Has anyone worked with Silent Investors?

Question

I’ve been landlording for 10 years and have acquired a number of properties in that period of time.

Recently I’ve had some family, friends and business partners approach me about investing together with the plan for them to provide capital as silent investors.  Does anyone have any experience with this arrangement?

What would be a typical way to set this?  What would the silent investors expect to receive out of this: a specific return on investment or just to split the profits?

Any thoughts or advice would be appreciated. Thanks.

Don Konipol · Answer

@Randy Forcier

Actually the above information that to promote an investment legally you have to do it under Reg D rules is incorrect.

You need to either register the securities or operate under an exception from registration.  Reg D is one of three commonly used exemptions.  You can avoid reg d by operating under the exemption for intra state offerings.  To comply you can only offer the investment to investors in a single state and you would have to comply with the states securities regulations

You could also operate under the general exemption for private offerings.  You can operate in as many states as you want, but you can not use general solicitation and advertising, and must have a preexisting relationship with any investors to whom you offer the investments.  Further, you must comply with state securities laws in the states you are making your offering.

What compliance with Reg D offers is a safe harbor for private offerings.  Reg D 506 b is similar to the general exemption for private offerings mentioned above.  However, with Reg d the offering can be made to no more than 30 sophisticated investors and an unlimited number of accredited investors.  Further, while Reg D requires notification and possibly payment to state securities boards, it exempts the offerer from having to comply with state securities regulations. It also requires a filing of information form D.  Reg D 506 c is similar, except that general solicitation and advertising is allowed.  In exchange for this privilege, all investors must be accredited and the offerer is required to take steps to assure that investors are accredited, while under ‘b’ self accreditation is allowed.

I have at various times used all three exemptions.  My cost for Reg D filings are about $10k in legal fees, however I do a number of these so that represents a discount from the more typical $15. - 20 thousand.  My cost for a Texas intrastate filing was $7500.  Cost of using general exemption was $1000 legal fee,

Keep in mind that Reg D offers a number of advantages over the general exemption for private offerings.  Namely, that With Reg D you have a statutory defense against lawsuits from disgruntled investors, while you lose the statutory defense with the general exemption; that with Reg D 506c you get to advertise; with Reg D you are exempt from compliance with state securities regulations which is not the case with the general exemption, and finally Reg D offerings having a PPM, Operating Agreement and Subscription Agreement are more professional to the potential investor and hence make it a lot easier to raise capital.

John Ward · Answer

Randy, when you work with "silent/passive" investors who only give $$ and you do all the work, you are actually promoting an investment. To do it legally, you will need to work under the Reg D rules. I suggest you find an attorney who can prepare your entity docs so you follow all the rules. As for structure, there are literally dozens you can choose depending on your experience and the demands of the investors. A common structure is where you co-invest alongside them (it is good to have "skin in the game") and then you take a promote or carried interest. Also, you can get some fees. We use the following structure. We charge a 2% acquisition fee on the property purchase price and we get a 30% promote after the investors achieve a 7% preferred return. We also get a catchup on the rental income.  This structure has been accepted by numerous HNW investors and also several capital groups and family offices so we believe it is fair to both the investors and ourselves. Be sure to consult an attorney on the Reg D aspect. Good luck

Steve Vaughan · Answer

I have a couple private lenders.  They get a trust deed on each property. Lenders only, not equity partners. No ownership.

If they can be considered private lenders (you know them personally) they could do the same with an entity like an LLC if there are more than one of them.  You borrow from the LLC, payments distributed between them according to their member % and operating agreement.

Seek legal advice though.  I'm a non-attorney from nowhere ;)

Brent Shields · Answer

Maybe your family is a lot different than mine, but in my family no one really understands what type of investments I am doing, and I would never expose someone to risk that they did not understand no matter how legal it was.

So that really leaves borrowing money and paying interest, which is pretty simple and easy for everyone to understand, and that way I take all the risk and give them a personal guarantee that they will get their money back with interest.

I suppose if you were able to explain the deal and they were able to really analyze it and make an informed decision about what the risks were then it would be different.

Jay Hinrichs · Answer

@Don Konipol  super explanation.. I just did one of the non registered accredited only  we only had 8 participants.

but larger investments per.  and 15k or so for the lawyer fee  .. with a ton of it the lawyer worried about CYA for their firm.

Luke Miller · Answer

@Randy Forcier before going down this road and taking the great advice listed above, think about the possibility of loosing your family and friends' money. One of the first questions I ask potential investors is something like "what would happen if this deal went south and you lost the entirety of your investment?"

An equally important question is if you did lose their money, would you still be friends?

Not saying to halt the operation here, but you have a fiduciary responsibility in explaining the downfalls of securities investing.

Amy Wan · Answer

This is likely going to be a 506(b) deal so that you can take friends and family money. You’ll want to very clearly delineate the financial structure and fees so people aren’t upset later on. Investors need to have a preexisting relationship with the sponsor (which it seems you have), but they also need to be “sophisticated” i.e. have some understanding of what they’re investing and and the risks that come with it.

Chase Louderback · Answer

Hi Randy,

Depending on the project and the number of investors involved you can do things different ways.  I've had experience with investors that will put capital down for fix and flips and essentially act as hard money lenders.  The other alternative (in the SFH space) is some investors just want a decent return over the long haul so they are open to putting down a second on a rental property for a set return over a set number of years.  You can basically be creative as you want to be about those arrangements.

If you have a lot of private investors (probably more than 3) and they want to do absolutely nothing besides give you the money and get a return on it, then you would be in the "syndication" space.  There are some more rules and hoops you have to jump through for syndications.  Also, you need to make sure the profit margins are there because syndications can get a little pricey.  How the structures, returns and profit splits can be done for this type of deal can vary a bit as well.

Feel free to DM me if you have any questions or just want to chat.  I'm happy to talk real estate any time.

Theo Hicks · Answer

You are referring to a syndication. A common structure is to offer a preferred return to the passive investors and a profit split thereafter. For example, an 8% preferred return and a 50/50 split of the profits. As the general partner, you can charge an upfront acquisition fee for putting the deal together (i.e., 2% of the project costs) and an ongoing asset management fee (2% of collected income).

But since you are doing a syndication, you will need to follow securities law, so you will need to find a good syndication attorney (i.e., securities attorney).

If you have any more specific questions about syndications, feel free to reply to this message or send me a DM.

Daniel Dietz · Answer

@Randy Forcier I invest both by myself and with two partners where we each put in 1/3 of needed capital on purchases. We have 25 units that way.

I just started, after about a year of planning from things I learned here on BP, investing with a 'silent partner' on a 4 plex. He brought ALL of the down payment 20%, we (2 partners and I) will do ALL of the acquisition * ongoing PM. All cash flow and equity growth will be split 50-50. Each of our intentions are to hold for at least 10 years and then evaluate again.

I have a few other potential silent money partners also as they have heard how we are working on this deal together. We set up an LLC to do this, and would set up a separate one for each potential investor and only have 1 investor per property/LLC.

Dan Dietz

Has anyone worked with Silent Investors?

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