Feb 15, 2022
Real estate investing may seem a complicated investment at first, but people like Badri Malynur make the process simple. Badri, Co-Founder and Vice President at Avestor, Inc., is on a mission to help busy professionals start their real estate investing and capitalize on the industry’s tax benefits and opportunities to generate another source of income outside their day job.
He drops by in our podcast to talk about customizable funds and why this is a profitable investment for passive real estate investors.
[00:01 - 01:45] Opening Segment
- Why Badri Malynur decided to jump to entrepreneurship from corporate America
- The problem his team at Avestor wants to solve
[01:46 - 11:06] What are Customizable Funds
- Badri describes what a customizable fund is and why you should invest in it
- How customizable funds can complement your syndicated deals
- The serves that Avestor offers to passive investors and sponsors
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- How Badri’s team help you get tax benefits
[11:07 - 21:52] How to Invest in a Customizable Fund
- The legal measures passive investors need to consider
- Badri gives us estimates on how much a customizable fund can cost
- The difference between a customizable fund and blind pool funds
[21:53 - 24:29] Closing Segment
- Your way to make the world a better place
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- Promote financial literacy
- Reach out to Badri
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- See links below
- Final words
Tweetable Quotes
“Unless you have a really strong track record, people may feel uncomfortable putting money in what you're calling is a blind pool fund, blindly trusting your judgment. So, you will find that a lot more investors are willing to put money in a fund if they get to pick and choose deals.” - Badri Malynur
“What we realized is we can scale much more rapidly if we make this [customizable fund] available for other sponsors, capital raisers, realtors, and GPs.” - Badri Malynur
“The customizable funds give
you a lot of advantages. One advantage is it's an evergreen fund.
You never have to close it, and another advantage is you can be
very nimble in your strategy.” - Badri Malynur
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Email badri@avestorinc.com to connect with Badri or follow him on LinkedIn. Say goodbye to the old ways of investing in real estate. Visit Avestor to know more.
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I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
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Email me → sam@brickeninvestmentgroup.com
Want to read the full show notes of today's episode? Check it out below:
Badri Malynur 00:00
A blind pool fund focuses you on a particular strategy. Otherwise nobody's going to invest if you don't know what the strategy is, they're not going to invest in. This gives you a much more flexible business model. It's very hard to charge a high fund management fee for a blind pool fund but you can charge a relatively high fund management fee for this fund because of all the value add provides some of the diversification and the single carry one. And a blank pool fund is either a closed end fund or an open end fund. We are combining really the best attributes of a syndication deal, the open end Fund and the closed end fund. And finally, it allow you to backfill your gap capital. So these are some of the key advantages.
Intro 00:37
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we will teach you how to scale your real estate investing business into something big.
Sam Wilson 00:49
Badri Malynur is co-founder and VP at Avestor Inc, a real estate investment technology platform that allows investors to build custom real estate portfolios. Badri, welcome to the show.
Badri Malynur 01:00
Hey, good morning, Sam. Happy to be here.
Sam Wilson 01:03
Thank you. The pleasure is mine. Three questions I ask every guest who comes on the show. In 90 seconds or less, can you tell us where you started, where you are now, and how you got there?
Badri Malynur 01:11
Okay. Well, I have always been an entrepreneur at heart, and had multiple startups, was in corporate America, but decided to switch over to be an entrepreneur, I've had a couple of startups and exits. And the problem we are trying to solve is real estate investing is too complex. I know you're in the same business, we are trying to make it a lot easier for passive investors, and also a lot easier for sponsors to create their own funds. That's why I started this new company called Avestor and we'd love to talk to you more about it.
Sam Wilson 01:39
Fantastic. I look forward to it. Give us an overview. What is Avestor? What does it do? What problems does it solve in the industry?
Badri Malynur 01:46
So you know, to answer the question, there are two separate parts: Avestor provides services for sponsors to create their own funds. And Avestor provides funds for people to build diversified portfolios. So let me start with the passive investor briefly. And then we'll mostly stick to the sponsors and what we do, okay. On a passive investor, they have this new type of fund called a customizable fund. This is the first of the kind in the world really, and I'm happy to be corrected, if that is wrong. A customizable fund is more like a buffet, where people can pick and choose their investments just like your pick and choose, what dishes you want in a buffet. So they still get all the benefits of the fund. And but they can say, “Hey, Sam, I love you. But I really don't like this particular deal. I want to put 20k in this deal, but I don't want this deal.” And they still get a single k one. So really with a very small amount 50,000, which is what you typically put in one deal, you can build a diversified portfolio of 10 deals, which you get to pick and choose a 5,000 each, or 10,000 each. So that is the value proposition we bring to the passive investors. And before I talk about sponsors, any feedback or questions about that?
Sam Wilson 03:02
Yeah, I mean, I would be curious how that works, you know, connecting with the sponsor side of things. Because, you know, for us, when we're raising money, it's nice to know that, hey, you know, you might have 50 or $100,000 that we've talked about that this is the right asset class for you, as opposed to then going, Oh, well, you decided that you want to put 10 in and then wait, what about the other 90 for the next 10 deals I produce and spread them out across those kind of becomes a little bit of a interesting, and maybe there's a way to solve that. But how do you overcome that when, I don't know? Does that question make sense?
Badri Malynur 03:30
Yeah, it does, and happy to talk to you about it. So let me step back a little bit from a passive investor perspective. If I were to ask you, “Hey, Sam, do you want to put $100,000 in the stock market? And do you want to put it in one stock or would you rather pick 10 different stocks, which I help you choose?” So most investors prefer the latter given a choice. So today's sponsors are not giving the investors of choice. And I'm not saying you take 10,000 from them, you still take 50 or 100,000 in the fund. But then you slice it, it's a choice. I mean, there are some investors who want to put 100,000 in one stock or in one investment. And there are others who would really benefit from having a more diversified portfolio. So you offer them the choice. I mean, if you want to put 100k in this deal, there are some benefits, but with the fund, there is a fund management fee. But in return, you get a diversified portfolio. And it's all about offering, targeting different market segments. So there are the market segments, in our opinion that are about 13 million accredited investors. Not in our opinion, there's a Federal Reserve data, but with a net worth of one to 10 million. And I would say all the sponsors are going after the same 200 or 250,000 investors who are willing to put 50 or 100k per deal, right. But our contention is that there are more than 12 million investors who are willing to put 50 or $100,000 in a fund, but they want lower allocations and so they can build a diversified portfolio.
Sam Wilson 04:56
Got it. That is strategically different than having a diversified fund wherein, you know, somebody comes along and says, Hey, you know what, you can put 100,000 bucks into this. Once it's in, then we go out and acquire assets. And you really have no say, necessarily, in what assets we acquire once you give us the money other than looking at, you know, whatever, our prospectuses and whatever we say what types of assets we're going to buy? In this case, you say, “Okay, you know, we're out here in this fund.” And this is one asset that we're looking to buy and put in the fund and you say, No, I don't want whatever my slice of the deal is put in that particular investment. Is that right?
Badri Malynur 05:33
Exactly. That is actually immensely flexible, both from a sponsor and customer perspective and a passive investor. So the passive investor gets to choose his investments. So he is a lot more comfortable than you know, Sam, I know you have a great track record. But unless you have a really strong track record, people may feel uncomfortable putting money in what you're calling is a blind pool fund, right? Yeah, blindly trusting your judgment. So you will find that a lot more investors are willing to put money in a fund if they get to pick and choose deals, that's from the passive investor perspective. Sure, but from a sponsor perspective too, the customizable funds give you a lot of advantages. One advantage is it's an evergreen fund, you never have to close it. And another advantage is you can be very nimble in your strategy. I know you do a lot of multifamily, but suddenly, you may want to get into self storage. I mean, it's a great deal when you may want to do that. Right? Right. So you can do that you cannot do that in a blind pool fund. Can you imagine if you take somebody's money and say, suddenly, I've changed my strategy, they're not going to be happy with you. Because they don't have a choice that money is going into every single deal. But here they have a choice. I mean, we are putting a little fund wrapper around a deal. So you're still raising one deal at a time. So this gives you a massive flexibility, both from a sponsor perspective and also from an investor perspective.
Sam Wilson 06:49
Yeah, that's really interesting. Do you find that people are committing capital? So they put in 100,000 bucks, just say, hey, look, I love what you're doing. But there's no live deal on the line. Are people still putting capital in and then waiting for opportunities as they come up? So when they come up, they can go ahead and just say, Yes, investor, how does that work?
Badri Malynur 07:06
They will, after you build a track record. So I think it'll be hard to commit capital without any live deal. You don't have to have 10 deals. But you don't want to say, hey, just give me 100,000. I'll let you know when I get a deal. You want one or two deals in the platform in the fund to get started. And we also do have a soft commit capability. So you can put the deal and this is a very low risk way for you to invest in another deal as an LP if you want already a deal. By the way, that's a very important point I want to mention, the deals you put in this fund need not be only deals you're doing as GP, you can be a capital raiser for somebody. And you can also do LP deals. So you can let say, you know a great sponsor, you take the deal, put it in your hand and collect all the soft comments, and then you can say, Hey, I've raised 200,000 so let me invest 100,000 in the deal, it's an order square.
Sam Wilson 07:57
That's interesting. There's so many questions here. I haven't even begun to really wrap my head around.
Badri Malynur 08:02
Let's go for it one at a time.
Sam Wilson 08:05
I mean, it's a unique take on on this entirely. You tell me what the next logical question I should be asking here because this is just a new way of thinking about this.
Badri Malynur 08:14
Sure. I guess one question, you can ask us, what is the process, if somebody goes around creating a fund like this. So the way to think about this fund is don't think of it as replacing your syndication deal, a business, it's augmenting the syndication deal business. So you still continue raising money, one deal at a time. But then you give investors an option, Hey, you want to invest in this deal? It's $50,000 minimum. But instead, if you want to, you're not comfortable putting 50k in one deal, put 50k in the fund, and I'll help you pick individual slices, right. And so the one other aspect, which I wanted to mention is Avestor helps you with all aspects of running the fund. So we are not just a software platform, we help you create the fund. We handle the legal entity creation, the SEC registrations, the blue sky filings, we help you with the accounting and taxes. Think of us as becoming a true business partner to help you create this fund to augment your capital raising efforts.
Sam Wilson 09:16
Yeah, because you guys handle all the backend, I mean, everything all the way down to k-one prep. Is that right?
Badri Malynur 09:22
Correct. What we do is we generate all the data, as you can imagine, a single k-one can be very complex. Yeah, imagine a customizable fund where people are putting different amounts in different deals. And some days, they're not investing, right, generate all the data required for the K-ones. And then you can work with one of our partner accountants or you can work with your accountant, we’ll give them the data and they issue the k one since we are not accountants, we can't issue the K ones but generate all the data required for it.
Sam Wilson 09:47
So yeah, that's a great question because that becomes hyper complex. I can only imagine. If you have you know, in one fund, you have five investors that have participated in 80% of the deals and you for investors only purchase. But suddenly it's like, Wait, who do we owe what and when? And how? And so I mean, how have you developed the algorithm to even keep track of that? Because that's, that just seems like, you know, really confusing.
Badri Malynur 10:10
Yeah, no, we have spent hundreds of 1000s of dollars. And we have gone through TOEFL accounting cycles. All our might, me and my co founders come from a technology background. So we take all the k-ones from the original sponsors. And let's say the funding was half a million dollars in a sponsor deal. And when they get the cable from the original sponsors, then we allocated prorate, or somebody may have put 50,000, somebody man for 20,000. And then we keep track of all of that at the end of the year, the generate the consolidated k one, and there are some various tax benefits. So by consolidating all of these k-ones, you're offsetting capital gains from one deal when a deal exits versus the depreciation you get fom the other deal. So there are some massive tax benefits.
Sam Wilson 10:52
That's really, really fascinating. Let's talk about this, just from a compliance standpoint. I mean, you're building one fund, just give us some high level, what do you guys see on the compliance side? What are some dangers, some gotchas? What are some things that you look that you guys have found, you need to kind of look out?
Badri Malynur 11:07
That's a great question. So obviously, we still have to conform to the laws of the land. So this fund is still a reg D fund. So it can be a 506(b) Fund or a 506(c) Fund. I'm sure many of your investors or listeners are familiar with the two. But to give a quick recap, 506(c) Fund can be advertised and can have accredited investors and can invest in any deal whereas a 506(b) Fund can accept non accredited investors, 35 sophisticated investors, but you have to invest only in five or six deals. So we help you conform to all the compliance laws. I mean, to start with the including the blue sky registrations, and the SEC reg D filings. And let me tell you three things we do, which not all platforms do. I know a lot of platforms do the accreditation checks and the KYC checks. We do anti money laundering checks as well. The SEC is tightening up on that as well. It's more important for foreign investors. But even for US investors, we do all three: KYC accreditation checks and anti money laundering checks. So…
Sam Wilson 12:14
That's really, really fascinating. Yeah, but you couldn't possibly have a 506(b) in a 506(c) fund running side by side, I can only imagine that you would get into trouble on that front. Is that right?
Badri Malynur 12:25
I'm not really you can have two separate funds. So the 506(b) fund, you cannot advertise. So let's say you're raising money for a deal, Sam, let's say you're raising $2 million, maybe what you do is you allocate a million dollars for a direct rise where people are putting 50 or 100k, your standard syndication. And then maybe you split the remaining 1 million, half a million in the 506(b) Fund and the half a million in the 506(c) fund. And then you don't advertise the 506(b) fund, but the same deal can be split across two funds under direct syndication. So it's perfectly okay to run both funds, a 506(b) 506(c)
Sam Wilson 13:02
Interesting, that's highly intriguing. Talk about the mechanics of it when it comes to, you know, number of investors, the size of the fund. I know you said it's evergreen, but just kind of give us some of the high level. What do you see some of the people who are using your platform doing right now? And what are some of the constraints?
Badri Malynur 13:19
Great question, you know what, we pride ourselves to accommodate your business model. We don't dictate our business model on you. So you tell me what your business model is. And it's very likely that we'll accommodate your, we'll be able to accommodate your business model. Let me give some examples. We have a hard money lending fund, where what he does is he does hard money loans, right. And he takes a $300,000 loan and splits it up into five or $10,000 chunks, it's very hard to find one investor to invest in a $300,000 loan. But it's a lot easier for people to invest in five or $10,000 loans, slices have this loan and he takes a percentage of the interest and also loan origination points. That's one potential use case. And then we have capital raisers. So there are some huge advantages in using Avestor. Today to raise capital people often do an SPV, or a single purpose vehicle. And we have what we would call this customizable fund is the ultimate SPV. Because in the SPV, for every single deal, you have to create a separate legal entity, right whereas here you create one legal entity and you can put any number of deals, and then you raise the money for the deal and investors can choose which deals they want to invest. So there are some massive advantages. And then we have people who are creating a fund focused on self storage. And then we have a large property manager in Florida who sells slices of vacation rentals. So really the sky's the limit. I mean, you can do any type of asset class in this, storage, multifamily, retail. You can do hard money loans, you can do equity really the fund is set up to be extremely flexible and accommodate your business.
Sam Wilson 15:01
It's essentially the benefits of doing all the multiple SPVs but yet wrapped under one single set of…
Badri Malynur 15:08
Bingo! Why would you do multiple SPVs if you can create one SPV, you're paying 10 or 15 grand per SPV for legal fees here. You're creating, you're paying that same 10 grand and you got one which will go on forever.
Sam Wilson 15:19
Right? That's really intriguing, though. So I mean, I guess going back to the end, forgive me, I did not do well in school. So when you go back to everyone getting a single k-one, how do you get that k-one not to be connected to every other deal in the fund, if they didn't participate?
Badri Malynur 15:37
That's our technology in the backend. So we keep track of how much they're investing in each individual investment. And then consolidate around the data and the offset the passive gains versus passive losses, and then we give them a consolidated game one, and that's the secret sauce.
Sam Wilson 15:52
Gotcha. And so if I invest, I still only gonna get a k-one, I'm only going to get the shares of whatever I own. It has nothing to do with other deals may have gone into or not gone into that fun.
Badri Malynur 16:02
Exactly, and you can see why there's advantages both to the investor and to the sponsor, too. So you don't have to worry about oh, will my investors, you create a fund, that blind pool fund like you're talking about, and then suddenly you come across this great deal, but that's not the asset class he orginally promised, then do you want to create another SPV for that and you maintain all the bank accounts and everything else? Or do you want to just put it in this fund and your investors are not upset with you? Because they don't have to invest in the new deal if they don't want to? So you're not dragging them kicking and screaming into your new deal.
Sam Wilson 16:31
Right? That's really intriguing. What about doctors about an expense side? Like what does this look like, as far as expense, I know, you said you could spend 10 grand can get an evergreen fund, but there's got to be ongoing expenses, both to the sponsor for putting this together.
Badri Malynur 16:44
Sure. So basically, for about nine to 10 grand, the legal fees, and there is a $5,000 setup fee for investor, you get the fund started for less than 15 grand. And then what we charge, we kind of think of ourselves as your business partners. Okay, we basically charge .5% of the investor assets under management. And we recommend that the fund offers some unique value to your investors, we recommend you charge one and a half to 2%. And some of our funds charge performance fees in the backend too. But we recommend you charge one and a half to 2%. And I can tell you, no investor has complained about that because they like the value proposition of the fund. Right. And we take point five out of that. So that's our model, we if you don't grow, we don't grow, we want to become your true business partner.
Sam Wilson 17:36
Got it. So you take a half a point four or 50 basis points for assets under management?
Badri Malynur 17:40
Exactly. Just assets under management, investor assets, not GP capital, you know. So let me tell you something else very unique about this fund. We allow you to decouple closing a deal from raising all the money. How does that work? So let's say your, for simple numbers, let's say that you're raising a million dollars, okay. And then, let's say your 200k shard, and maybe you have 200k of your own money, you invest in the deal temporarily. And then we can slice it and allocate it to investors six months later, one year later, or even two years later. And we keep track of the fact that your money was tied up for six months. So you not only get a portion of the cash distributions, but you also get a portion of the capital gains. So we are the only platform in the world, which allows you to backfill your GP capital and still get paid both in terms of capital gains and cash distributions for the time your money was tied up.
Sam Wilson 18:33
Right, yes, because I've done that before where it's like, oh, shoot, I need, like you said, you know, 100 to $200,000, I'll just write a check. And that might be tied up for, you know, a month or two. Exactly. And of that time, I just, you know, typically as part of just, you know, putting the deals together and knowing that it's on me to get it done, you just, you get the 100 Grand or 200 grand back, and then you're like, well, whatever, that's all I get back out of the deal.
Badri Malynur 18:56
Exactly. But now you'll get paid for it. You keep track of the fact that your money was tied up for two months. And when the deal exits, you get a portion of not the cash capital gains to some.
Sam Wilson 19:06
Right. Yes, because the hassle, the paperwork and tracking hassle beforehand was such that it was like, hey, it's just the juice isn't worth the squeeze, even though you may have it written in the operating agreements, or whatever it is that say, Hey, look, you know…
Badri Malynur 19:18
You have to calculate how do you recover it? But here, it's the platform takes care of that for you.
Sam Wilson 19:23
Right? Yeah. And that's when most of us as general partners, just go, whatever, it's the cost of doing business, put it in, get the deal done, and keep moving. So that's really, really intriguing. Fascinating. And I guess that would work the same way. Because a lot, you know, I invest in every deal that we put out. So the same way as opposed to me coming in as a limited partner. Now I'm just coming in investing in my own fund.
Badri Malynur 19:42
Exactly. We don't charge you for that, by the way. So any GP money you put the, we don't charge that . 5%. We charge .5% only on the LP assets.
Sam Wilson 19:50
Okay, that's cool. That's a nice thank you to your sponsors for joining the platform. That's really really fascinating. Badri, this has been I mean absolutely intriguing. Excited to see where this platform goes. What are some questions I haven't asked that I should have asked?
Badri Malynur 20:05
So one other question I would ask is how does this compare with a blind pooled fund? Right? I mean, I think we have kind of talked about it, right. But let me kind of recap the big difference. I mean, first of all, a blind pool fund focuses you on a particular strategy. Otherwise nobody's going to invest if you don't know what the strategy is, they're not going to invest in. This gives you a much more flexible business model. It's very hard to charge a high fund management fee for a blind pool fund but you can charge a relatively high fund management fee for this fund because of all the value add provides some of the diversification and the single carry one. And a blank pool fund is either a closed end fund or an open end fund. We are combining really the best attributes of a syndication deal, the open end Fund and the closed end fund. And finally, it allow you to backfill your gap capital. So these are some of the key advantages.
Sam Wilson 20:55
Fantastic. I've loved it. Thank you for, and I guess last question I have for you is how did you dream this up? What was the thing that you said, Hey, wait, there's a hole in the market or a gap in the marketplace and I want to fill it? What was that event?
Badri Malynur 21:07
Great question. It started from the journey as a passive investor for my co-founder, really. So he was putting 50k 100k per deal. You know, he really didn't have the time to research all the deals, one deal went wrong, you know, everybody makes mistakes. And he said, There's got to be a better way to do this. And so we built it, we built our own fund for passive investors, they allowed it. And then what we realized is we can scale much more rapidly if we make this platform available for other sponsors, capital raisers, realtors, GPs, they said, hey, I love this customizable fund, why don't you do it for us? So we evolved our business model to say, yeah, we have our own fund, but we will go ahead and expose the platform to you guys. I mean, we have more than 15 funds signed up, and we hope to have more than 100 funds by the end of this year.
Sam Wilson 21:53
Man, that's fantastic. Absolutely love it. That's awesome. Let's jump here into the last few questions. Okay. One is this: when it comes to investing in the world, what's one thing you're doing right now to make the world a better place?
Badri Malynur 22:03
You know, one of the things that I'm trying to do is start a nonprofit, which will encourage more financial literacy in schools. I know there is a little bit of that, but you know, simple things like balancing a checkbook. How does credit work? What is the company? How do companies work? How do you invest in the stock market? What is the stock market, right? And then, so I'm beginning to put together some materials, you know, I want to wait until this COVID things, hopefully, is behind us pretty soon. And that's one thing I would like to do. So…
Sam Wilson 22:33
I love that. Yeah, ‘cause it's such a shame that you can graduate high school, and you have no idea how the stock market works. And yet they've forced you to take you know, higher level…There you go. You're taking higher level calculus, but you can't balance a checkbook and you don't know how to buy a stock. Exactly. A case in point, man, and this is near and dear to my heart, which is why you touched on something that's just it's just mind boggling to me. I mean, my wife is three times 10 times smarter than I am, she had three master's degrees. And she didn't know what a HELOC was on a house. I'm like, sweetheart, that's just a home equity line of credit. She's like, well, how does that work? Like, oh, geez, how did you get this far? So education? And you don't even know basic? And I'm not upset with her. I mean, she's again…
Badri Malynur 23:13
It's just you're not exposed to those concepts. Right. I think it should be an integral part of school education, actually
Sam Wilson 23:18
write drop calculus and teach kids how to balance a checkbook
Badri Malynur 23:21
Or do both right now, or do both?
Sam Wilson 23:26
Do both? Yeah, exactly. That's fantastic. I love that. So great work on that front. boundary. If our listeners want to get in touch with you or learn more about you, what is the best way to do that?
Badri Malynur 23:35
You know, the best way is via email. Yeah, and by the way, there's a ton of information on our website, avestorinc.com. That is like invest but a-vest, A-V-E-S-T-O-R-I-N-C dot com. And my email is Badri, B-A-D-R-I at avestorinc dot com. And we'd love to talk to anybody not only about Avestor but you know, investment in general, or shoot the breeze. So…
Sam Wilson 24:00
Awesome. Andre, thank you so much for your time today. I do appreciate it.
Badri Malynur 24:04
Thank you, Sam.
Sam Wilson 24:05
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners, as well as rank higher on those directories. So I appreciate you listening. Thanks so much and hope to catch you on the next episode.