How to structure new construction build/sells with investors

Question

I have land under agreement in Tampa, Florida. Hoping to develop and sell two Single Family houses for a good return. Have a good builder who I have used on a previous project, should be a little over a year after closing to get the two houses built and sold. Looking to raise money from friends for the construction and offer them an equity return. How should I structure deal? What's the standard return? Should I have some of my own money in the deal? How would my return differ from my friends/investors. Also, would there be a guaranteed amount I would receive for overseeing everything, even if the property does not end up making money? Looking for some advice here. And again, I really just want to do the standard and simplest structure which aligns to the current market/market rates. Thanks everyone!

Allan Smith · Answer

1. It's illegal to sell securities without a proper filing or exemption with the SEC. You are selling securities if you take peoples money to give them a profit and it's a passive investment for them and you are handling their money. You can get around this with a JV, but then your partner has to bring capital AND do something substantial as an active partner.2. That being said, if you want to raise money (legally or illegally), how you structure the deal is up to the goals of your investors. On something as risky as a build, I would say your return to your investors cash on cash should be at least 15% (if you have family money they might be happy with a lot less though). You might as well avoid putting your money in it unless they want to see you have skin in the game.  Unless you have cash laying around that won't get much of a return otherwise. If you did put cash in, your return would be the same as your investors, of course.

You can work in fees to mostly guarantee income for yourself, like a project management oversight fee, 1% of ARV, or 5% of the construction budget. Something like that. I will say I would advise against this unless you have a track record. If an investor hears you say "I want to guarantee income for myself in case the deal doesn't make money" they will run away so fast you won't even know what hit you. I sure wouldn't want to hear that from someone that I'm about to lend a bunch of money to!

3. So, a typical partnership where you are overseeing the project and the builder, you'd probably give 60 - 70% of projected profit to your money partner. So if $100k profit is projected, you pitch it to them like they get $65k when it's all said and done. If the project makes $65k or less, you give all the profit to them for 2 reasons: 1) You want them to lend to you again by showing high character 2) You want word of mouth to be favorable about you.Investors wire in money to closing office the day of closing. Get a bank loan, most likely. You do ALL the legwork, money guys just send the money. That's a basic, kind of template, way of structuring the deal. A good starting point, and then you tweak stuff based on yours and investors' preferences.

Allan Smith · Answer

1. It's illegal to sell securities without a proper filing or exemption with the SEC. You are selling securities if you take peoples money to give them a profit and it's a passive investment for them and you are handling their money. You can get around this with a JV, but then your partner has to bring capital AND do something substantial as an active partner.2. That being said, if you want to raise money (legally or illegally), how you structure the deal is up to the goals of your investors. On something as risky as a build, I would say your return to your investors cash on cash should be at least 15% (if you have family money they might be happy with a lot less though). You might as well avoid putting your money in it unless they want to see you have skin in the game.  Unless you have cash laying around that won't get much of a return otherwise. If you did put cash in, your return would be the same as your investors, of course.

You can work in fees to mostly guarantee income for yourself, like a project management oversight fee, 1% of ARV, or 5% of the construction budget. Something like that. I will say I would advise against this unless you have a track record. If an investor hears you say "I want to guarantee income for myself in case the deal doesn't make money" they will run away so fast you won't even know what hit you. I sure wouldn't want to hear that from someone that I'm about to lend a bunch of money to!

3. So, a typical partnership where you are overseeing the project and the builder, you'd probably give 60 - 70% of projected profit to your money partner. So if $100k profit is projected, you pitch it to them like they get $65k when it's all said and done. If the project makes $65k or less, you give all the profit to them for 2 reasons: 1) You want them to lend to you again by showing high character 2) You want word of mouth to be favorable about you.Investors wire in money to closing office the day of closing. Get a bank loan, most likely. You do ALL the legwork, money guys just send the money. That's a basic, kind of template, way of structuring the deal. A good starting point, and then you tweak stuff based on yours and investors' preferences.