How to structure a specific deal to raise capital?

[Eric Michiels]

Hi, I have an opportunity in GA to buy single-family homes and work with a company that puts tenants in each room. They pay weekly for the room but rent for at least 30 days. Vacancy is very low because there is a lot of demand for this type of arrangement. 

I want to raise $7M at 11% to buy 20 houses. Fix them up to have each one set up with 6 to 7 rooms. With that rent money I'm able to cover a property manager, repairs and interest. But I want to structure the deal so that when we sell the properties I get a cut from whatever we make on the houses. 

Any advice on how I can structure a deal like this? I don't want to reach out to investors and sound ignorant on terms. 

Thank you,

Eric

[Ned Carey]

@Eric Michiels it sounds like with that kind of money and how you describe it you are creating a "security" This makes you subject to security laws. This means you should be talking to a securities attorney. You could be talking $15k to set up an arrangement like that. 

Searching here for security laws or Private Placements may lead to some valuable posts. Sadly what sounds simple on paper or in your head sometimes requires following very expensive regulatory requirements. 

[Eric Michiels]

Thank you @Ned Carey

[Ned Carey]

@Eric Michiels hopefully some others wo are in the syndication industry can chime in. @Brian Burke a popular contributor here is in this business. You may want to check out some of his posts. He wrote an excellent book called the "Hands off Investor." It is available from the bookstore here.  

It talks about what an investor should look for in deal like yours. Which means it is also useful to people like you so you know what to offer others. 

[Brock Mogensen]

You likely want to structure it as a syndication (GP/LP).  That way you can charge a promote for the upside on the exit.

[David Lilley]

@Eric Michiels If you haven't identified which properties you are going to acquire, it sounds like a blind fund is what you would need to form. If it were a portfolio of 20 homes that you could buy in one transaction, you could do a specified offering.

Funds are more complicated than specified offerings, so I wouldn't go that route unless you have lots of experience raising money and managing equity. My firm is at $50M AUM and we may start thinking about raising money for a fund at around $100M AUM.

[Alex Breshears]

Hi Eric! Love the enthusiasm, and there are some great points written here, but I will tell you that officially raising capital with an SEC exemption is no small task. What may be a better option since you are new to the business model would be to start cultivating private lenders for each property, rather than going full bore into 20 properties that haven't been identified yet.  That way you can match up one individual lender to one property, the lender gets title insurance and is named as a mortgagee on the hazard insurance, and you sign a promissory note and whatever the lien instrument is in your state (mortgage vs deed of trust).  Some people may have capital sitting on the sidelines that they want just regular income coming in monthly, so they would be happy to have a private loan out for longer periods of time because they want the steady income.  That way you could get a few properties under your belt with this business model, knock off all the dust, build the processes and infrastructure to run it well, and then go to the market to raise capital with experience from the first few properties. 

[Peter Walther]

I suggest you check the zoning to be sure SRO is allowed.  In any case I'm sure the neighbors will be inviting you to the next block party as an honored and esteemed guest.