What route do you think makes more sense to bring together private capital for flips?
Would a simple JVA would suffice at this early point or SEC regulations would make this more complicated, and expensive?
@Michael Bishop is a syndication pro at this kind of thing.
If you're flipping apartment buildings (5+ units) then syndication may be a decent choice.
If you're wanting to do residential deals, I've most often seen a JV work best because then it's a deal-by-deal basis, and the securities aren't tied to one house)
It's not a matter of apartments or single family residential deals. The question is whether or not all parties will be actively involved in the deal (JV/partnership) or if there will be one lead/sponsor/general partner and the rest will be passive investors with expectations of return on their money (syndication). Anytime you're raising money and making all the decisions and doing the work then it should be a syndication. The exception (according to previous SEC attorney's post here on BP) is if you raised that from a single person.
@Pavlos Kasselouris are you familiar with running a "cost of capital" calculation? Most of the time even the hard/private money loan rates are less than the cost of equity. Figure out the true cost of capital! :)
All the best!
@Pavlos Kasselouris SEC regulations only come into play when you are dealing with securities (public or private). As @Michael Le has pointed out there are differences in the way syndication and partnerships are run.
Unless you are doing above a certain $ value, getting into a syndication will be a massive waste of time and money.
E.g. you will spend at a minimum $10-15K (this is being ultra cheap) on a securities attorney (not including other costs around administration, legal and accounting).
If your deal flow is $1M, the attorney costs alone will be 1-1.5%. Layer in additional costs and you are looking at 7-10% costs before operating. That would eat into your profits. At the minimum, it would be a significant drag.
You can choose to structure an agreement where the capital providers can get passive returns (similar to syndication, if you're inclined to use that model) while you retain complete operational discretion. Ownership and management decision-making are two different issues. Technically, as long as all parties agree any arrangement is viable.
@Pavlos Kasselouris , as @Michael Le & @Omar Khan have indicated, it's really more about the specific deal and how you want to structure it. If it's a small multi-family flip that you only need $200K for, or if the only people who will be investing are family and friends, deals along these lines.. syndication would be a terrible choice because of the resources it requires.
However, if you want to take down an entire apartment complex, or a big office space, and require millions in capital for which you'll need to go outside of your inner circle, syndication is basically a necessity.
So, you need to know all the nitty gritty about your deals before deciding how to structure it in terms of raising private equity. If you do decide to go the syndication route.. advice or general discussion on BP is great and all, but don't take anything anyone says as the holy grail (unless they're a securities attorney). Instead, get in touch with a securities attorney to CYA (cover your a$$). @KimLisa Taylor is a pretty active securities attorney here on BP and may or may not have some insight for you.
Thank you everyone,
It was not my intention to go the syndication route, because the deals will not be more than 200K.
If it was an apartment complex I understand that it becomes more complicated.
I tried having my attorney draft an agreement, but when I mentioned to him SEC...he decided to pass, since it was outside his field. I do want to raise capital the legal way even though it's less than 1M, during a evolving year.
We have a document in our office that allows a smaller syndicator to raise capital for smaller deals for less money. It basically provides all the risk factors, operating agreement, and subscription agreement. We use it for any syndicators that are raising less than $500,000 with fewer investors. It helps the guy or gal that is just starting out while still providing proper disclosure.
If you want some samples, I have some distribution and fee samples I have been providing people. You can email me with the subject line "Samples Please" and I will send them to you right away.
@Jillian Sidoti would this apply to funding residential flips on a regular basis? I am looking to partner funds with friends and family in order to lend to a contractor partner, either as straight debt financing for acquistion and repair costs, or a combination of debt and equity partners, participating in profits after resale. Do you handle these types of partnerships and have sample agreements and entity structures?
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