How to Position Your Real Estate Business for Success

Question

Thanks to @BrandonTurner post regarding “The 100 Ways to Make Money in Real Estate” it is clear that there are numerous ways to get deals done in real estate. More importantly, there are a variety of ways to get funding which is always a priority. That being said, I am interested in learning more about how to structure your real estate investing business to be in a position to approach different types of funding opportunities. In this post I focus on private money however, I am interested in hearing about other successful set-ups.

Private Money

What’s better than using other people’s money? If you are looking to start a real estate investing company or have already started one I have to believe that you looked into ways to get into the game using private money. What are some of the different strategies for setting up your business for private money?

To be clear, I am especially interested in hearing the specific business entity structures that have worked well for you and your business and if you have any resources that could be useful. I have found numerous resources that talk about how to be successful once you have started your business but, few that speak to how to position your real estate business for success.

Look forward to your responses.

Regards,

Ned Carey · Answer

Brian Burke gave you a great direct answer to your question.  I am going to come at it from a little different direction.

The best way to position it for the future, is stop worrying about the future and do a deal.  As your business grows you will make changes. I have 6 different companies based on different partnerships and needs for particular deals. I would have never envisioned that. I has simply evolved.

Frankly unless you are talking about large ventures it doesn't matter.  most private lenders won't care.

If you are getting traditional financing from banks etc. holding in your own name is the best for getting financing. It is more difficult to get financing in an entity like an LLC.  However Hard Money lenders may prefer you have an LLC or may not care.    good luck - Ned

Brian Burke · Answer

Tough question, Calvin L. Todd Jr.!  In order to best answer it I'll make some assumptions.  I'm assuming that you are looking for entity selection advice specifically relating to private investors investing equity and/or debt.  If I'm off track let me know.

First off, I'm neither a lawyer nor an accountant.  Just an investor that has been there and done that.  Entity selection decisions are very personal because your income projections both inside and outside of the entity can influence the decision as well as legal issues.  When choosing, I start with my accountant and once I have his opinion, I tell my attorney the accountant's opinion then get the attorney's opinion.  This decision will also vary by state because different state's fees, etc can make a difference.  For example, I don't use LLCs in California for investment entities because the fees to the state get very high when the income climbs above certain thresholds.

In CA I use limited partnerships.  My investors invest in the LP and receive a split of the profits.  These investors are equity investors, not debt investors.  It's a pretty simple structure.  The general partner of the LP is an LLC of which I am the managing member.  This gives me the limited liability personally that the LP by itself won't give me.  This LLC wasn't formed for liability protection however, that is what insurance is for (although the added protection of the LLC isn't lost on me), instead it was formed because I have partners and we needed a structure for the business itself.  It could just as easily have been an S corp, but my CPA advised to go with LLC because he is very familiar with my income situation and thought it might have a slight edge.  My attorney agreed because the LLC gives us incredible flexibility in the structure and arrangement between partners.

In Texas, I use an LLC.  Now I don't have to do the LP+LLC structure that I do in CA because TX doesn't have the ultra-high state fees.  Even though I don't have to, I still do anyways because all of my entities are managed by the main LLC.  I guess for the TX entities I get double liability protection (triple if you count the insurance).  :)  Otherwise, same deal for the investors except they are LLC members not Limited Partners.  Semantics.

For debt partners, they just get a note and deed of trust securing a particular property.  No entity structure needed except that the entity having ownership of the asset is the borrower and trustor.  If I owned the asset personally, I could have no entity at all and I would be the borrower/trustor.

Finally, you asked how do you position your business for success??  For starters, entity structures don't position you for success, they just give you a vehicle from which to conduct your operations.  What positions you for success is your strategy, your market acumen, your TRACK RECORD, honesty, integrity, and results.  These all take time to develop, and many newer investors fail because they don't have the patience to do the steps necessary to attain these things.

I hope the answer to your questions was in there somewhere!

Brian Burke · Answer

Calvin, you're close but it is upside down.  The GP LLC would go at the top of the org chart, and the property LP at the bottom.  The lines for the investors would go into the property LP, as opposed to intersecting with the line between the GP and LP.

I noticed you depicted the property in a LLP.  The use of various entity types varies from state to state.  In CA, for example, I only see attorneys, accountants, architects, and engineers using LLPs.  LPs are more common. That might be different in your state.

All of the technical stuff aside, the best entity structure may be no entity at all.  If you are just starting out, there is nothing wrong with (gasp) owning property in your own name.  Yeah, I said it!  Just get good liability insurance and save yourself the entity hassle until you really need it.

Calvin L. Todd Jr. · Answer

Thank you for your responses to my question. I really appreciate you all taking the time to provide some good insight on this. Ned Carey, I think you were spot on with your position regarding my question. Based on the response from Brian Burke it is clear that each property in which you invest could have a different entity structures depending on the location, investor demands, liability protection etc… I do think however, that it is important to be thoughtful about how you position yourself and connect with experts that know this stuff so that you understand the advantages and disadvantages of each structure. Again thank you for your post it was very helpful as I am a new investor and can easily get caught in the marginal details.

@Brian Burke thank you for your response as well. I now have a better understanding of entity structures and the importance of understanding state laws and fees so that you can structure your deals appropriately. I took some time to create a visual of your CA entity example. Please take a look at the linked image below and let me know if this is an accurate depiction of your example.

[https://docs.google.com/file/d/0B2kLbMGY7JGQTVFzeFdMdTg5RWM/edit?usp=sharing]

Regards,

Laurence Bealer · Answer

Have you determined how you plan on investing in Real Estate?

Dan Brown · Answer

Great reply to Calvin L. Todd Jr. post Brian Burke.  I definitely think you answered Calvin's questions.  Thanks for the thorough answer, I've benefited greatly from it.

Dan Brown · Answer

Great post @Calvin Todd....I'm really interested to see how experienced investors will answer this post.

How to Position Your Real Estate Business for Success

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