Before you even start raising capital for your first deal, there are a few important decisions you’ll need to make. The first is how you want to structure your deal — as a syndication, within a traditional fund, or by using a customizable fund.
This decision can have major impacts on your expenses, the types of investors you appeal to, and ultimately on the success or failure of your deal. It’s not a decision you should make lightly, and you shouldn’t assume that one choice is the right one just because it’s worked for someone you know.
Here are some of the key things to consider when deciding how you want to raise capital.
Customizable Funds vs. Real Estate Syndications
When you’re first getting started, a real estate syndication can seem like the ideal way to raise capital. It allows you to execute deals quickly, and because each deal is done under a separate entity, the stakes can feel lower.
But when you compare syndications to the customizable fund model, the cons of syndications quickly become clear:
1. Syndications are significantly more expensive than a customizable fund: A syndication model requires you to create a new PPM and file new blue sky filings in every state you take investor money from. Plus, you have to send your investors ACHs for each individual distribution, and separate K-1s for each syndication deal. All of this adds up to significantly more expenses than a customizable fund.
Want to see the true cost difference? Check out this article.
2. Syndications have a start and end date: With each syndication, you can only raise money for one specific deal. If you raise more capital than you need, or you want to start raising for additional deals, you’ll have to form new entities for each opportunity.
Customizable funds, on the other, allow you to continuously fundraise outside the timeline of any one specific deal. You can add new deals to the fund at any time, and investors can choose to add more capital to participate in new deals, or to reinvest their distributions over and over.
3. Syndications are inflexible: Traditional syndications are limited to specific business models and asset classes. A customizable fund, on the other hand, allows you an enormous amount of flexibility as you grow. You can include multiple asset classes, asset types, and business models within the same fund, which reduces your costs and gives your investors more options.
Customizable Funds vs. Blind Pool Funds
For years, blind pool funds were the most popular way to raise capital. And while they do provide certain benefits that syndications do not, they ultimately fail to give you (or your investors) as much flexibility as you might want.
1. Blind pool funds are expensive to start: If you’re just starting out as a capital raiser, you may find that a traditional fund is far too expensive. Launching an Avestor customizable fund, on the other hand, is about 50% less expensive than a traditional fund.
2. Blind pool funds don’t give investors the control they’re looking for: Many investors want control over the deals they’re participating in, and a blind pool fund does not allow this. With a customizable fund, on the other hand, investors can choose which deals they want to participate in and how much capital they want to allocate to each one.
3. Blind pool funds don’t support multiple asset classes: With a blind pool fund, you won’t have the option to expand to additional asset classes. A customizable fund allows you to include multiple asset classes and types within one fund.
Reach a Wider Pool of Investors with a Customizable Fund
There are more than 13 million accredited investors in the U.S., but only around 200,000 of those individuals invest in real estate syndications. This is largely because of the high investment minimums for syndication deals, typically $50,000 or higher.
Think again about the investor with a net worth between $1 million and $10 million who has $50,000 to invest this year. That person may not want to invest the full $50,000 into one deal, but they may be comfortable spreading the $50,000 across three or five deals.
With an Avestor customizable fund, you can appeal to those smaller investors, because they can fractionalize their investments across multiple deals.
Get the Flexibility You Need to Grow
There’s no getting around it, your business is going to change and evolve over time. With a customizable fund, you won’t need to start from scratch whenever you want to add a new offering or expand to a different asset class.
Plus, Avestor customizable funds are evergreen with no end date, so you can continue using it as long as you like.
Ready to learn more about how a customizable fund can help you succeed at your first capital raise? Our team would love to answer any questions you may have. Schedule a time on our calendar at this link.
