It's been a challenge getting financing from banks mainly because I'm self-employed and I haven't had a W2 in years. Now I'm being creative and looking to raise money outside of the banks with private funding. For those who have gone this route, can you please advise on the best deal structures? please give examples if you can. I'll like to structure a deal where I bring cash to the table and where I don't. Ultimately I want my partner(s) to have majority of equity since this is my first go and I'll like to build some trust. These are also friends that I already know personally. Thanks.
What type of properties are you looking to buy, how active/inactive do your investors desire to be, what are you investors goals/risk tolerance, what are your goals/risk tolerance.
Based on answers to those questions you could have some investor for whom debt is the best option or a limited partnership could suit you best but a simple LLC could do the trick.
Hard to give help with out knowing details.
@Bill F. I will be doing most of the leg work including finding the deal and managing the property (Multifamily 2-4 units). My investors are mostly tech guys and all have day jobs so they will be passive for the most part.
I'm doing exactly this, because I live and work in the UAE, and because I'm paid by the UAE government (no W-2), I don't pay taxes in the USA, so it looks like I don't get paid period. Aren't banks awesome? So I'll use my current situation as the example.
I bought a house for 70k using owner financing, and I intend to flip this house. They were kind enough to let me put zero money down and do an interest only loan, meaning I pay nothing up front and I pay the interest, taxes, insurance, and utilities every month from the time I assume the property until I sell the property. This makes the holding costs lower.
I know the rehab cost will be about 30k. I also know from the comps that the ARV is around 150k. Like you, I brought in my close friends and family, those who have shown interest in real estate, and would like help getting a foot in the game. Since the deal is so nice, it was relatively easy to convince them to contribute for a return. I also told them that everything will be documented from the very beginning all the way to when the house is sold. Everything. This is my gift to them for trusting in me to invest their hard earned money.
For example, and this is just to illustrate the figures, let's say the profits are expected to be 30k. Let's also say I raised all 30k from friends and family, meaning I'm putting in zero dollars. One member, mom, contributed $3,000 to the rehab, which equals 10% of the total rehab cost, so she will receive 10% of the profits.
But wait, your time for facilitating this deal is worth something too. After all, a professional must be paid for his services. In my deal, for putting it all together, my fee is 25% of the profits before any other profits are paid. 25% of $30,000 profits equals $7,500. That money goes to me. The remaining $22,500 gets paid back to the investors. So mom, who contributed $3000 (10%) gets back her $3,000 plus 10% of the profits ($22,500), which is $2,250. That equals $5,250, which is a 75% return on investment (2250/3000 = 75%).
And you, just for facilitating the deal, make $7500.
I would recommend speaking with a real estate attorney, which you can find on BP like @Jynell Berkshire , to help you draft a contract that covers everything you need. I'm sure others will be willing to help you too.
I know this isn't your exact scenario, but hope it helps get you closer to your goals. Good luck.
Appreciate the thorough sample @Michael Volek very helpful.
@Mike Ojo anytime. It's always a good idea to put yourself out there, so I hope everything goes well for you. Take care.
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