Hi BP Community,
I am looking to partner with people on Long term Buy & Holds (1-4 units at the moment) and I'm finding myself in a bit of a dilemma as I'm trying systematize this process. I realize that for me to have the best opportunity to get great deals I need to offer all cash. I want to do so using OPM (other peoples money) to keep scaling my RE Portfolio but take a slice of the equity/cash flow. Essentially, I find the deals/manage the PM and maintenance, etc, and they bring the money as a passive partner. The problem is that RE Agents require a POF in order to make an initial offer on a property and want it to be in an account of mine.
My plan was to organize an LLC in which people disperse their funds into a giant pool of funds as I fundraise and can make offers with this LLC. When I come across a deal, I'll have it in the contract to say and/or assign in which I will transfer the contract to a new LLC which has me and whoever is partnering with me along with an operations agreement detailing Equity break down structure, etc.
The problem I'm having is that I doubt people will want their money sitting in an account even if it's secured via paperwork written up by my attorney if it's not making them any money.
So my question is, what process would you/have you used to make offers with OPM, considering it is for a long term buy and hold asset?
I was reading a thread about this the other day. The minute you have “passive” investors meaning they have zero say in day to day management, that is syndication and you need a securities lawyer.
No legal advice given
@David Roque @Caleb Heimsoth - SEC concerns is a great point, I have read a lot about that and it's true, I need to make sure I'm covered in that regard. As far as the escrow fund, it sounds as though my plan wasn't far off how people normally deal with these kind of things?
Are you saying that people are normally down to commit their money to a big pot and not earn anything until a deal is made or are they typically getting some return on their money the minute it's committed to the pot?
Do either of you or any one on BP know of any RE attorneys that deal with these specific kind of deals?
One way to potentially satisfy POF may be to get letters of intent to invest (with $ amounts) from your investors. A letter of intent does not have to be legally binding, therefore it does not lock your investor into partnering with you in a case where they have a change of plans or change in financial situation while you are out vetting deals.
Another consideration if you have a good track record and significant trust from you investors would be to setup a fund structure (ie big pot) of committed money. If you use this structure you can get signed commitments from your investors without requiring them to wire any money until you have a property identified and under contract. The signed commitments may also be a way to provide POF. You could set a capital call period for your investors of say, 12-24 months, over which you will find deals to invest their full commitments to the fund. You could also have a preferred return of something like 9% annually on investor capital that is drawn down from their commitments. The signed commitments, capital call period, and preferred return, combined together could be a solution for you to provide POF (without having to ask investors for money before a deal is identified), while also assuring your investors their money will not be sitting un-invested for an indefinite period of time. I am not an attorney so please don't consider this legal advice, but rather a couple of examples of how to solve your problem.
Let me know if you have any questions!