How to bring investors into a deal? How do you set up contracts?

Question

Happy Sunday everyone!

I have investors that are considering investing with me but I am stuck on what to offer them back. I have personally been thinking on giving them a 8% return on their money until the money is paid back. I know there are other ways where you can make them partners and share the benefit of appreciation and depreciation but rather not do that.

I invest in STRs and this is why I would be ok giving a 8% return on their money. Listings bellow...

My questions:

What are you offering your investors (I know it depends on the numbers)?

How do you set up the contract terms?

Who do you think can help me best with this?

https://www.airbnb.com/rooms/5...

Thank you in advanced!

Eduardo

Brock Mogensen · Answer

You can begin the process with the lender before having all the docs finalized.  You want to engage the lender as soon as possible.  Within the first few days of having the deal under contract..ideally.  Financing always takes longer than you think so you'd rather start that process sooner rather than later.  They won't need the final operating agreement until way later in the process.

Evan Polaski · Answer

@Eduardo Bilbao, step 1: talk to your securities attorney.  Passive investors require the sale of securities, which has its own nuances on structures, filing requirements, investor requirements, etc.  Any advice you receive here should always be subordinate to your attorney's advice, since none of us are your attorney, and very few of us are attorney's at all.

You need your legal framework wrapped up before you can get a deal or mortgage or investor.  To get you legal work wrapped up, you need to know what the primary business terms of the structure will be, how cash flow, gains and losses will be handled, responsibilities of the all parties, etc.

If you generally know what your investors are seeking, your ONLY next step is to talk to an attorney and maybe a CPA to understand what the structure will look like.  You may not need to set it up as a passive investment, and your investor can still have limited liability and share in upside.

Paul Moore · Answer

Hi @Eduardo Bilbao. Great question. I used to invest in these types of deals on a one-off basis and I got involved in them along the way (as a deal finder and marketer).

My friend and I used to start with a potential a pool of 100% of the proceeds. Then I got my principal back first.  Then we took out each of our hours at $20 per hour. Then we took out 12% annual interest to me as cash investor.  Then split the balance 50/50.   We did this for years and never had a disagreement.  Good luck!

Darius Ogloza · Answer

@Eduardo Bilbao You can spend a lot of money and get nowhere if you undertake this task in the wrong order.  First, find out what your investors are willing to accept.  Secured debt?  If so, what kind of collateral can you promise them?  All Equity?  You will not be on the hook to repay if your deal goes south but you need to make sure your deal is properly papered or fits an exemption from the securities laws.  Some debt and some equity?  See both above.  Creating a structure before you know what your investors will entertain can be money down the drain.

Brock Mogensen · Answer

It really comes down to how you want to structure the deal.  If you want to offer equity upside to the investors, structuring as a syndication (GP,LP) might be your best bet.  If the investors will be taking a debt position, then a more simpler structure can be created.  Definitely consult with an attorney though.  An attorney with experience in real estate partnership agreements (Operating Agreement) should be able to help.

Evan Polaski · Answer

@Eduardo Bilbao, you are approaching this wrong.  You should not be "thinking about giving 8%" return.  You should know what your investors are willing to invest for.  While I agree with Terri, that you need to understand what your deals generate for you and what various deal structures will generate for both you and your investors under various scenarios, at the end of the day all this only matters if your investors are willing to accept that type of return.

Your first question to the group is a good one, to understand "what market is".  I do not do STRs or invest in them, but I have talked to a few people that have investor money in their STRs.  It is an equity split, not a flat interest rate, but that is those operators and investors.  If your investors are used to comfortable being a private lender, than your initial thought might be fine.

As for who you talk to about structuring the legal work, that will sort of depend.  If you are bringing them on as a private lender, a real estate attorney is probably adequate for a private note.  If you are bringing them on as equity, specifically as passive investors with no control, then you need a securities attorney.

Ronald Rohde · Answer

This sounds like you're selling a security. You should reach out to legal counsel to protect yourself.

8% pref is pretty common in multi family, I think your general plan seems a bit riskier so would want a higher return.

Terri Wyzkoski · Answer

First of all, you need to know what your own return is over a period of 5-years and 10-years.  You need to be able to prove this in projections.  Once you have this, you can reasonably determine what to provide your investors.

The investors are normally identified as LP investors in each syndication in an Operating Agreement.  That is where terms of Internal Rate of Return and cash-on-cash return, and timing of distributions are spelled out.I’m happy to help with this process.  Reach out to me.  It’s a process and there are legal ramifications for setting this up incorrectly.

Alex Talcott · Answer

Can be structured as debt, equity, or blend. This lawyer loves contracts.

How to bring investors into a deal? How do you set up contracts?

Most Popular Reply