less about millionaires. And then they do um, people people under that million dollar mark. You know, they, it's the rules are built to govern and protect these people from, you know, soliciting millionaires in a walmart parking lot. I mean, Yeah, that's right.

This is to protect the general public from from getting swindled. I mean, I'll be honest, there's been a couple deals that I've gone into where the sponsor wasn't 100% truthful in what they were doing. And the deal didn't make money. And now, uh, it was a really small portion of my network that I had at risk. So it's okay. But it, but a lot of times, you know, non accredited investors, you know, if their net worth is 100,000 or 200,000 and they're trying to put 25 grand 50 grand, it's a huge percentage of their net worth and it'll be a big hit if it doesn't go well. So this is all to protect them. That's why in, in the 506 B, which does take some sophisticated investors, They want that pre existing relationship. So you know who you're dealing with, not just, you know, you've never met this guy before and he's putting the hard sell on and, and he's like, you gotta invest today. You're gonna, you're not, you're gonna miss it. That's why they, at worst. They have that 30 day cooling off period. Yeah. So we just went over the three easiest, most common ways to raise money in commercial real estate.

You're probably going to start off with a joint venture. Just filling out an LLC with state, getting an operating agreement with you and your buddy fix and flip this house. Um, you don't have to file anything with the state, You know, besides your LLC, you don't have to raise any money or do these complicated documents super easy the next step. You know, after that you're going to get bigger investors, You may go to friends and family or rich uncle or grandpa or something like that. And you know, pulled together some capital. They're super limited the investors, they're not doing any of the work. You're doing more work. You're getting kind of more profits for doing that work and you're raising more money At that point. You're probably in a five or 6 b. I need to get an attorney at that point. And then after that right, you probably tapped out all of your friends and families money after, you know, a few five years in deals. It's not like you've lost it, but it's tied up in deals. You're probably starting to look for more investors out of your local area. You want to start advertising And then you're probably gonna progress into 506C uh, interrupted by a brief phone call. Sorry about that.

Anyway, you're gonna move on to five or six C because you can advertise, but you can only take your credit investors. So just along the way as you take more money and different types of money and bigger deals. There's just a little more paperwork, but it's fairly easy because it's the same attorney who can draft all of this, the same guy. You can change deal structure. You can go back and forth. We're doing a, we have a five or six B right now. We have five or six sees right now and we have joint ventures right now so you can do all of them, you know, co terminus lee on different deals and we'll get into the more of the details and some future episodes because I know people listening, I know at least before I did one, it just feels intimidating but it really isn't. All you need is the right attorney a deal because any good deal will raise the money uh and and maybe a mentor or a partner. So if you're the unknown, so we're taking that unknown to known how to invest in commercial real estate. I mean that's what it's about. All right. All right. Well, um if you haven't already, make sure to go grab the free L. O. I download from our website, you type in your email address, you get our free letter of intent that you can use for all your deals.

It's invest how to invest in sierra dot com and make sure to like and subscribe. Thanks for watching, listening. We'll be back in a few days. Thanks guys. All right. Mm. Yeah.

Episode #011 - The three EASIEST ways to raise money and STRUCTURE your Commercial Real Estate Deal!
Episode #011 - The three EASIEST ways to raise money and STRUCTURE your Commercial Real Estate Deal!
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