My partner and I are considering the most optimal way to structure the private money portion of a potential transaction. We are currently looking at a 11 unit apartment building that would require approx. 140k down payment. We have colleagues that would take the opportunity to lend and we are considering ways to approach / structure the deal. Ideally we would borrow the entirety of the 140k, keeping our reserves for maintenance and other expenses on the property. Additionally, we currently own an sfr free and clear that would appraise for approx. 90k and a duplex with 20k of equity. Any suggestions on how to approach this?
I would not advise putting zero down, as it does not show confidence to your potential investors, make sure everyone knows where they stand maybe form an LLC that is owned based on percentage of down payment plus reserves contributed that way nobody feels that anyone is getting an unfair share of the deal.
If you are getting a loan from the private investors you may be able to avoid the SEC regulations. As soon as you offer a piece of the profit, based on the sole effort of you and your partner, you enter into the securities world and have to follow their rules. If you are going the path of profit sharing, I typically see a 50/50 split after all invested capital is returned. It would be up to your investors as far as your skin in the game, but if you are covering rehab costs, that may suffice. Don't forget closing and loan costs in your calculations.
Like @Jeff Greenberg said, if you get a loan for the down payment then you will likely be able to skirt the SEC requirements. However, you will likely run into a couple problems after that.
1. The lender will not like to see the down payment money coming from a loan, especially if none of that money is from the operator.
2. Your friends/family will have to at most be on the 2nd lien note and not primary so they won't be too happy as they have little recourse if you don't pay.
All very helpful points - If my partner and I bring 40k to the table and use private money for the remaining 100k we will be more reputable / accountable for potential lender. What about using a line of credit on the three properties in our portfolio (one SFR with 90k equity and a duplex with 20k equity)?
I think you are fine with having an investor bring $140k to the table, especially if you are keeping reserves and closing costs. Just put that into the LLC account. That amount alone should be $30-40k. If you choose an equity split, just make sure you consult with an attorney as to the role of each owner. The "passive" investor needs to be active in some way. Also a bank loan will be hard unless the passive investor will sign on the loan or you structure an 81/19 split, so you have to get creative and get legal advice.
Todd, Thanks for the reply. Recently found your podcast! I like what you are doing.
What are some successful ways you structured returns for your investors? I have seen many different methods, but what is the standard?
@Joseph Dunphy , I just stumbled on this old post and saw you asked me a question (next time @Todd Dexheimer and I will see it). To answer your question, check out this blog I just posted: https://www.biggerpockets.com/blogs/10145/73373-op...
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing