I just bought my first deal a little while back and have people interested in my next deal. How do I raise money? PPMs & Term sheets? How do self directed IRAs work? Open to any and all suggestions!
In regard to self-directed IRA's they allow you to use money in your IRA to invest in alternative investments that generate returns that are tax free or tax deferred. The most common alternative investments are real estate, notes, mortgages and precious metals. However you can invest in a large variety of other things as long as it is not deemed a collectible item or is life insurance. There are also some regulations and prohibited transactions that you should be aware of. The biggest thing being that you personally can not receive benefit from an asset in your IRA until you reach retirement age.
I hope this helps clear up some of your questions.
A bit more details of a proposed transaction would help us be more specific to you structure questions. You could simply have one investor fund a loan and be in a first trust deed position recorded with the county recorder as well as a promissory note outlining the rate and terms. You could have a partnership structure where you and the investor go on title together as tenants in common, you can have a joint venture agreement, you can form an entity in which one or more investors plus yourself own shares of the entity, and the list goes on.
As for self directed retirement accounts, unless you know the rules and regulations involved in that or deal with an investor who does, you should not go that route until you do. Providing inaccurate advice in this arena could get you and the investor into trouble.
Once you know the ins and outs, an investor with a self directed IRA or 401k could use those funds to invest making sure that all investments and returns go back to the tax deferred account and not to the account holder personally. The account holder may not be a disqualified party to you (lineal decendents, fiduciaries to the plan, accountant, etc). For whatever reason, siblings are not disqualified parties per the IRS guidelines.
As a hypothetical situation:
$500K 4plex 20% ($100K) down. An investor wants to put in $75K leaving me putting in the remaining $25K. Additional funds needed for whatever reason are split 50/50. How would divide the ownership and cash flow?
From here on out you can leave out information regarding self directed IRAs
Who found the deal, what are the responsibilities of each partner, who guarantees/signs the loan, etc Need this info to provide advice on your hypothetical. It is not just a straight 75/25% split based on cash inputs.
its a simple partnership just negotiate it nothing is standard...
however who ever puts up the most money and signs on the loan would want or should want the lions share of that deal.
you if you sign and PG then you can split profit pro rata and you can take a taste for finding and running the deal as well.. what ever works for you guys.
A lot depends on your potential investors level of financial knowledge and investing experience. Some investors will be very knowledgeable about self-directed IRAs, term sheets, private placement memorandums and basic risk analysis, others will have no idea and may be scared away if you use this kind of terminology too soon.
What I usually do is in the first meeting, get to know them and their investment history.
What they are comfortable with and what they are looking for?
I rarely do more than a few minutes about my investment offer in the first meeting because it's more about knowing what their goals and objectives and experience is rather than the investment I'm looking to raise funds for.
This is also a time to get a feel for if you both fit, in terms of temperament and personality. A lot of time we get so caught up in raising money that it's all we consider and then 6 - 12 months down the road we find ourselves in a deal from hell because we borrowed money from Satan (haha just kidding but you know what I mean).
Once you learn what they are comfortable with, their level of experience and you feel they would be a good fit then you should have another meeting with them to discuss your offer in more detail, and make sure you cover their points of concern as well as what makes them excited and cover it in a sandwich style, meaning excitement, excitement, risk, excitement.
Always be completely transparent, be conservative and be open and accessible and you will raise the money you need.
It's not easy, especially getting started but it gets easier.
As far as the contracts and term sheets, once you and you investor have agreed on the outline, have your attorney handle the rest. I hope you have the best attorney you can afford because there's a reason why the best attorneys cost more, because they will save you move in time and headaches.
But that's my advice. I hope it's useful.
Best of luck!
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