Questions about private lending

[Michael G.]

Hi all

My partner and I have a few properties under our belt at this point. Up to now we have been using hard money for the rehab phase, it costs a lot but it's a necessarily evil.

We have connections to some folks that would like to invest in our business (meaning we wouldn't be advertising for investors).

We are talking to our attorney about setting up an LLC and selling shares from that LLC to fund our rehabs. We would back up the investor LLC with the property we are working on, we would also pay out 12% per share at project completion.

I know there are a lot of considerations to look out for but is the above idea even legal?

Thanks

[Kevin Amolsch]

A security is typically any time you offer a return, even a percent of profit, to a passive investor. A passive investor is someone who expects a return without actively participating in the deal. With that said even a note and deed of trust is a security and you may very well need a license to do it. There are several exemptions to licensing including a Regulation D filing with the SEC. John and Brian are right a private offering exemption should cost north of $20k. In some states if you are raising money for yourself and using notes and deeds of trusts or mortgages, you will fall under a state exemption. You can do as many notes on a single property as you want. Each note stands on its own so it would not be considered pooling money. You are however putting junior lien holders at a higher risk and your state regulators may require that you carefully qualify your investors.

This is all very complicated and can get you in a lot of trouble. There are many people out there doing it incorrectly and I also know of people that have been arrested and fined for doing it wrong.

My opinion is to not raise small chunks like $5 or $10k at a time. If that is all the investor has than they cannot afford the loss and you could get yourself in trouble by selling them a security. Not to mention that the smaller the investor the bigger the headache. I promise you will get lots of phone calls from investors like this which will create a hassle and take time away from you making money.

This probably goes without saying but you need to qualify every investor and you are supposed to have a relationship with them before you offer an investment.