How to get private family money for buy and hold properties?

3 Replies

Okay so this is a tough question and I read some of the other similar threads here and most of you believe this is quite impossible.

Here's the thing, I have some cash saved up and I will be buying 2 houses out of which one is making 1K a month and one is a rehab project which should also bring in 1K a month.

The thing is I've got some people with some money in my family and they would happily invest if I can guarantee a profit to them and if I can show them a couple examples. Another thing is they don't care about owning a property or having the hassle of chasing tenants so the following would be my deal. Another thing to note is in my religion they don't like interest so what ever money I borrow I would have to make them some sort of a partner.

  • Ask $20K ( The property won't just be 20K I will also be investing some)
  • I will be the owner of the property. (Yes they will be okay with this.)
  • I will guarantee their money back no matter what.
  • Guaranteed ROI = 25K Total
  • Payments = 500 x 5
  • They can ask their money back at anytime at this point we will sell the property and give their money back.

Or is it better to make them a minority partner of the property instead so I'm not the only one responsible for damages.

Also how do we structure such a deal in legal terms.

I know it's a tough question but let's try answering it, but if not the. I guess Fix n' Flip is the only option where you can borrow someone else's money.

You might want to investigate a limited partnership if you do not want to pay interest for Shariah reasons and you want to separate them from any ownership obligations.

http://en.wikipedia.org/wiki/Limited_partnership

Your family would be limited partners - limited only in that they contribute funds and have no say in the business. You act as the General Partner.

Otherwise, you could issue them preferred equity notes that pay a dividend and not interest.

@Tom V.

Could you explain a bit more about preferred equity notes? And how would you actually structure a limited partnership for every single property? Does my investor have to have a business license?

And either way you do it, it really is just interest or investment what ever one wants to call it.

The bigger issue is how to structure such a deal in legal terms. Where I can show in my taxes that I'm paying the investor from our profits?

Could you explain a bit more about preferred equity notes?

A preferred equity note or share evidences ownership in the business. It is 'preferred' in that in the even of bankruptcy or liquidation it takes priority over other regular owners. It is a way to make equity take on more characteristics of debt. Usually preferred holders get less 'upside' but more protection.

And how would you actually structure a limited partnership for every single property?

Businesses are papers in folders. You could pay a lawyer to set up a partnership one time and then replace the name of the partnership provided nothing else has changed. You can google around for partnership documents or better yet go to Amazon or your local library and read up.

Does my investor have to have a business license?

No, but your partnership should register with the California SOS:

http://www.sos.ca.gov/business/be/starting-a-business-types.htm You will need formation documents to open a bank account.

And either way you do it, it really is just interest or investment what ever one wants to call it. Correct!

The bigger issue is how to structure such a deal in legal terms. Where I can show in my taxes that I'm paying the investor from our profits?

Your partnership will have its own tax return as a separate legal entity. The dividends paid to preferred equity holders would be distributions of capital. Consult a CPA.

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