Hello all, I have started an investment company that specializes in flipping houses and I have a group of investors that are fronting the capital for the projects. I am doing a split with them based on the % they have into the deals. In the beg. I am taking a $6k/month draw to cover my expenses and time invested into running the business. This amount will come out of the company money funded by the investors. My question is what is the best possible way to to get that money recovered for the investors? For example, if it takes 3 months to finish the first deal, that's $18K gone. And once the profit is made, there is no way I can put the $18K back, pay out back to the investors their ROI and still have enough left to pay myself. Anyone had a similar situation or advice? Much appreciated!
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
The topics that concern me here that are not really being addressed are the managerial and administrative responsibilities you will have. It does not appear these areas are your strength and in some sense you have zero experience with.
Being candid and no disrespect meant, you are equating your efforts of 100% of the work to transaction/project management. It seems you have experience doing this part and it seems the investors are comfortable with your involvement of that side of the business. Great. You need to get some more education on the administrative and managerial side of the business.
The general description and eagerness of your capital structure is quickly approaching Regulation D situations. Its not clear how many investors you have obtained or how much capital you have on call but the tone I get from the post makes me want to raise this flag. All that said, its a good thing to have investors and money but you have to do it correctly or get sued or worse.
Administratively you need to gain an understanding of how you will take your investors capital in and how you will deploy it. Is there a managing company which you own and then a fund type entity the investor invest in and then does the fund type entity hold title to the assets or do you setup new companies to do that?
Or does your company take the money in from your investors, which means they become members or partners of the pseudo parent corporation and if in this manner are you truly shielding your investors from liability as best you can/should?
Will you call for investments on a pro rata basis fund structure or on a project by project basis?
How many investors do you plan on having to use in the structure?
What are your qualifications of an investor? Can old man Bill give you his savings of $50K?
How long is an investor required to hold his committed capital to you before the commitment rescind? What is the penalty if you call on the capital and it is not available?
Do you hold any portion of the capital like 10%? If so, how and where?
The capital commitments you have, is that in some form of documented capital call paperwork or subscription document?
Are you properly disclosing the investment opportunity to your investors and are you properly soliciting investors for your investment program?
Taking on investors and leveraging their equity without proper disclosure (a.k.a. getting hard money loans) can open you up to liability from your investors.
How and when will you report to your investors?
For the sake of not making this an exhaustive list I will stop there. It is possible that I have read too far into this but I am posting based on what is running through my mind as I read this post. There is a bit of a different demeanor to the manner in which you are approaching getting started opposed to the typical newbie. Some of that may stem from the success you had in your previous role at the company you left. Your approach to your experience is admirable but I can tell you you will soon learn why you never say stupid things such as "...not a single one of them have ever lost money nor even missed their target ROI from my direction". I can't tell you how bad of a statement that is and if you have an attorney his head is spinning like the Exorcist right now.
I am not trying to take the wind out of your sails or pick on your ideas or experience. I am trying to point out what seems to be evident is that you need to take some time and become versed in administrative and managerial side of investing and raising capital. Those actions are regulated and monitored activities in the United States. Additionally, you have a learning curve on tax implications and investment structures. Again, not to pick on you but you had a misunderstanding that an investor gets a 1099 instead of a K-1. That seems harmless perhaps to you, but it is sort a big deal as they are not really close to the same thing.
As I stated, I could be off in left filed but I get a sense you want to go 1 million miles in 10 seconds but you don't really have the experience to do that just yet. The best advice I can say is slow down and make sure you are doing things right and be concerned about what you don't know and less about what you do know. That detail can mean the difference between success and failure as well as litigation and prosperity.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Perhaps I am missing something, but didn't you already get paid upfront each month via the $6k? Now you want back end profits too and have no capital in the deal? As one of the investors, I would never invest in such a JV.
If you are finding the deals, managing the rehab, managing the sale, and doing 100% of the work other than the money, you certainly deserve a fair share, but as the profits come in, not in advance. (My opinion)
Also, if you only do one deal every 3 months and you have already taken $18k of profit from that deal, the rest should be going to the cash investors unless the total profit on that one deal was in excess of $36k. In which case, perhaps you structure your agreement to have you get your $6k paid each month, then on profit day, all profits up to $18k (for the 3 month period) go to investor and anything left over gets split 50%/50% between you and other partners.
The other thing to consider here is to run 2 deals at once (or at least 2 deals within that 3 month period providing more profit to split).
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
14y
Matt- In my opinion, your investors shouldn't be happy with this deal for MANY reasons. Are you a PROVEN commodity? I've paid General Contractors LESS than that to do entire construction of a spec home, accept all the liability, and provide all insurances. Do you do that?
In this case, I'm with Will 100%. Rich
Yeah I figured this would be hard to explain by doing just a small post. The 1 deal/3 months at $18K was just an example. I am perfectly fine if I just made the draw in the beg. If it did actually take 3 months and I made $18K, I have absolutely no problem with and wasn't looking to make more on the back end. I would only take more of the profits if it exceeded the amount I took out for myself and then do a 50% split with the investors. What I am saying is that my goal is to eventually no longer need the investors money and instead just use my own company funds. Obviously I plan on doing more than 1 deal at a time. but I used an example that would show if things were running slow. But I am concerned that unless things picked up to be able to do multiple deals, then I would never be able to get to a point to where I would not be dependent on investor funds. I hope this makes sense because it's obvious that I do not have everything figured out. Which is why I came to you guys and I really appreciate your input and advice.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Matt, that makes sense.
Keep in mind that I have flipped many homes over the years and just added up my deals from 2011 for someone else. That total came to over $3.3M in total value and I still continue to rel on OPM (other people's money). OPM allows me to apply leverage responsibly to increase my COC returns. If you do some deals and end up with enough cash to fund your own deal, you should not. You should be at a point where you can find some less expensive OPM in teh form of a hard money or private money loan, then bring in the balance needed with yoru funds and do this on 2-3 deals at one time. That is how wealth is created.
Thanks for advice Will, I am actually already connected to 4 other hard money lenders and planned on taking the company funds I get from the investors, then using those funds with the hard money in order to do multiple deals. Does this make sense? My concern is that with investor and hard money involved, the deals will get too skinny in order to pay everyone off on their return and still have money left over for the company.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Without seeing your deals, I could not answer that for sure, but sounds like a true possibility. Combining hard money with that of your partner funding will eat up a ton of the profit.
In your shoes, I would find a HML to work with and one or two private money lenders willing to loan in second position for your "gap funding". Like I stated before, once you have some capital, you no longer need the gap funder, just the HML.
If you were in my shoes, how would you handle paying income taxes? That should come off right off the top first right? Before paying out the investors? Otherwise, I will be stuck footing the whole bill.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Depends on your structure. I am not an accountant and you should consult yoru CPA, however, if you structure as an entity, like an LLC, then the profits for each partner come their own K-1 and each individual is responsible for their own portion of the taxes.
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
14y
Matt Hunt, have you already raised investment capital, or are you seeking investment capital? I find it hard to believe anyone would invest funds like this in a start up, with no track record and allow the promoter to take a $6K per month draw out of their capital.
Your question seems to be that you're afraid your business model won't be able to cover investor returns and your draw. If this is the case you have two choices, either change your business model or forgo the draw.
BTW, success in raising passive investment capital is usually dependent on three things (1) your personal experience and success in the same or similar business (2) the amount of your own capital you are investing in the company and (3) the strength of your business model. How do you stack up on these three counts?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Originally posted by Matt Hunt:
Yeah it's an LLC so I suppose I would just 1099 the investors and they would be responsible for themselves.
If they are members of this LLC, then no you do not 1099 them, they get a K-1 from teh company. if they are only lenders and you are 100% owner of the LLC, then they are paid as a lender on a shared appreciation mortgage in which your LLC deducts that cost as operating expenses on that deal, thus their profit comes off the top and they are then 1099 for their proceeds.
Also, you should answer the 3 questions from Don above, the answers will help guide you in your structure.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Well, I'm watching Shark Tank on TV, some of the stuff people come up with....LOL it's interesting seeing how of the sharks think and their comments....so let's play it
Nothing personal here, so....
You're asking for is a job, a $72,000 annualized salary as a draw (is this a draw that you repay or that you're sucking out of the entity from day one?)
Consider that I can get a decent construction type for 2k a month and give him a nice bonus after deals are out the door.
In my area, I can hire an attorney for $3,000 a month as an employee.
I can have brains and brawn for less than you want.
So my question is, what makes you think you're worth that kind of money when you can't figure out how to split with partners, best tax strategy, or cover any of these minor details?
If I put my money up and you have a job for 6 months I'm down $36K, what keeps you from walking when you find out you can't perform on the big stuff?
I think I'd be better of with my own attorney and hammer banger.....
Sorry, but I'm out!
LOL!!!
Really, can't you get by on less starting out and build the company from what you do? I've been the hub for all kinds of ventures and I never asked for 3K up front, by the hour yes, but not as a draw from my partners......
And answer Don's three questions and let's see.....
Good luck!!!!
There is a lot for me to respond to so I will do my best with it.
[b]Don- I actually am doing both. I have investors committed but I want to make sure everything is ready to go before we get started and all the loose ends are taken care. And you can never have too much investment capital or investors so I am always looking to raise more capital in order to do more deals at a time.
I'm only a newbie to starting my own company, not investment real estate. For the past 4 years I have been Sr. Acquisitions and portfolio manager for the largest real estate investment wholesale firm in Central Florida. I have personally consulted many investors on flip property deals (many throughout the entire start to finish process). All have done very well and not a single one of them have ever lost money nor even missed their target ROI from my direction. I know the Cen FL investment market like the back of my hand. At times I was in shock when I knew more about the deals and how they work than they did, and it was their money at stake!! The projects I have helped out with are actually in my business plan to show my track record.
Don, the business model is sound. The $6K/month does not all go into my pocket. All business expenses other than the purchase prices of the properties and the rehab costs will be coming out of this $6K. I will only see a portion of it that actually goes to me. I will also be doing wholesale deals myself during the flip projects. I plan to make at least $3K per deal so I only have to do 2 per month to offset the $6K I am taking from company capital. I am doing 100% of the work myself. Investors are silent just providing the capital.
I am extremely confidant in my ability to do this because I've been doing a large amount of this work already, just not reaping the profits. I only sound concerned because more than anything I make, I want my investors to make their returns. Because without them I truly have no business. So it's extremely important that they hit their marks, even if at times I make no money at all. I was just presenting a very conservative scenario.
So this should answer question 1 & 3, but #2 is not a strong area for me because it is mostly funded by investors. I am only taking a draw just so I can put 100% time and focus into making the business successful which I know it will be. And like I mentioned, business expenses comes out of this draw as well so it is substantially less than $6K that goes to me. I bring a lot to the table because of my knowledge and track record that my cash investors do not possess.
[b]Will- Thank you very much for your advice throughout the day. You seem to be a vet in the industry and I really appreciate you taking your time.
[b]Bill- If you like Shark Tank then you should read Mark Cuban's book if you haven't done so already. It's incredible.
Remember, the $72K/year you think I am making is not the case. First of all, this is before taxes. Second, I have to cover business expenses out of this to keep things going while the projects are being finished. And yes, it is all being paid back into the company. I am not making a dime more unless my profits are over the what is being taken out monthly. And even with those I am doing a 50% split (clearly you didn't see the previous posts where I discussed this). This actually turns out to be considerably less than I make now, but I am taking a risk (wife and 2 kids) because I know it will work and it's my passion. The wholesale deals I will be doing in between should cover my expenses anyways.
Like I said, I am new to starting a company so asking questions about splits and taxes are important because I want to get it right and make sure my investors make money. And I see nothing wrong with asking. Isn't that what the forum is for? I said earlier that obviously I don't have everything figured out yet. Do you have everything figured out about your life? I doubt it.
What you pay your people in your area is of no relevance to me so congratulations on that. I don't need to address that.
No investment is 100% safe, including yours. Just ask the people in the stock market right now. But I know what my abilities are and what I'm capable of doing. So to answer your question on am I worth the money that I am taking a draw on? You're damn right I am considering the returns I will be able to give the investors! I think I'm worth more actually, but I am choosing to get by on less and not be a greedy scammer.
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
14y
Matt
you started this thread and asked for replies and that is what you are receiving. I just moved from Southwest Florida two years ago. I purchased properties, still on properties in Florida, and consider myself a very astute investor/rehabber/Flipper. The way you have presented your process, as an investor, I would not be a taker for your program.
The "hog line" is hard to define. In my opinion, based on the facts that you have provided, I would feel you are crossing that line.
I am surprized that you were shocked that you knew more about the potential deals then did your potential investors. You are asking for 50% for that knowledge and if you're investors had that knowledge, they wouldn't need you at any fee.
I'm not intending to attack you simply reply to your post in an open, honest way. Consulting about flip deals is very different than being the general at the front of the Army. According to your previous posts I don't think you actually ever done one from start to finish, with your own money and therefore you have no actual experience to show.
Good luck on your program, but I do believe it needs a little more fine tuning and thought process. Rich
Thank you for the comment and I do not think this is an attack at all. I welcome an open discussion, but I think there is some confusion here. The company I am starting is not a flip consultant company where I advise investors and make 50% profit. What I am doing is the actual flips themselves, just using investor money to do the projects. What I was referring to about consulting is what I do now for the company I'm with. And I didn't make any extra money for consulting. I did it because I wanted to make sure my investors where successful, purchased from our company again, and to build relationships. And I absolutely was shocked when I knew more about the deals than they did unless they were new to the game. What I mean is, if I had that amount of money involved, I would know every in and out about the project, house, comps, marketing, resell, exit strategies. If it were my money, I'd better know more about what is going on then someone else, but that is my opinion.
So no, I am not asking for 50% for knowledge. I am doing 100% of everything. The location of the property, putting it under contact, getting it closed, lining up the contractors, being a project manager, listing it and doing the marketing to resell it. The investors are silent and providing the funds and then get a ROI when the flips are done.
I agree with you 100% that consulting about flips is different than having your money on the line. But that does't mean I have no experience. There were a few times where I was working with new flippers/investors where I literally did everything. I found the properties, explained what they should do with it, did all the comps and research, put the rehab estimates together, did all the closing work (had lien issues that needed to get worked out), lined up the contractors and got bids, put the rehab timelines together, was project manager, listed the houses for them, taught them how to write a contract, played regular Realtor and marketed the property, and got it moved for them. So yes, I def think I have experience and I have done different things for others. And like I said, I made nothing extra for this, just wanted my clients to be happy and buy from me again for the next flip project they wanted to do. But you are right in the sense of I have no experience doing flips with my money on the line. But that does't mean I have no clue what I'm doing, quite the opposite in fact.
Thanks again Rich for comments and I appreciate the dialog.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Matt, sorry, it was not clear from the beginning, seems this is pretty simple.Tell us if this is not what you're doing.
You want to set up an LLC allowing other members to join and earn a rate of return on their contribution as well as a % of the profits, up to 50% and you will draw no more than 3,000 a month for operational expenses which include your salary or draw. Any amounts you take personally will be off set by your 50% of the profits on each deal and you will receive the balance as your earnings.
They provide the funds, I do all the work and 100% of the effort. And profits are split 50/50. I am taking a draw in the beginning to get me through until the deals are done. But I am only entitled to my 50% of the profits once the $$ used on draws are recovered. Then if there is money left over, then I get a 50% split of that. All other profits go back to the investors. If for some reason we finished a deal and I was not able to recover the draw $$ and pay their return, I would make no money. Which I'm fine with. However, I will also be doing wholesale deals on the side that will recover the draw money so it won't need to come out of the flip profits. Then once the company starts to become profitable, I will no longer take a draw. This is just to help out get business and personal expenses paid while starting the business.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Matt, I think we are saying the same thing, it's just that you add too many words attempting to describe little twists to it that are irrelevant to an opearating agreement.
For example, your draw, nothing is said that you must take a draw, that is up to you. What is important is that the investor members know that you have the right to a draw. They also need to know you are covering expenses along with your draws.
The fact that you are doing 100% of the work is clearly understood, you will be the active managing member and the others will be in a passive membership status. By default, that means you do it all.
If you keep going into such detail your attorney bill is going to be a bunch!
Your issues will be addressed in an Operating Agreement of the LLC. You can make it simple or 2000 pages long and everytime you try to specify something in great detail the more you will restrict your ability to operate. Kinda like being on the stand in court, answer only the question asked, the more you say the deeper you'll get.
Probably the best way to structure your arrangement is by having investors contribute money as capital to the LLC if you have 3 investors they put in 1,000 each. This is operating capital that you draw expenses from for labor and materials or whatever.
That contribution to the operating account comes from the capital accounts of the members. Each month, they contribute as necessary to fund the operating account. When a project is completed, proceeds can first be paid to any investor loan, then to refund any contribution to the operating account by investing members, then to pay profits, 50% to you less your labor draws and the remainder divided according the their participation.
Now, each memebr has their own capital account on the books, they can put in whatever, say in even amounts (but doesn't really matter) but let's say 50,000 each.They can fund the capital account at any time, but prior to getting any property if they want to participate. When you find a property to buy you borrow from the memeber's account in whatever % you need, that % is their "ownership interest" in that deal. It's a loan that the LLC needs torepay to that account. The interest is the yield they expect while those funds are loaned out and in use. When the project is done, the loan is repaid. The profits from that project are then disbursed respectively to each member.
This is all standard accounting functions that need to be used in the company, it's common practice and described simply in the Operating Agreement BY YOUR ATTORNEY.....didn't mean to yell, but you need an attorney!
You will be active in the management of the LLC, that means your draws and income will not be as a passive investor which means you will be paying taxes and withholdings there is no legal way around it .
Maybe print this and take it to your accountant, they will understand it and to the attorney so he has the baisc idea of what you need.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Matt Hunt do you have an attorney? There are many threads on BP about structuring partnerships, voting rights among members in an LLC, borrowing between members, etc. Good luck
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
The topics that concern me here that are not really being addressed are the managerial and administrative responsibilities you will have. It does not appear these areas are your strength and in some sense you have zero experience with.
Being candid and no disrespect meant, you are equating your efforts of 100% of the work to transaction/project management. It seems you have experience doing this part and it seems the investors are comfortable with your involvement of that side of the business. Great. You need to get some more education on the administrative and managerial side of the business.
The general description and eagerness of your capital structure is quickly approaching Regulation D situations. Its not clear how many investors you have obtained or how much capital you have on call but the tone I get from the post makes me want to raise this flag. All that said, its a good thing to have investors and money but you have to do it correctly or get sued or worse.
Administratively you need to gain an understanding of how you will take your investors capital in and how you will deploy it. Is there a managing company which you own and then a fund type entity the investor invest in and then does the fund type entity hold title to the assets or do you setup new companies to do that?
Or does your company take the money in from your investors, which means they become members or partners of the pseudo parent corporation and if in this manner are you truly shielding your investors from liability as best you can/should?
Will you call for investments on a pro rata basis fund structure or on a project by project basis?
How many investors do you plan on having to use in the structure?
What are your qualifications of an investor? Can old man Bill give you his savings of $50K?
How long is an investor required to hold his committed capital to you before the commitment rescind? What is the penalty if you call on the capital and it is not available?
Do you hold any portion of the capital like 10%? If so, how and where?
The capital commitments you have, is that in some form of documented capital call paperwork or subscription document?
Are you properly disclosing the investment opportunity to your investors and are you properly soliciting investors for your investment program?
Taking on investors and leveraging their equity without proper disclosure (a.k.a. getting hard money loans) can open you up to liability from your investors.
How and when will you report to your investors?
For the sake of not making this an exhaustive list I will stop there. It is possible that I have read too far into this but I am posting based on what is running through my mind as I read this post. There is a bit of a different demeanor to the manner in which you are approaching getting started opposed to the typical newbie. Some of that may stem from the success you had in your previous role at the company you left. Your approach to your experience is admirable but I can tell you you will soon learn why you never say stupid things such as "...not a single one of them have ever lost money nor even missed their target ROI from my direction". I can't tell you how bad of a statement that is and if you have an attorney his head is spinning like the Exorcist right now.
I am not trying to take the wind out of your sails or pick on your ideas or experience. I am trying to point out what seems to be evident is that you need to take some time and become versed in administrative and managerial side of investing and raising capital. Those actions are regulated and monitored activities in the United States. Additionally, you have a learning curve on tax implications and investment structures. Again, not to pick on you but you had a misunderstanding that an investor gets a 1099 instead of a K-1. That seems harmless perhaps to you, but it is sort a big deal as they are not really close to the same thing.
As I stated, I could be off in left filed but I get a sense you want to go 1 million miles in 10 seconds but you don't really have the experience to do that just yet. The best advice I can say is slow down and make sure you are doing things right and be concerned about what you don't know and less about what you do know. That detail can mean the difference between success and failure as well as litigation and prosperity.
Investor · Garland, TX · Member since 2010 · 99 posts · 92 votes
14y
My friend (contractor) and I look for equity partners on deals that will be great flips with big profits. I look for the home in great communities with low DOMs. Once I find that home my friend come inspect the property. We then structure the property with a HML. The potential equity partner will come in with the difference in the total rehab and acquistion cost. After we put all the numbers together, we send out the proforma to our potential equity partners showing the potential ROI. The equity partner or partners has the option of having deed in their name or we all can form a LLC with deed in LLC name.
My friend does all the contracting work on the property. My friend and I get a small portion from profits. We started doing this because so many people were wanting to get into real estate using their IRAs, but did not want to use all of it. They are looking for a nice return in a short amount time.
We meet with all potential equity partners in person just to explain our concept and to get to know us. I want people to know that my friend has the construction experience and I have the experience in finding properties with big time profits in them.
At the end of the day I just want people to be happy with their ROI and know they can trust me and my friend with their money. I will earn my money from my own wholesale deals.
Investor · Orlando, FL · Member since 2012 · 431 posts · 106 votes
14y
I'd highly suggest reading Dion's post about 10x and really think hard about all of his points as well as much of the good advice in previous posts.
Lots of red flags in here.
One point I think the OP needs to consider is that if he doesn't live up to his end of the bargain and has even one litigious investor that things could get ugly quickly. It' can be very expensive to defend a lawsuit. This could quickly put someone of limited means in a bankrupt situation.
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
14y
Matt Hunt, while the split does seem a little generous (in your favor), if the passive investors are comfortable with it and willing to invest then the free market has determined that your split is viable.
While all these post bring up great points, you need to start somewhere and can't possibly cover every concern; if no enterprises were ever started without every issue covered then we'd have no startups!
You do seem to have experience in the main function of your new company, and that is the most important thing.
Taking a draw in this business is a red flag to me, but as I said if you're able to strike this deal with your investors, then it doesn't matter whether I or anyone else would do it that way; what matters is that it works for you.
The other red flag to me is that you state that in four years you have never had an investor make less than projected ROI or had a losing investment. Maybe.....But I find those statements very suspect or the results of very favorable markets. I have been a very successful investor, earning consistent double digit returns for myself and my investors, and I have made plenty of mistakes, taken a number of loses. Almost all investors/companies who claim never to have had a loss either as a lender or investor are either not telling the truth or using a very suspect accounting system. I don't know if this is the situation in your case, but for what it's worth that's what my 30+ years of real estate experience tells me.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Dion brought up important issues in dealing with investors and as Don mentioned, if small companys ironed out every issue before they opened the door, they'd never open.
Your question was about how to split fees or income not how to structure, administer and stay in complaince with rules, regulations and law but I'd agree that there are some issues you do need to address before opening the doors with your partners.
Many RE guys open an LLC with some false impressions concerning liability, while we talk about shielding from liability that is with or about non members, the public, but you can have significant issues between partners.
It may be wiser to have your "investor" be an active member in some capacity, say adminstratively, especially if they are not "Qualified Investors" as defined by the SEC.
Look to at the exemptions for family members as investors.
How you get the investor is another touchy aspect, if you have had past business dealings and they are known to you or were you soliciting people to invest with comments made of high yields and profits?
The documents you use for any lending as to committmets can quickly take the form of a security, an unregistered bond.
These are a few of the compliance side issues you need to address before you open the doors IMO. You will make mistakes, we all have and you will have losses if you do any business at all. It's how you address the losses and make those up to your partners that keeps them smiling.
Thank you guys for taking the time to give your advice. I'm not going to jump right into this until I have all the ends tied up. I'm hiring a corp attorney to handle the setup of the company and all the odds and ends that come with that. I would like to not have to give up any ownership stake in the company to outside investors but I'm not sure if this is possible or legal. I talked to someone who holds a securities license and he said it is but I'm going to find out on my own before I do something that would get me in trouble.
