Fair Splits for Actively Managed Short Term Investment where LLC takes on debt

Creative Real Estate Financing
1yFollow

Fair Splits for Actively Managed Short Term Investment where LLC takes on debt

Brian H.
Investor · Los Angeles, CA · Member since 2016 · 33 posts · 6 votes

We have experience purchasing properties through our LLC using lending, where we own 100% of the properties. However, we are now exploring opportunities to bring in passive investors to help accelerate our portfolio growth. Our primary goal is to retain as much equity in our properties as possible while leveraging outside capital to scale faster.

Proposed Investment Structure:

  • Investors contribute 30% of the purchase price and 30% of furnishing/rehab costs.
  • Our LLC secures a new purchase loan in its name only, taking on 100% of the debt.
  • This structure allows us to maintain 70% ownership of the property.
  • Properties will be actively managed to maximize returns, likely achieving higher upside than long-term rentals.

Proposed Compensation for Investors:

  • 6% preferred return annually.
  • After the preferred return is met, profits are split 75/25 (with investors receiving 75% of profits on their portion of ownership).
  • Profit Calculation:
    • Revenue – Operating Expenses
    • Excludes mortgage principal & interest, as our LLC assumes full responsibility for the loan.

Looking for Feedback:

  • Is this structure fair and attractive to investors while ensuring long-term alignment? Are we possibly cutting ourselves short here with a deal of this nature?
  • Have others structured similar deals, and if so, what worked well (or didn’t)?
  • Are there any potential flaws in the way we are setting this up?

Since this is our first time structuring an investment deal like this, we want to ensure it’s fair and appealing to both parties. Any insights or alternative structures would be greatly appreciated!

Thanks!

0Reply
37 views

1 Reply

Jump to latestLatest
  • Lauren Robins
    Attorney · Salt Lake City, UT · Member since 2025 · 144 posts · 180 votes
    1y

    Hi there, Brian! 

    Your proposed investment structure is a strong starting point for bringing in passive investors while allowing you to retain majority ownership. The 6% preferred return, coupled with a 75/25 profit split in favor of investors after the hurdle, makes the deal attractive to potential partners. Additionally, keeping 70% equity while leveraging outside capital ensures that you maintain long-term control and benefit from appreciation. Investors may also find comfort in the fact that they are not taking on any debt risk, as your LLC will be solely responsible for financing the property.

    However, there are some areas where you may be overcompensating investors. Since they are contributing only 30% of the purchase and renovation costs, yet receiving a preferred return and 75% of profits on their portion, you may be undervaluing your role in securing financing, managing operations, and assuming risk. You might consider adjusting the equity split to 50-60% in favor of investors after the preferred return or increasing your retained equity to 75% or more. This ensures that your expertise and responsibilities are adequately rewarded.

    Another consideration is the impact of taking on all the debt in your LLC's name. While this simplifies things for investors, it may limit your ability to scale, as lenders could become cautious if your balance sheet becomes too leveraged. Maintaining a healthy debt-to-equity ratio and strong cash reserves will be critical. You should also anticipate how investors will eventually exit the deal—will they be repaid their initial capital through a sale or refinance? If they remain in indefinitely, you may need a buyout provision allowing your LLC to purchase their shares at a predetermined return.

    Additionally, aligning incentives is crucial. If you are actively managing the property, will you charge a management fee? How will you handle situations where cash flow is low? Will unpaid preferred returns accrue over time? Clarifying whether the preferred return is based on simple or compounded interest and outlining how losses are managed will help avoid misalignment with investors.

    You may also consider alternative structures to maximize your returns. A tiered equity waterfall could be more beneficial, where profits are split 75/25 until investors achieve a 12-15% internal rate of return (IRR), after which the split shifts to 50/50. Another option is a debt-equity hybrid, where part of the investor contribution is structured as a loan with a fixed return (e.g., 8%), while the remainder receives a smaller equity portion (e.g., 50% instead of 75%). This approach reduces long-term dilution while still providing investors with an attractive return.

    Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free