Have interest from private money...Now What?

[Larry K.]

I have one 2 family under my belt. Currently holding it successfully with cash flow. A relative watched me do this and now wants to do the next one with me. He may have some buddies who also want in. Not exactly sure how.

Would we form an LLC put money in and then I'd be the "Managing Partner" spearheading most of the search, buy, renovate, and hold?

or, similar to that but after I find the right deal we put together the LLC right before we buy?

How to handle Returns, %'s, my time managing the renovation, then my time managing the property, etc......

Keep in mind I am interested in buy and hold, not fix and sell.

Slightly complicating this is that though I am a buy and hold guy I'm not thrilled about the idea of holding a property for several years with a relative knowing the property management issues that might arise. Perhaps I would need a way for them to be a silent partner.

[John Blackman]

I have the same problem and after a few of these do not include partners in LLC deals unless I know and trust them and they bring partner level value to the transaction. Partners will take on the risks and associated management duties of the business. If you want your family to participate in these deals in a passive way, I suggest a simple unsecured promissory note with a fixed rate of return that is less than the performance of the asset you are going to use the money in. The difference is yours for sourcing and managing the deals.

This way you have simple fixed debt on your books and your assets cover it. Send them a 1098 at the end of the year. Simple as that.

They don't have any recourse if something goes wrong as the note will not be attached to the asset. This will only work for friends and family who trust that you aren't going to bail on them.

For non friends and family investors you can go through the LLC route, although after trying this a few times, I will never do it again.

The other route is to offer a private placement. That is a lot of work and expensive, but the right vehicle for raising a substantial amount of capital.

The above is just my experience and certainly not a hard fast rule. There are a lot of ways to do this.