LLC Structure for Private Money

[James Letchford]

BP: Does anyone have any advice on how to structure an LLC with someone providing private money that would only like return on their money?

I.e., I'm doing BRRRRs and would like to pick up another property utilizing some money my buddy would like to put to work. In order for the money to be good for a loan, I'll need to structure some sort of LLC between the two of us. However, when I refinance the property, the entire loan and deed should be in my name.

Any inputs are greatly appreciated.

[Brian Burke]

@James Letchford, the simplest structure would be for the investor to simply make you a loan in exchange for interest payments. But this probably won't work because your primary lender probably won't allow subordinate financing.  If the loan was unsecured they might not find out, but they might look to see the money seasoned in your bank account so it still wouldn't work. Plus there is the added disadvantage that you have the cash flow burden of interest payments. 

So a better structure might be to form an LLC or LP with the investor as a member or limited partner. You would be the managing member or general partner, or perhaps you are both members of a member-managed LLC. Then you can have a buy/sell agreement or terms in the operating agreement stating when the investor is to be repaid and the terms of that repayment. For example it might say that you are to redeem the investor's principal plus an 8% preferred return within three years and the investor has no further interest in the LLC upon redemption. You would then use the proceeds of the refinance or sale to make the redemption.

But whatever you do, be sure to have the guidance of good legal counsel to make sure it is done right and you don't get into trouble.  Laws around accepting capital from passive investors carry severe penalties if you fail to comply with them.