First deal with investors

5 Replies

Hello BP Family, I am new to investing but not first timer as well. Have done few flips on my own by now and at a point where I feel like I am prepared to take on bigger projects and invest with a group not just myself.

I am in Southern California

I am teaming up with three other investors for a flip project. This is my first project with investors.

We are getting ready to start submitting offers for properties. Each of us are investing different amount of cash and will be equity partners. We will need to borrow about 30% of the project cost from a lender.

Should I set up corporation or LLC? (I am assuming most responses are going to answer yes and LLC)

California state charges minimum $800 to maintain an LLC is there a way to avoid it?

How can I get the investors to commit the project cash?

How should I handle financial part, meaning, should I open a bank account in LLC or Corp's name now and deposit all cash in there, or can I wait until we get in contract for a property.

I want to know how to structure the deal and do it right.

Thanks for all your help in advance.

@Mitul Patel

Good questions! I have been investing with partners since 2001 and formed several syndication groups for different projects. 

My suggestion to you, since it is a smaller group and I assume you are investing in specific projects:

1. Yes. Form an LLC. In the Operating Agreement state who the members are of the LLC and I would suggest that you elect the other partners as "non voting members" so you have more control and flexibility. They are still part of the legal entity.

2. You can have a base LLC, that can act as an intermediary for the purchases until they are finalized, as long as the final investment (and title) is vested in the LLC formed for that purpose at closing.

3. How can you get the investors to commit the project cash? Once you come up with a property, prepare a proposal showing all the breakdown (purchase price, construction, holding costs) and possible profit. Show the profit as a percentage of the funds invested (i.e. $300,000 invested ... final profit after sale $30,000, which is 10% ROI). Have the investors sign the proposal and put up an "earnest deposit" ($1,000+) to be deposited with a title company or a closing attorney, unless you have an escrow account.

Good luck! You seem that you are off to a great start!

All good questions. You welcome pm message and hopefully o pint you on the right direction.

@Mitul Patel Congratulations on taking action.

Although I don't do residential property flips, it is my understanding that the lenders want you close in your name not an LLC as we do in CRE. You could do a (TIC)Tenant in common with each of your names.

If you live in CA and are buying in CA, CA wants their $800 if you form an LLC.

The other issue I see is, if you are pretty much controlling the deal and the other investors are passive, you have formed a security.  Now you need to engage a SEC attorney and get a PPM.  You don't want to be on the wrong side of the SEC.

@Mitul Patel I am an investor in CA if you are still looking for investors please feel free to message me. Thanks

Sorry folks I was out of country for a bit. Thanks a lot for responding to my post. All the information is really valuable and helps a lot. 

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