Starting a business for friends / family to invest

[Jessica Monroe]

Good Morning BP,

Over the last year or two I have shared my RE interest with family & friends. A handful of them have reached out to me and want to be a part of it, a few want to actively invest with me (buy &hold) & a few want to diversify their other investments.

I am working on creating this business model but still in the beginning phases. So far what I know I need to do & working on.

- Create an LLC

- Finalize my business to plan to present to potential investors and outline how I believe the future business will be successful

- Set up a team. I currently have a real estate agent, lawyer, insurance agent

If anyone has any feedback or suggestions I would love to hear them! 

[Jon Holdman]

If you're going to take money from multiple people, pool it and invest that money, you have a much tougher road ahead of you than you think.  If you stick with making these investments as loans, this is much easier.

If you get money from your friends and family in the form of a loan, you don't have too much paperwork.  You would have a promissory note between you and the lender.  If the loan is secured by a property, you would also record a mortgage or deed of trust given the lender a security interest in the property.  Which document is used varies from state to state.

If you're going to pool money, you are "selling securities". You will need to create a pile of paperwork, including a very detailed operating agreement for your LLC and a "private placement memorandum". You need an experienced securities attorney. You should expect expenses of perhaps $25,000 to set this up. You truly do want to do this, if this is the path you're going down. This paperwork give you protection if (and, at this point you MUST assume the correct word is "when") things go wrong. If you and your investors go into this assuming things will work out well, you will be in deep doo-doo if things go badly. And deep doo-doo means potential very serious legal troubles. If you prepare for things going wrong now, you will be in a much better position if they do.