I got 10 people to invest 10k each to buy Real Estate..

[Gabriel Kolendrekaj]

I wanted everyone opinions on this idea I came up with, that I'm hoping will be fully ready by end of year. (Before someone jumps at my neck....obviously I know I haven't come up with the idea of partnerships lol but I mean in context of for my family and friends)

So when I started doing my first flip I posted constant updates on Instagram, and a lot of friends and family I had took notice and followed along. We finished our first flip for a 150k profit, then bought another and so on and so forth and I constantly posted updates on each flip we did, and everyone seemed to love the updates, and everyone had the message " I wish I could do that but I don't have that kind of money", news flash neither do I, Hard Money loans, and ton of credit card debt has gone a long way into these flips. A lot of good friends of mine, family members wanted me to help them get in but no one had more than 30-40k to their name, and I didn't want anyone risking everything for a flip. 

So I came up with a way everyone can get involved without risking their whole livelihood. I messaged everyone back and pitched an idea where we are all equal partners in an llc, we each put in 10k each and use that money towards buying a house to flip. I would be the managing member, and have total control over what we bought, sold, renovated, or held long term. This kind of dictatorial rule over the llc was my idea of making everyone else involved more comfortable with the idea of investing 10k with other people they may not know. I had the knowledge and experience and I was the member that connected everyone else together, and they only wanted me to control what was and wasn't done with the money. 

I had an attorney draw up the operating agreement that had these keys points. All profits would be split equally among the partners, I would be the exclusive realtor on purchases and re-sales 3% if sold in house 4% if through a cooperating broker, in the event that we hold a property as a rental, I would be the property manager at 5% of collected rents, to remove me as managing member there had to be a 70% majority, all members must always have equal shares of the company, distributions of profits are done after completion of each deal unless 100% majority agrees to roll over profits into another deal giving us more purchasing power. 

My idea is to take the 100k use it to get hard money loans, or other kinds of financing to purchase and rehab properties. Any member of the group is welcomed to come along and shadow me as we move through the deal to learn so that they may choose to do one by themselves later on. 

I genuinely did this because I wanted to give my family and friends and avenue through which they can learn about real estate investing and encourage them down this path, there really is no major benefit to me doing this group because I make 10x more when I do my own flips. But a lot of them starting talking to me about going to these freaking 30k seminars to learn, and that would have just killed me. To have them burn that money for something they could easily learn by investing 10k in themselves instead of putting 30k into someone else's pocket. Yes I get my realtor commission and management fee if we hold onto something but other than that I'm make no other money through this company. 

So far my flips have averaged 117,000 in profit. Even doing one deal a year at a 80k profit means that everyone would be getting a 80% return on their money. I don't think I could have given them a better avenue to invest and learn through. 

What do you guys think of this strategy? Am I getting in over my head? Am I making it too simple? Will I grow to regret this?

[Jonathan R McLaughlin]

You are adding SO much value, I'd think about giving yourself a little more upside. Plenty of room here without squeezing your partners (investors really....do they participate in specific jobs?). Lots of people more used to large partnerships than I am, and I'm interested in their opinion, but here's what jumps out at me:

5% management fee is under market 8-10% fairer

what about a bonus for you over a certain return? If the average is 117, what if the percentage is split more favorably to you after you hit 100K or something?

All legal expenses should be borne by others I think, or something written in that they cover your costs for any partnership negotiations/questions where you have to involve counsel or accounting. You need to protect yourself here. Its possible you have 10 different lawyers talking to your lawyer and accountants. Getting 100% to agree on anything is a very high bar. You only put 70% for your removal. Have a written property management agreement made spelling out your responsibilities and compensation...Do you charge rental fees, etc. I'd check on the security laws and the difference between partners and investors. I'd spell out the timing and nature of the communications they can expect. Assume you will get sued and plan accordingly.

Questions:

How are you protected on the downside? What happens when a flip loses money? Who gets paid first/last? How do they exit? Boy I'd spell that out. What about capital calls and if some want to do it and some don't

You asked for opinions, and mine is that I really admire your spirit, generosity and creativity, but there is a very high odds this ends in tears and--oddly--it is more likely to end in tears the more you bend over backwards to give your partners unreasonably favorable terms. No one thanks you for silent sacrifice. If you want everyone to be lucky you should include yourself in that group and be treated accordingly. Right now you are signing on for a big, big job. They are willing to give a stranger 30K under much less favorable terms...

is a very high bar. You have 70% for your removal...