I'm getting ready to do a few deals and wondered what peoples thoughts were on private hard money funding. I'm in the process of developing what I like to call "Call to Investors." The plan would be to send out an analysis of the deal my company is making. In the analysis would include all of the major details including Purchase price, renovation costs, and ARV. I'd like to collect a network of investors that could subscribe to an email list to receive these deals. We would put a call out to how much funding is needed and how much equity per $1000 they would receive.
What are the legalities of taking investor money on these deals in exchange for a percentage of the deal if I'm a single member LLC?
Its a very interesting idea, and id like to hear what others think. Im sorry i don't have much input at this point in time, but ill ask around and comment if i find anything that may help.
Best of luck!
REI Attorney Perspective..
Tread lightly when it comes to talking with investors about pooling money together for REI acquisitions. You are in the world of 'securities laws' here, which are both federally and state regulated and come with a serious bite for noncompliance.
Prior to talking to any investor you should understand how securities laws apply to your investment strategy and how to best fit them under the requirements of an exemption from registration of securities, which is in essence a public offering.
Some exemptions permit the general solicitation of investors, some require a substantive pre-existing relationship. The exemption you fall under will depend on the type of investors you are targeting, where they are located and the amount you are raising (to name a few).
The way you plan to structure the deals leads me to believe that each deal will have to have a separate 'fund' attached to it. If this is the case, it wouldn't be a bad idea to set up what's called a 'special purpose vehicle' which investors would invest into and that SPV subsequently invests its proceeds into the operating LLC that your single-member LLC owns equity in, as well, and that operating LLC purchases the property. In other words, investors money is pooled into one entity. That entity funds another entity separate from your single-member LLC. The investor entity and your SM-LLC hold equity positions in the operating entity. That operating entity purchases the property(ies). There's other ways to do this that might be a bit simpler, but from how you are talking about breaking up the request for funds property by property this seems like, at the very least, a good starting point.
Before you talk to anyone though, make sure you have this initial legal groundwork set up. Would be happy to chat with you in more detail if you have any other questions.
The Reel Law Firm
Helping entrepreneurs and real estate investors Make Things Happen.
Thanks for the response. To my understanding each project would be a “joint venture” investors would only be funding each deal individually. At the sale of the property the funds would be due back to the investors.
Regardless of how you structure it, you're taking investors money and investing it into something to generate a profit or ROI for them (and you). Securities laws are all over this, especially since they would be 'passive' in their involvement in the JV.
Like I said in my first response there are a few different ways to structure it. JVs could absolutely be one of them. Still, I would encourage (1) the investors pool into one JV partner entity per property purchased and (2) making sure you are compliant with securities laws. Pooling the investors dough into one JV entity makes equity management, profit distribution (waterfall) and carried interest (what you take on the back end) a whole lot easier to calculate.
I think the key for you really is developing that relationship before you talk to anyone and then, obviously, making sure your documents are all in order to provide them so they can analyze the deal and make a fully-informed decision.
Hope this helps.
@Chris Reel is right, and unless you are doing multi-multi million dollar deals, I'd steer clear. Why not just grab a silent partner to fund your deal/s? That would be much less sticky. Get a few deals under your belt, and one investor will start talking to other investors on your behalf. Concentrate on the deal.