The Real Estate God

Choose Deal‑by‑deal for Low‑cost, Flexible REPE Startup

You want to start your own real estate private equity firm but you don’t know how much it’ll cost Here’s how to think about start-up costs: There are basically 2 ways to set up a real estate private equity firm 1. First way is to start a fund. This means you raise the money first and find the deals later 2. The second way is to operate deal-by-deal, which means you only raise money for specific deals as you need it Starting a fund involves a ton of legal costs, compliance costs, administrative costs Wouldn’t recommend even thinking about this path unless you’re planning on raising a lot of money ($50MM+) It involves a ton of startup costs and a ton that can go wrong So I’d recommend option 2 instead: operating deal-by-deal It allows you way more flexibility with how you operate It also involves minimal startup costs. Why’s this? Because all the “startup costs” are layered on the deals themselves (which investors pay for), not your firm Legal costs are registered as “deal costs” for the specific deal “Administrative costs” are the asset management fees you receive yearly You’re able to off-load your startup costs onto each deal, meaning that your actual startup costs are very low (sub $25k if you do it right) This means that the hardest part isn’t the startup costs. It’s the *ongoing costs* Real estate is a long game. It takes years for a deal to pan out (even a great deal) How’re you going to put food on the table in the mean time? That’s the main question you have to answer You can’t eat IRR - you need money to live off of before your first deals sell And you need money to invest as a co-invest into any new deals (REPE GPs usually contribute ~10% of the equity). So you have to get creative You basically have 4 options to “navigate” this tricky initial period 1. Take on a deal big enough to give you ongoing cashflow through AM fees 2. Have enough savings to support yourself 3. Have another business you run that generates cashflow 4. Spouse whose income supports you 1. A deal big enough to support you through ongoing AM fees AM fees are typically 2% of equity. So you need to raise $5MM in equity to bring in $100k year of AM fees $5MM of equity is roughly $20MM of property value (assuming 75% leverage) That’s a lot of real estate to buy ($20MM worth) - just to support yourself And that only gives you $100k/year. That’s not much - definitely not enough for living expenses + co-invest So I really don’t like this option unless you combine it with one of the other strategies 2. Have enough savings to support yourself This is a far better option and can work as a standalone strategy If you save up $1MM, that gives you several years of living expenses as well as a few hundred k to invest as co-invest into new deals Very viable 3. Have another business you run that generates cashflow This is pretty common. You want to focus on a skill set you already have that can generate heavy immediate cashflow Examples include general contracting, brokerage, real estate consulting, property management This strategy can work really well If you can build a business to $10k+/month, you’re in pretty good shape The obvious downside is that it takes time away from your main real estate private equity business, which isn’t ideal But sometimes it’s necessary 4. Spouse whose income supports you This one is pretty self explanatory. If you have a spouse who makes a lot of money, you can live life on easy mode Makes your business venture way less risky and provides cashflow to live off of and co-invest with Those are basically your 4 options. #4 is not a “strategy” as much as it’s a circumstance but the other 3 options are very controllable The beginning is usually a bit of crapshoot. You’ll probably be scrambling around, combining several strategies to generate enough cashflow Maybe you have $250k in savings, are generating $5k/mo with a side business and are generating $50k/year in AM fees. That can work well. And very doable if you put your mind to it If you want it to work, you’ll find a way to make it work It literally is that simple This is all only temporary (2-3 years most likely). Then, once your deals start to sell, everything gets easier Even if you’re doing small deals, you should start collecting promotes worth a few hundred grand at minimum Your cashflow issues ease up and you start making real money So the main issue isn’t the start up costs, it’s the ongoing costs. Focus on cashflow You need to get creative and figure out how to “bridge the gap” for 2-3 years That’s the entire game. Bridge the gap for 2-3 yrs and you’re in an incredible position to start making real money