Would you ever consider putting up money to invest in an LLC where there are other investors doing the same thing (who you don't personally know)?
I've recently been made aware of a group that essentially puts investors together based on their investment goals, available capital for investment, etc. The group invests alongside the other investors and takes care of property management. Basically, you'd be "buying into" the LLC as one of several individual investors. Property would be purchased for cash. LLC shares could later be sold, but group has right of first refusal.
Lots of questions still to be answered, but wanted to get everyone's feedback to see your thoughts and whether or not anyone has successfully (or unsuccessfully) done this.
@Mark S. ,
I would be cautious. (I am a new investor with no background on buying into an LLC)
My first questions:
- Is this group credible?
- Who told you about it? Do you trust this person?
- What happens if the group dissolves or a property goes bad?
- Why not start your own LLC?
It sounds like you have capital, why not invest in a property yourself and learn as you go while seeking knowledge and information from the forums and local meet ups?
@Scott Hollister , thanks for your reply. I found out about it from another BP member. In looking to be completely hands-off and just enjoy the passive income. The person running the group would put some of their own money in the deal, be a part owner with you, and take care of the property management. That's a major benefit for someone like me who wants to be hands-off and might not otherwise want to be a landlord.
Can't you have your own LLC invest as a partner in someone else's LLC?
This can be a very effective way for investors without tons of money to get a decent return. You have to be very careful not to set off alarms with the IRS and the FTC. When ever you pool money from more than one source there is a potential to fall under Securites Law. You should get a copy of their share documentation and run it by an attorney.
Some questions to ask:
1) How many partners will be in the LLC?
2) What is the total value of the fund?
3) Are all partners all in State or are there out-of-state investors?
4) Who are the managing partners, how many and who are the decision makers?
Let me think on it some more. I may have other thoughts.
@Mark S. I don't think this is a bad way to invest. Besides when you invest in the stock market you are basically doing the same thing. Get as much info on the group i.e. financials, past deals and speak with prior investors who have worked with the group.
1.) It varies based on the deal. Usually just a few.
2.) It's not a fund, as best I can tell. They take 25% deposit of the amount you want to invest, hold it at a bank, have 60 days to find a property and then put all investors' funds for that particular property together at the end and buy it for cash.
3.) I believe there are some out of state investors this group deals with, but let's assume all in state.
4.) The gentleman who runs the group basically does it all with his team, but I think he would be the one managing partner listed.
@Shawn Ackerman , thanks for the advice. I am in the process of gathering this info.
At what point would this be considered syndication? Or is that the case no matter how small the deal / how few the number of investors?
Specifically, if the deals are NOT advertised and a few private investors throw some money in together (that don't necessarily know each other outside of the deal), is this considered syndication?
@Mark S. What you are referring to is a syndication. Experienced sponsors provide investors with an opportunity invest passively alongside the experts. Sponsors and investors pool their funds into an LLC which purchases the property. Generally, there is a preferred return, meaning the investors get paid before the sponsor takes anything. Investors receive quarterly payouts from the profits, receive regular updates and financial statements and receive an allocation of the depreciation in their K1 at the end of the year. If you are looking to grow your portfolio passively OR learn how to be an active investor, I think syndication is one of the best ways to invest. The key part is to due your homework on the sponsor and make sure they have a long-standing track record of performance. I'm happy to answer any questions you have on the specifics of how a syndicate works or how to properly vet a sponsor.
Only invest with those you know. If you don't know the lead personally you are just scratching the surface.
Moat people I know don't invest in real estate, so if I did this, I'd probably never get started. I figured by doing my due diligence, creating my own LLC for protection, and starting with a nominal amount, this is a way to minimize risk.
@Mark S. , what you are describing is investing into a syndication. I have bought and sold over 1000 apartments units using this model as I am the operator, managing member and sponsor.
You as the passive need to get comfortable with the operator and strategy of the opportunity.
Syndications are very common such as investing with other passive investors you don't know. The common link though between all the parties is the trust between you and operator. The operator, like myself, is active and makes the investment decisions to guide the opportunity from start to finish.
There are many people like myself who run deals like this and allow accredited investors to join in on these types of investment structures. To give you a couple other names, feel free to check out @Brian Burke and @Joe Fairless .
@Brian Adams , thanks for your response. Yes, it seems like this is syndication. I'm told this group can take on both accredited and non-accredited investors (obviously vetting those non-accredited pretty well). Since it's not openly advertised, this opens it up to non-accredited investors, from what I'm told.
These deals are mostly buy-and-hold deals with occasional flips. Most are SFR and small multi-family. Not sure if that makes a difference. I've met and really like the sponsor, but just want to make sure there are things I'm not overlooking either.
This is very common and thousands of deals are being closed this way, each day. Ensure the principal or deal sponsor has a strong resume.
@Mark S. , What you are describing is definitely a syndication. Any time investments are taken and the outcome is outside of the control of the investor it's a security and has to be treated as such. It's also very common. The most important part, however, is the part of the definition of a security that talks about the outcome being outside of the investor's control.
This means that the outcome is dependent on the efforts of the sponsor, so, for the investor, you have to do twice the due diligence. You have to do DD on the property itself AND on the investment sponsor.
Make sure the sponsor is experienced, has a track record, and can show you how their other deals have performed compared to their projections. There are a lot of good sponsors out there, but there are also a lot of bad ones and first-timers so you have to be very careful.
A bad sponsor can destroy a great deal, while a great sponsor can deliver the best possible outcome in the face of adversity. Tread carefully and choose a sponsor as if your capital depends on it.
just wanted to comment that creating your own LLC gives you no protection against a bad deal.
LLC is simply a vehicle created to hold property or own a business.. it can give some personal protection in case of litigation from other third parties but won't protect you as an investor if the deal goes south.. Single member LLC provides no protection normally vis a vi your personal acts.
I would do a little more research on the subject those that chimed in above are all knowledgable and can help you I am sure.. at least let you know what to look for.
If your not personally aquainted with the sponsor you will want to run a full background check on them and credit.. you be surprised what those things will dig up..
@Brian Burke , thank you for responding. Definitely some good points to consider.
@Jay Hinrichs , thank you for responding as well. I realize the LLC doesn't protect me from a bad deal and I still have to do due diligence on the sponsor/deal, however, I am doing it for personal liability reasons in the event something happens with another investor, a pissed off tenant, etc. I just want to minimize personal liability and feel like this, in addition to a personal umbrella, is a good way to do so.
it adds another layer but its still a single member LLC which affords you pretty much zero protection.. your protection will come as being a member of the entity that owns the aforementioned property that would have a pissed off tenant coming after you. Although I can't speak for others but unless your running your stuff like a slumlord I don't see a lot of liability coming out of owing rentals.
short of some super bad thing like 20 kids parting on a deck and it collapse severly injuring someone.
@Mark S. This isn't legal advice, and you should certainly consult with your attorney, but if you are investing in a limited partnership or LLC interest you already have protection from personal liability. Your liability is limited to the amount of your investment. Investing in the LLC with an LLC doesn't add anything but costs. This is one of the benefits of passive investing in properly structured syndications. If your legal counsel advises otherwise, go with it, but I suspect that won't be the case.
I have explained the structure to my attorney and he thinks more layers is better. Obviously there are additional costs, but he's done other work for me and I trust his judgement.
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