Fair Splits for Actively Managed Short Term Investment where LLC takes on debt

[Brian H.]

We have experience purchasing properties through our LLC using lending, where we own 100% of the properties. However, we are now exploring opportunities to bring in passive investors to help accelerate our portfolio growth. Our primary goal is to retain as much equity in our properties as possible while leveraging outside capital to scale faster.

Proposed Investment Structure:

• Investors contribute 30% of the purchase price and 30% of furnishing/rehab costs.
• Our LLC secures a new purchase loan in its name only, taking on 100% of the debt.
• This structure allows us to maintain 70% ownership of the property.
• Properties will be actively managed to maximize returns, likely achieving higher upside than long-term rentals.

Proposed Compensation for Investors:

• 6% preferred return annually.
• After the preferred return is met, profits are split 75/25 (with investors receiving 75% of profits on their portion of ownership).
• Profit Calculation:
  • Revenue – Operating Expenses
  • Excludes mortgage principal & interest, as our LLC assumes full responsibility for the loan.

Looking for Feedback:

• Is this structure fair and attractive to investors while ensuring long-term alignment? Are we possibly cutting ourselves short here with a deal of this nature?
• Have others structured similar deals, and if so, what worked well (or didn’t)?
• Are there any potential flaws in the way we are setting this up?

Since this is our first time structuring an investment deal like this, we want to ensure it’s fair and appealing to both parties. Any insights or alternative structures would be greatly appreciated!

Thanks!