Using Friends/Family Money to Grow STR Business

[Ashley Rothacker]

Hello! We have some friends and family that are looking to invest in our STR real estate business. They would strictly be investors and we will maintain all the work (i.e. finding and purchasing the property, then managing the STR business) and charge a management fee. The loan will be in our names and the investors (friends and family) will receive a payout every month.

We are basically trying to figure out how to formalize using their money to purchase properties. Would the best route be to setup a real estate fund under an entity?

Any advice is appreciated, thanks! 

[Jacci Konkle]

When bank loans are involved, it gets pretty muddy. Anyone who owns 25% or more needs to also sign the loan as a guarantor. If you keep it under that, they likely would not have to sign, but you'll need to check with the lender. Then, you simply form an LLC for the property and put all the payout details into the operating agreement. Remember to also put something in there for how one can buy the other out down the road. It's MUCH easier if you do not need to use a bank lender at all. Then, you do not even need to own it together....just have them be the lender, agree on an APR to pay them, create a note that explains the terms and payback, and record a mortgage in first position as them as the bank. You might be able to do it the same way if using a bank, but they family member would have to be in second position and the bank might not let you have a second lender...you just have to ask. The key part is that everything is in writing and spelled out completely! If you want to pool money, be careful as it is illegal. The way around it is to use a PPM and set something up under Regulation D of the IRS code, but it's super expensive and you need a quailified attorney to set it up.