How To Structure A Group of Investors

Buying & Selling Real Estate
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How To Structure A Group of Investors

Jason K.
Member since 2018 · 4 posts · 3 votes

These seems to be a common unanswered topic.  Here is my specific situation:  I have about 20 years of successful investing experience in both flips and buy and hold. As a result, I have many friends/ family/ business contacts that would be willing, and often ask, to get involved.  Many are new to investing so a flat out partnership is not that attractive to me with any 1 of them as I don't really need the money to fund simple deals.

However, I am considering amping up my investing and buying a larger project or several at one time.  Since this requires more money, I have about 10 people committed to put up 100k (1 mil total), to invest in 1 large or several small projects (goal is mostly to build a collection of rental properties).  Myself and 1 other partner would be the managing partners and the rest silent "money" partners, however they want to be in the know and involved, but no real decision making abilities and too many cooks in the kitchen slows things down. 

The question" How do I legally/ financially structure this ? I assume an LLP in the best, but not sure. I know there are more investment focused ways like creating a real estate investment fund.

Also, how are these investors paid ?  Guaranteed annual return and then piece of the returns.  Maybe I just make them all money lenders and pay interest ?  Although, many want to get involved because they want to learn investing, not just invest. 

Clearly my ultimate plan will be to hire an attorney to create this structure, so if anyone know of any that specialize in this (preferably in NY/ NJ/ Phila metro area), let me know. 

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Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
8y

Start with this article: https://www.biggerpockets.com/blogs/10145/72118-sy...

I will be posting another one on syndication soon as well.

Anytime that you use someone else's money and they are not directly a decision maker and doing the "day to day," you need to consider a syndication. Just because they are your brother, sister or some other relative or close friend or that it is a small group under 5, doesn't mean you don't need to do a securities offering (these are common misconceptions). 

I would scour biggerpockets, podcasts, books (It's a Whole New Business, by Gene Trowbridge), youtube, etc and learn about syndication's and how to do them. Messing up on the first one, could mean it's your last one. 

Be sure to find a good Securities Attorney. There are a few active on Biggerpockets and likely a few where you are located.

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  • Fradel Schaechter
    lakewood, NJ · Member since 2017 · 282 posts · 156 votes
    8y

    @Jason K. I belive the real answer is that the way you structure the deal is up to you, the operator. Of course this must be done within the framework of the laws, but I believe you get to decide what you think is a fair split, and then offer that to the investors that are interested. 

    Good luck finding that attorney! There are likely many of them here on BP, you just have to find them. If you attend RE meetings near you, you can ask others for recommendations.

    0Reply
  • Simcha Davidman
    Rental Property Investor · Baltimore, MD · Member since 2014 · 408 posts · 209 votes
    8y

    @Jason K.  I recommend doing a search on BP for "syndication" or something like that.  This is what it sounds like you're trying to do, and you will likely need a securities lawyer to draft the Private Placement Memorandum (PPM).  If it's small enough, there are exceptions, or exemptions, and depending on the location of the investors and property, only state "Blue Sky" laws may apply, as opposed to the federal SEC regulations.  Bear in mind that most of these types of deals are limited to accredited investors.

    I also found some pretty interesting videos about the topic on youtube.

    Best of luck!

    1Reply
  • Zachary LaJoye
    Rental Property Investor · Cincinnati, OH · Member since 2017 · 58 posts · 48 votes
    8y
    I agree that it sounds like syndicating a deal is what you’re getting at. I have no experience personally doing this yet, but hope to take this same avenue in the next year or two when I find the right deal. So I have done a fair amount of research on the forums here and elsewhere as well. Generally speaking, it’s common practice to provide a “preferred return” to your investors. This can be whatever rate you decide to set but should be attractive as to convince your investors that they want to invest with you. For instance, I just read about a deal in which the preferred rate was 9%. Paying this preferred rate to the investors takes #1 priority when distributing the cash flow from the deal. Several other fees can be charged by you and your partner if you plan on managing the property or charging a “finders fee”. These would be paid only after the preferred rate is distributed and the decision to include any of these would be made at your discretion and agreed upon by all investors. The remaining cash flow or any profits from a planned sale would be split amongst the investors and you and your partner in a pre-determined split. For instance, the same deal I mentioned earlier provided a 70/30 split with 70% going to the cash investors (limited investors) and the remaining 30% going to you and your partner. If you and your partner are also putting your own money into the deal, then you would earn a share of the 70% split also in proportion to your investment. Obviously, all of this is negotiable and would be in the agreement you sign with your investors. As someone mentioned above, I would definitely get in touch with an attorney to draft all of the documents so as to provide adequate protection to both you and your investors. It seems pretty kosher to structure your deal so that all costs related to these fees are attached to the closing costs so that all investors would equally share in the cost. I hope this helps! Good luck with your endeavors!
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  • Kris Benson
    Roswell, GA · Member since 2012 · 79 posts · 94 votes
    8y

    @Jason K.  A great place to start is with an attorney who has significant experience in non registered securities.  I am happy to provide a couple of referrals but this is who you want to connect with first.  Relay the business plan of the project you are working on to him/her and she can help give you some perspective on what their clients have offered over the years.  DO NOT skimp on the money spent on your attorney.  Ensure they have the experience to guide you appropriately and check references.

    In regards to the structure of the returns for the investor I would start with the return you would like to offer the investor and work backwards. For example if you want to provide an investor an 18% IRR over 5 years then back into that number with a preferred return and equity waterfall. If you are interested in what the "market" has to offer for syndicated projects start reviewing deals on the crowdfunding websites. After you read 15 or 20 investment summaries you will start to understand what opportunities and structures are out there for investors.

    Hope that helps!

    0Reply
  • Jason K.
    OP
    Member since 2018 · 4 posts · 3 votes
    8y
    Perfect Simcha- thats exactly what I am looking for! Appreciate the help.
    1Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    8y

    Start with this article: https://www.biggerpockets.com/blogs/10145/72118-sy...

    I will be posting another one on syndication soon as well.

    Anytime that you use someone else's money and they are not directly a decision maker and doing the "day to day," you need to consider a syndication. Just because they are your brother, sister or some other relative or close friend or that it is a small group under 5, doesn't mean you don't need to do a securities offering (these are common misconceptions). 

    I would scour biggerpockets, podcasts, books (It's a Whole New Business, by Gene Trowbridge), youtube, etc and learn about syndication's and how to do them. Messing up on the first one, could mean it's your last one. 

    Be sure to find a good Securities Attorney. There are a few active on Biggerpockets and likely a few where you are located.

    2Reply
  • Odie Ayaga
    Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
    8y

    @Jason K. did you manage to find an SEC attorney to get you started on this front?

    0Reply
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