I have investors! How do I structure the deals?

Question

I've had success with flipping homes. Naturally everyone in my center of influence now wants to throw down $20k++ to get in on the action. This is perfect because I prefer not working with banks (multiple reasons here).

As you know in the world of flipping, cash-in-hand is king. There isn't time to structure a deal-by-deal basis, especially not in the red-hot market I'm in. Ideally I'd set up some sort of fund pool. Everyone puts in their capital, I manage it via buying and selling flips, then pay the investors after the sale.

Any suggestions on:

• What to offer the investors (interest rate, a % of profit, etc)?
• How to set this up?
• Tax/Legal implications?
• Is there a name for this?

Allen Fletcher · Answer

@Mitch Larrivee

Depending on how many people want to give you money and the quantities you may have a major issue with the SEC. Before you accept any money sit down with a lawyer and accountant to discuss the legal ramifications and filing requirements.

As for the rest of your questions, it really depends. For example, you can borrow the money from your investors (thus paying them a set interest rate) or you can make them shareholders/partners and give them a percentage of profits.

If I were in your shoes I would start an LLC and then create a  basic loan agreement that you can use to borrow money from each person using the same contract. (Make sure that this is allowed in your state and check the regulations). After you have done this tell your investors that they should have money ready for quick loans. You find a deal and then contact your investors asking for loans to make the purchase and rehabs. Those who want to supply the cash sign the agreement with you, transfer the money, and await for you to fulfill your side of the contract. After the property is sold, you then return to your investors and pay them all the principal and interest. Rinse and repeat. This strategy may seem like a hassle, but it is far less work and less expensive than having to file with the SEC and have them poking around looking for ways to fine you.

Good luck,

Allen Fletcher

Allen Fletcher · Answer

@Mitch Larrivee

I write my own loan agreements and have not had a lawyer look over them (all of my loans have been with my 1st circle i.e. family). If I decide to take on investors outside the first circle I will have a lawyer proof the loan contract before I use it. If you keep your loan agreements more or less the same, sitting down with a lawyer should be a one-time thing. As for proof of funds, ask what the seller/agent considers sufficient. They may accept a copy of the promissory notes or at worst they would want the funds held in escrow, you can be flexible to meet those requirements as long as you work the details out with your lenders and sellers ahead of time.

Allen Fletcher

Mitch Larrivee · Answer

Excellent! Thanks so much @Allen Fletcher!

Mitch Larrivee · Answer

Thanks @Allen Fletcher. I figured creating a cash pool would involve securities law. Thanks for confirming that. Definitely not something worth getting into on a small scale like this. Do you find it necessary to sit with an attorney/accountant for loan agreements? Also curious how to handle proof of funds (with offer) with 3 to 4 private loans?