Best way to structure investor network (LLC or Promissory Notes?)

4 Replies

Have had some experience with rentals - up to four units (doors).  I have some close friends who are interested in investing in real estate with me - what is the best way to structure a potential partnership like this?  I know we'd have to consult with attorneys to make sure whatever operating system we draw up protects all involved - but does anyone have suggestions? Some different options we are considering:

1.Promissory notes? (in between banks (cheapest) and equity (most expensive))

-A promissory note, sometimes referred to as a note payable, is a legal instrument (more particularly, a financial instrument and a debt instrument), in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms.

-Would be a fixed payment - say 6% or 7%. (2% is what you can get in a high interest money market. What is an expected return for a promissory note backed up by real estate? How long would the money be locked up for? 5 years? 10 years?)

> Can lend to a specific property - holding company that lends money down to other partnerships.

2. Membership shares in an LLC? (like a “capital call”)

-Membership units are ownership units, with voting power (?)

-An LLC operates as a business entity. As long as it's registered properly with the SEC, you can sell shares of the company to other investors who want to invest with you. You can sell shares as a security as you grow. Or you can sell the LLC altogether as a business that owns things.

-Set up the LLC where the property is. Don't favor Nevada or some other state over others. The LLCs that own certain properties should be set up in the state the property physically exists in.

> Have a separate LLC for each property (for liability reasons). Don't do an S or C corporation for real estate. LLC are very forgiving from a tax planning perspective.

Please share your thoughts.  

Thank you! 


@Beau Daane It really depends on what role the other investors are going to play. Active vs Passive, are they all pooling the money or are you putting one investor in one property?

Also promissory notes and deeds of trust or any other debt instrument is a security so either way you go you need an SEC attorney to advise you. @Mauricio Rauld is very good and would be the first call I make.

@Beau Daane if you're bringing in other investors as limited partners with limited roles and say so, you should consult with an SEC attorney. The preferred attorney to handle these matters is @Mauricio Rauld

@Beau Daane I would structure everything with an LLC, using Wyoming as the state to create the holdings company. If you're going to pool together investor funds, to be on the safe side I would do everything the right way through an SEC attorney. @Mauricio Rauld would be my go to guy for this.