How to invest with OPM on residential properties

Question

Hi BP community,

I've been RE investing for about 12 months now. Own a 4plex, 2 single family homes, and am looking to continue investing.

Recently I've had friends & family express interest in investing with me in an OPM type of strategy -- they give me money, I invest for them, which is great. I'm however struggling with the legal/contractual portion of this, especially because my focus so far has been smaller residential properties. I spoke with a lawyer about syndication set ups but those were too expensive. Creating a new LLC for each single family investment seems like overkill too.

I'm wondering if anyone has experience knocking down deals with a simple promissory note contract that legally binds me to my "investors," so that everyone can feel comfortable investing with me without the hassle/cost of a new LLC or a syndication.

Any advice or expertise would be greatly appreciated. Thanks everyone.

Charlie Austin · Answer

Thank you. Appreciate the guidance.

Edwin Epperson · Answer

@Charlie Austin No I do not, and I would HIGHLY, STRONGLY encourage you to not use a template off the internet either. Contact a RE Attorney in your state and discuss with them. Pay the $350 - $450 1 hr consulting fee it will be worth your time and effort. Plus they will be able to handle the closing, escrow, and recording of all documents on your next deal. Best of luck.

Charlie Austin · Answer

Hey @Edwin Epperson - super helpful, thanks. To answer your question, F&F would help with "equity" position.

A recorded Memorandum of Agreement sounds like exactly what I need. Do you draft MOAs for RE investors?

Edwin Epperson · Answer

@Charlie Austin as I am sure many people will post here, but you should SERIOUSLY consider speaking with a securities attorney and not take for face value, the myriad of recommendations and ad-hoc "duct-tape" fixes that will be presented here. That being said, the way you have been doing business (assuming what you typed) is in violation of SEC regulations, and could be grounds for the Fed to come down on you. Now will that happen... lets be honest your not doing this with millions of dollars, so the SEC has bigger fish to fry. That being said, from an ethical perspective you are violating the law. How? Primarily because you stated, "they give me money, I invest for them". Thats called pooling funds, and is heavily regulated.

My suggestion is to have them fund closing directly, meaning wire funds directly to the title company you are using to buy the property, or if you are refinancing.

Next question. Are these investors providing you 100% of the capital you are requesting for both the purchase and the construction (let's call this a debt position) OR are you using their capital as the downpayment and closing costs (let's call this an equity position)? If your F&F are providing the "Debt" position, simply have a RE Attorney draft up a fractional Mortgage and Note, then have title record the mortgage. There is nothing more secure than that for your F&F and you can grow to a point where opening a REG D fund will make sense. If they are providing the "equity" position, then this becomes a little bit more complicated. AGAIN speak with a RE Attorney, or an SEC attorney (RE would be cheaper) on how you can "secure" the F&F capital to the property. If you are using their partial capital to leverage a 1st pos. loan at lower costs, this makes sense for you and them, however in most cases, 1st position lenders may not want a 2nd position mortgage/ Deed of Trust behind them, so they will not allow a 2nd pos. mortgage/ deed of trust. A creative way that I have helped RE Investors line up "equity" financing is by drafting a Memorandum of Agreement, which is recorded, but will not trigger (in most cases) a 1st position lenders no 2nd mortgage clauses. You would then have a participation agreement with each F&F that participated in the deal. That being said, if the 1st position has to foreclose, the MOA has no default remedies for the investor, though a RE Attorney should be able to draft a MOA with default language to help protect your F&F. Hope that helps.

How to invest with OPM on residential properties

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