Suggestions setting up real estate business with family investor

4 Replies

Can anyone give me information on structuring my business? Details below:

  • Interested in buy and hold, HML, JV of SFR and MFR
  • Family investor is passive and only interested in ROE to supplement retirement income
  • I will be doing the leg work of reviewing deals, negotiating and buying at first. The goal is to get the system set up, so I will be overseeing the machine run smoothly
  • I have a full time non real estate job, but it is autonomous and am flexible with my time and location. I enjoy my job but would consider transitioning full time into RE
  • Investment properties will be near the investor (Fresno) but 4 hrs. away from where I live.
  • I am new to RE and just got my CA BRE license (It may not have been necessary in my case, but it was a great way to learn about RE and network with others)
  • I'm in the process of setting up the team and am talking to accountants and lawyers that have worked with RE investors.
  • Next step is getting to know more investors and realtors (BP and local REIA groups have been great)

First of all, a lot of people will say don't get into business with family, but this has been discussed for a while and we are prepared. I think an LLC may be good. Set up properly this should avoid the gift tax penalty. My question is how does the investor get paid (dividends?) and how will I be compensated for my part (salary?) of any profits?

Amongst the great BP members I've followed, I am reaching out to @Frank R. @Elizabeth C. @Mike McKinzie @Michael Zuber @Jeff S because their situation may be related to mine. Of course anyone else that may have any ideas please chime in. All suggestions will be for informational purposes and not taken as legal advice. Thank you in advance for your guidance.

@Yutaka M.  ,

Getting started is always the biggest challenge. But you're on the right track networking with others, making connections, and building relationships with other successful investors. Have you tried checking out @Brandon Turner  new book, "No ^ or Low Money Down.."?

I've partnered with others on JV deals also, although I think Brandon's getting better terms ;) I recommend definitely keep networking though, and see how others are structuring.. I do 50/50 deals with one at a time, and put up some of my share, and borrow some of my share from the other investor, with a healthy yield.. Others just put in the time, and the investor puts in the capital.. But all depends on your circumstances.

@J Martin I haven't read @Brandon Turner book yet but I picked up both of @J Scott book as soon as I joined BP. Excellent reference and a bargain for the amount of information it contains. Best mentorship program that one can get starting out.

Although, I'm new to this, I'm in it for the long run. By building strong relationships I hope to find the needs of those that have assisted me and make it a win-win situation.

@Yutaka M.  

  If your family member is just looking for a return on there capital I would just use them as a bank.  You don't need to form an entity with them.  Find a deal and use them as a lender, give them 1st position security on the asset and pay them monthly interest. 6-8% interest only would be good.  Buy the property at the right price and refinance after 6-12 months into permanent financing with a institutional lender.  There are several banks in Fresno that do portfolio lending.

You do this a couple dozen times and you will be a bad asz.

Frank

@Frank R.

I appreciate the feedback. The formation of an entity is to clearly show IRS the funds were used for investments. Great idea for a win-win investment with the family member. They'll be my HML. I get a deal with no points and pretty low rates, and they get their monthly check. I approached a few credit union booths at a recent home fair in Fresno and got names to the lending officers. I'll listen to podcast #55 with @jimmy moncrief again and get tips before applying for refinance.

Hopefully, in two years I'll be in your position and have a few successful cash flowing deals under my belt. The last time I was in Fresno our schedules didn't work to meet, but I plan to be there a few more times before the end of this year. I look forward to meeting you and maybe, find out there is something I can do for you.

Yutaka

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