Utilizing Multiple Investors

[Clint W.]

Hello all,

I have dug around for a bit, but I can't seem to find what I am looking for. 

My business partner and I have had a good run on joint purchases and solo purchases; however, we have reached the limits of our resources.  We are starting to accept that we can't expand much further without outside support.  We have had multiple friends and associates offer to help us with investments, but until now, we have stayed away from them.  We wanted to gain the experience and knowledge to be good stewards of their investments.

One of our biggest questions now, is how do we proceed?  We don't necessarily want loans with structured interest and returns.  We want to pursue an investment mentality.  You succeed if we succeed.  We have been discussing this, and what we think is that the returns are split via investment percentage (e.g. If you invest 5% you get 5% of the profits).  Does that make sense (it does to us)?   Is there a better way to involve people as investors?  What kind of contracts should we have?  How do we protect ourselves from retribution, if the investment is bad?

I'm not sure this is in the best forum, but I can always move it.

Cheers,

Clint

[Taylor L.]

Clint,

Sounds like you're thinking syndication, but you might not be 100% familiar with the structure?

There are many resources to learn about syndication. Here are a couple - Joe Fairless, my mentor, has written and podcasted extensively on his experience. I wrote a post on 10 takeaways from the Fall 2016 Real Estate Guys Secrets of Successful Syndication seminar. David Thompson is active on BP and writes actively as well.

Syndications are either Limited Partnerships or LLCs. The property is deeded in the name of the LP or LLC. In LLCs, for example, investors are "members" and own "membership units" of the LLC, with certain voting and control rights (outlined in your Private Placement Memorandum). You, as the sponsor, also own membership units with more voting and control rights over the company/deal.

Re: your small property question - syndication isn't ideal for small $ value deals because there are high fixed costs, mainly legal. Syndication of this type falls under SEC Regulation D Sec 506 b or c. The fixed costs of legal compliance are fairly high. The lowest cost provider I've seen is RegDResources.com but as a first time syndicator I wouldn't go this route. Having an experienced local securities attorney who is available to consult and walk you through the process could save you a lot of time and headache down the road.

Furthermore, if you're able to raise capital from 3rd party investors, why not go all in and take down a big deal anyway? 

(disclaimer - I'm not a lawyer. Talk to a lawyer). 

If you're ever in the Richmond VA area, do come to the Richmond Multifamily Meetup. We meet on the 4th Monday of the month and discuss a topic relevant to multifamily investing.