Using other peoples money

[Jonnathan Thompson]

I am sure this is dependent on a lot of variables and how the deal is... But I am curious to learn.

I see all over the place saying to raise funds for deal from other people. They're talking about  friends, family, investors, etc. When going that route, how are you making the deal appealing to them? Are you promising a certain amount of money per month then a lump sum to cover the rest in  a few years? Are you using their money in conjunction with a loan/mortgage (from bank)? Will you only take the money if it covers the entire cost of the property or will you take what ever they're willing to give you? Are you required to file with the SEC or something? I've seen a ton of information online and on here, but really it's just too much information. It's hard to decipher what would work and what wouldn't. So examples would be cool to see. 

Thanks!

[Scott Krone]

@Jonnathan Thompson  There are primarily two means to accomplish what you are asking - they either are Private Money Lenders (PML) or an investor can share an equity position.

While I don't agree with @Ned Carey position, that a PML is in a safer position, there are benefits to being a PML.  They are only in a safer position if they are in first lien position (first loan on the property).  A second lien is unsecured, and is not safe (the RE crash of 2009 was not too long ago).  A private money loan offers your investor a rate of return - typically a lower rate of return because the assumption is they get paid first or second.  That is the benefit, they get a "rate of return" over a defined period of time.

An equity position (owner, partner, member in LLC - these are all the same terms), shares in the risk as well as the reward with you. Typically, there is a bank loan, and then the equity position fills the balance of the cash requirements. Typically, the investor gets a % of the profits or a guaranteed minimum follow by a % split. You can structure it any way you feel is best to appeal to your investor.

I believe your larger question is how does one fill the Sources stack.  Uses are how you spend the money.  Sources are where you get the money to spend.  Most use debt for a large portion of the Sources stack because it costs less, and they can increase the rate of return on the equity or cash position.  Most real estate transactions with bank debt require equity/cash from an investor.  One can use  friends, family, investors to fill this portion of the capital stack.  Either way, the deal is typically attractive to an investor based upon level of confidence, experience, length of time, level of risk, amount of money at risk, and rate of return.  Most presenters of deals focus too much on the last item and not enough on the others.  Generally speaking, a 30 year old investor (higher level of risk for growth) has dramatically different goals and level of risk compared to a 70 year old investor (lower level of risk for asset protection and cash flow).  You need to get to know and most importantly understand what your potential investors are seeking in order to know what they want.  Propose a structure that makes sense to both of you.

Either way, I would suggest you contact an attorney to properly guide you as to how to structure your project - either with PML or equity.  There are rules and guidelines one needs to follow.