Business is new but growing and friends and family want to invest

[Adam Soyak]

Currently, I own some rentals, 2 SF homes, 1 two-flat, and an additional BRRRR closing next month. I have flipped 4 homes as well. These properties are all in my personal name, and will be under an umbrella policy very soon.

Friends and family are now reaching out wanting to invest witnessing the decent track record I have developed.  Amounts range from $10k-$30k each that they would be willing to invest into my future projects.  Most of my personal funds are now tied up in the rentals so using OPM is definitely attractive to keep this train moving.  

I am trying to figure out what kind of agreement to come up with that is fair for both parties.  I am open to suggestions, just not sure what is typical to start (ie interest, duration, terms, etc)  I also am not sure if I need to form some type of syndicate or other entity for this to work and be legal.  Is there any letter or promissory note that you have used in a similar situation?

Any advice would be greatly appreciated!

[Kyle Altenau]

As far as their returns go, you should model out your next potential deal and include the cost of their capital. Put it at different levels and see what it does to your returns. How much are you willing to give them and give up yourself? I think that's a good starting point. 

The way they're secured will also drive what their returns should look like. If they're equitable owners theoretically it should be a bit on the higher side, but tied more to the profit of the venture itself. 

You can do it more like mezz where maybe they get a preferred return and then there's a waterfall of profits after that. 

Then there is of course a loan. It'd most likely have to be unsecured, if you wanted to get senior debt on the project. Unsecured debt can be expensive too.

At the end of the day though, I'd try to get a feel for what kind of returns they'd expect. It can be an awkward conversation to start with family sometimes, but remember they came to you. You're not going to them begging for their support. I think you'd be surprised with how low they'd be comfortable with. In my experience, I've offered higher returns to family that's invested in my projects because they didn't ask for enough. 

As for the actual deal structure. You need to speak to a lawyer and have them take care of it. It'll cost you, but it's the cost of doing business.