I am trying to pull together passive investors to fund a fix and flip. What are some of the common practices in structuring these agreements between me the developer and the investor? For Example, is it common to guarantee both the principle investment and a rate of return to the investor or just the principle? In the case of using / combining hard money or bank financing, how is the privately invested money secured if the bank or the hard money lender is in the 1st position? Are the returns that people offer annualized (like 10-12%) or are they based on a % of the initial investment and project whether it takes 6 months or something shorter than a year?
probably worth a 30 minute discussion with a MA attorney well versed in syndications.... you/they will look to make sure you fit into an exemption for pooling investor funds, etc.
@John Gallagher Ultimately, what's required will depend on the individual investor's preference. The most common terms I've seen are 1 to 5 points and 8% to 16% annualized interest (depending on experience, assets, etc). I personally wouldn't play around with something complicated or risky like guaranteed returns outside of typical interest.
To secure the note, the private lender will likely have to take a second position to the bank. You can do that with a simultaneous closing where the bank takes first position and then a few minutes later you close second position with the private lender. If the private lender is putting money up for the down payment the timing can get tricky so you'll need to find a title company that's willing to do a simultaneous closing. It's best that everyone knows what's going on to stay out of trouble. I'm not a CPA or attorney so take this as my two cents. Good luck!
Thank you for your input!
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