Structuring Private Capital to Serially Flip Houses

[Brock Salgado]

BiggerPockets Community, I'd like to ask advice on how to structure our business:

As we finish up our first flip, my partners and I plan to flip many more houses in 2023. Many of our financially aggressive friends have reached out wanting to be involved passively with our future deals as they learn and grow their own real estate investments. With about $70,000 in tentative contributions, we intend to use this money for holding/loan costs and rehab reserve using 100% LTV loans, so as to maximize the number of flips we can do at any given time.

To do so, we were planning on pooling funds in one LLC that gives our passive partners equity in the company. This fund would invest in flip projects (funding construction reserve and holding/loan costs) and would receive a percentage of the profit from each. While this structure sounds ideal to us, I have concerns with it being classified as an investment company under SEC regulations or with it needing a registered investment advisor to manage it. While I know most cannot provide legal counsel, I'm looking to hear from those that have ever structured something similar to this or have advice/recommendations on structuring private capital for a similar business plan.

[Chris Seveney]

@Brock Salgado

Look up the howey test. Based on your comments you would fail the test and would be considered selling a security. Most people do a regulation d 506b or 506c

With a 506b it’s considered friends and family as it’s people you have a relationship with but you cannot advertise and must provide audited financials

With a 506c you can advertise but must only accept accredited investors

[Brock Salgado]

Could some sort of guaranteed return for investors eliminate the second pillar (common enterprise) of this test? Would this still be the case if we decided to share a portion of profits after a certain threshold?

[Mike Lowery]

@Brock Salgado by no means am I an attorney or are providing legal advice, but I would think that the second pillar stating a 'common enterprise' would be met when you indicate the pooling of money.

I am currently in the process of a similar venture myself, however, with buy and hold investments. That being said, if you are dealing with individuals who you have a prior relationship with, are going to be constant partners in the LLC (meaning you will use the same LLC for multiple flips) then I think it would be beneficial to pay the fees associated with hiring an SEC attorney.