Q on equity investors, raising capital, and LLC

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Q on equity investors, raising capital, and LLC

Brad James
Developer · falken, KS · Member since 2008 · 29 posts · 0 votes

We are venturing into real estate this year and potentially with a personal investor with 12 figures. If that deal falls through, I will have to find a way to finance my goals. We recently started an aerospace mfg business from a residential property for now that is already making money but took me walking away from employment to do it. I now sit on a 740 credit score and NO claiming income right now. I have been pumping up the credit card limits to fund a small investment/flip but the bigger developments we need to be in will require low 9 figures.

So is there a way to fund my projects without private investors? If I use private investing, what can I expect to pay for the money? Terms?

Also, I will need to form a corp for this so I can retain earnings in the business without giving it to uncle sam. Is the LLC the best way to go? why? and what kind of fees can I expect to pay? Is there a back door way to get this done? The only reason I want to form the corp is to retain my capital for future investing unlike a S.P. that requires all income be claimed or deducted per fiscal year.

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  • Account Closed
    Manhattan, NY · Member since 2008 · 801 posts · 61 votes
    18y
    Originally posted by B M:
    So is there a way to fund my projects without private investors? If I use private investing, what can I expect to pay for the money? Terms?

    If this is your first forey into this type of investment you are going to be hard pressed to get any kind of institutional money in the "low 9 figure" range. If you want to try, you are talking about dealing with investment banks, insurance and retirement fund pools. They are not going to take you serious at this stratospheric level for your first deal.

    Can you cobble together private money to do this? Maybe, how strong is your network of people with lots of money? That is not a flippant question, every investor should always be looking to build their network. Your goal should be to be within one or two introductions to people with funds like you describe, if this is going to be where you want to live from an investing point of view.

    What will it cost you? It depends on how well they know you and trust you and whether you are looking for a private lender or equity partner.


    You will still pay tax on all retained earnings and depending on how well you can justify the retention as needed to conduct the business you may pay some additional penalties to "retain it". A C corp is the best option to retain earnings and while you can set up an LLC and elect to treat it like a C corp, I don't know of any benefits to doing it.

    You are talking about a very large dollar deal here. Spend the bucks on a good attorney and CPA who are familiar with the type of deal you are trying to take down.


    There is no free ride of the kind you are seeking. At best you will still pay the federal and state corporate rates and at worst you could be hit with penalties for retaining earnings beyond the amount needed to conduct the business.
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  • Brad James
    OP
    Developer · falken, KS · Member since 2008 · 29 posts · 0 votes
    18y

    Thanks for the reply. I guess one of the major questions to be answered is how a typical private lender might structure a deal? My thoughts are this, present a 20% APR return on investment capital used. Payments dispersed either in lump sum or annual as new development sells off. Investor is paid first. Honestly, there is hardly any way to lose money in what I am doing.

    The guy I am looking to work with is a national icon in the entrepreneurial world and knows what risk is. Even if he bounced back with a 50% return or profit split, it would still be a lucrative deal for both of us. Projected 300% + ROI over 2 yrs.

    Regarding retained earnings, my CPA is next door and I will be talking to him on other business next week so I will see what we can do. There has to be a way and I thought the S corp had ability to retain earnings in certain situations since it is deemed operating capital for investing. I do want to dump it right back into real estate, I am not talking about pocketing the cash. I am just looking for a way to roll over the income as capital to another fiscal year.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    18y

    S corps are pure flow through entities, and the shareholders have to pay taxes on the earnings regardless of any actual distributions from the company. C corps will pay taxes on net income, regardless of what happens to the money. Salaries paid to employees (e.g., you) are tax deductible for the corp, but taxable for you. Retained earnings would be subject to taxation at the corp level. Anything paid out as part of your business operations would be an expense, and would be deductable. You or the corp pay taxes on income, not revenue.

    Any money paid out by the C corp as dividends gets taxes twice. Once at the corp level and then again at the individual level.

    20% returns would cetainaly be attractive to investors. But track record is going to count for a lot. You'll need to show you've done this before, show why there is a market for whatever you're selling (e.g., condos in FL would be tough sell these day), and detailed projections of how the money is used.

    To be frank, when you offer 20% returns and say "there is hardly any way to lose money in what I am doing" my eyebrows really go up. You may be totally correct with those statements, but the BS detector just tripped, and now you have some extra convincing to do.

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  • Account Closed
    Manhattan, NY · Member since 2008 · 801 posts · 61 votes
    18y
    Originally posted by Wheatie:
    To be frank, when you offer 20% returns and say "there is hardly any way to lose money in what I am doing" my eyebrows really go up.

    So do the eyebrows and investigative interest of every state regulator and the Securities and Exchange Commission.

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  • Brad James
    OP
    Developer · falken, KS · Member since 2008 · 29 posts · 0 votes
    18y

    I apologize for seeming arrogant in returns on this deal. Without going over every detail, we know what land sells for in our area. We know this by simply asking home owners and seeing what it is listed at. We know if we can buy ag property and rezone, we can get the land MUCH cheaper. We also do not plan to buy at FMV but rather a minimum of 80% of FMV so as to create a buffer of protection in the deal. Land around us is being bought up at an ALARMING rate and pricing is near insane. I would LOVE to do a municipal residential development but the dollars, time, and experience are required.

    I guess our reason for working outside the city limits is to reduce our obligations as the developer. IE, paved roads, sewer, water, etc. People in this area area also looking for large lot areas at the edge of town. Hell, that is how I was pulled into this deal. We needed land for our business, now we are looking at things differently. I have studied the market in our area for close to 10 yrs now and we do not experience the fluctuations of some other areas of the US.

    EDIT I just realized I did not put much info in about what I am doing. I posted also in the development area so I hope you can piece this together that I am looking at a rural development outside of the big city.

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