Paying private money % to family?

Question

Hello Biggerpockets family,

I am looking to raise money from family members to start flipping my own deals. I have three people that are willing to invest. I will be using this money for down payment of a hard money loan and repairs.

Questions

1. How much should I pay my private investors back in interest % per deal that I use their money?

2. Should I open a trust to hold the money?

Back story- I started as a realtor, turn wholesaler. The last deal I did was a wholetail deal. I purchased the property with hard money and just listed it without any rehab and made a great six figure return. However if i had more money i would have been able to flip it and make even more. I have a team and an LLC. We come across 3-4 great deals per year that i want to flip moving forward. However this market in Los Angeles is expensive and I need private money just to get 10% and repairs for a hard money loan.

How do i structure this with my family members / Investors and how much do i pay them?

Miguel Talamantes · Answer

Thank you very much. Great response!!

What I’m thinking of doing is adding them to the LLC as 1% and change the operation agreement to pay them out as investors.

I got them to agree to a 7.5 interest rate on their money per deal that I flip. With a goal of 4 and minimum 2 flips per year.

I didint know that the operation agreement on the LLC can be modified and changed to almost anything. You are right on the money. Thank you.

Will Barnard · Answer

First off, if you have a hard money loan in front, your private investors are now in second lien position which is a higher risk with less equity spread to cover the downside. As such, the investors should expect to be paid a higher rate of return. Your HML is likely at 8-12%. If your investors are to take an equity position as opposed to a debt position, than you need an entirely different format to structure the deal, i.e. new entity for the new purchase with your private investor partners as equity share holders with a full operating agreement and other legal documentation.