My husband and I are real estate brokers and experienced house flippers, and we are actually getting lots of interest from friends and family who want to invest with us. I'd love to expand our flipping business and start to run more projects per year, and this could be a great way to do it, but I'm not sure how to structure the deal. What is attractive to most investors? We want them to make a good return, but we'd like to make money as well. :) We've used private money for most of our flips, but typically with a single investor, which is obviously much simpler, but our investor charges a pretty steep interest rate (15%). We've gone back and forth between paying a basic interest rate for the term of the loan on some deals and/or offering a split of the net profit. When you have multiple investors for a project, what's the best way to structure? In a flip scenario, we can't really offer preferred cash-on-cash returns throughout the project, since there is no income until the property sells.... how do we make this attractive and still make money? If you do an equity split, how much equity do you give to the investors and how much do you keep as the syndicator?
I would recommend talking to a securities attorney who specializes in real estate like Jillian Sidoti over at Crowd Funding Lawyers.
Don't structure it as a syndication. Syndications are for large, long-term hold projects. To legally set-up a syndication with a securities attorney will cost you a ballpark of $12,000 per deal, minimum. If your flips are large enough to handle that kind of set up cost, more power to you!
The safest way to structure these kinds of deals with partners and still stay legal with the SEC, is to structure it as debt or a true joint venture. The joint venture side of things is treacherous as that's what many people do to avoid falling under the purview of the SEC, but an SEC attorney will tell you not to. I'm not an SEC attorney and I'm not giving you legal advice.
Syndications typically pay an annual preferred return to the investors, 8% is typical, plus they include an equity split upon sale of the asset. Anywhere from 12-24%+ annual IRR.
@Renee Sobering You don't use a syndication for flipping. You can either put your family members in the position of the private lender secured on the property with a mortgage and interest rate or put together an LLC to purchase the property and have the operating agreement spell out the terms for the partnership or JV.
I think the best way to do via JV. Investors puts in the money and then get repaid and split profits. Speak to your attorney to setup.
The way you would structure this is as a small blind pool debt fund. Basically, you raise money from investors at either an interest rate or preferred return. They are secured by fund's title on the property, but they hold debt on the fund instead of equity. You can recycle the money many times in a year since flips are short. I've done this for multiple private lenders/crowdfunding fix and flip lenders and note buyers.
At the end of the day, it all comes down to "what's your business model and how do you want to do business"---and then we securities attorneys build a fund structure around that. It can be property-by-property, or over many properties--it just depends on your preference.