Real Estate Investor · Waukegan, IL · Member since 2013 · 367 posts · 80 votes
I'm looking to present a deal(s) to my parents. Being as they are my parents they would more than likely simply loan (no interest)/give me the money, but I want to approach it from a business standpoint A) to show them they would get better returns than just sitting in the bank and could be great supplemental income for retirement years and B) I'm not looking for a handout but truly trying to learn how to structure deals for private money in the future.
That being said those of you who have partnered/joint venture would you be so kind as to share some of your different agreements? I'm looking for multiple options to present.
Investor · Statewide, MO · Member since 2011 · 813 posts · 424 votes
12y
Every private money deal I have done has paid interest to the lender. No splits, profit shares, etc.
It keeps it clean and simple and keeps you in full control of the investment.
I think payments being paid on performance / profit splits can lead to tension in the family and limit your control in a deal.
For instance, if you were going to sell for a loss, and your parents disagreed, or vice versa. By paying interest, fulfilling your obligations under the agreement are pretty clearly completed or not, which I think could save you a lot of drama.
Speaking from past partnership experiences, with unwritten, open ended arrangements and agreements, it's great at the start until one person feel's like they're carrying the whole team. Then defining who has done what and how balanced or equal the work has been done becomes another mess.
@O'Brian (for whatever reason, I can't @ you) But I did not set up anything with my parents. They had their money tied up in a business with my sister.
Fine in the family, but friends? Need to look at SEC regs selling interests of a company, and unsecured, regardless of who they give money to, you or the company, setting the interests over to an investor is selling stock ownerships.
Need to talk to an accountant, allow them in the company and keep their money in their capital account, then they contribute to deals from that account and they can take an interest according to their contributions, but don't buy notes this way, just RE.
That goes for family too, really, the LLC owns the property. A note and deed of trust or loan is not needed when the LLC owns the property, the accounting of the capital accounts sets the degree of ownership (or can) and the operating agreement sets the liabilities and profits between members.
Also, this is not a DIY thing to do, begin by doing it right, see an accountant and your business/RE attorney. Good luck :)
Bill, so what if as an investor I'm looking to get a personal loan from friends to fund real estate purchases in my own name and not in an LLC? I've done one personal loan from family and just used an unsecured promissory note to document that loan.
That's fine, however, you aren't protecting you friend very much with an unsecured note. If you got hit by a bus, does you estate have enough liquidity to pay for friend off? Could an attorney take your estate to bankruptcy, sell the property and still stiff you friend.....you bet they could. I bet your medical bills and funeral would be paid before an unsecured note. And these are "friends"? :)
Lender · Los Angeles, CA · Member since 2015 · 278 posts · 78 votes
11y
When it comes to joint ventures and lending, we keep it simple. Our company puts up 100% of the purchase and rehab cost. The rehabber pays points, interests, and closing costs. On the back end, we split profits according, usually 50/50.
Professional · Los Angeles, CA · Member since 2015 · 15 posts · 9 votes
10y
I wouldn't necessarily rule out the LLC. An LLC doesn't necessarily have to entail 1 party putting in the money, the other party doing the work, and splitting 50-50 or 25-75. For instance, you can structure an ownership stake in an LLC to be more similar to a loan. For instance, 1 party puts in the cash and gets a "preferred return" on the money, and only after the preferred return gets paid does the person doing the work get a portion of the returns. You can get very creative with LLCs, but you definitely should not try to draft an LLC Agreement without a lawyer's (and possibly accountant's) help. There are tax implications that vary depending on the structure.