Allowing Passive Investors

[Greg B.]

I have people that would like to invest in my rental business, a first for me. We are negotiating an annual percent of return. Right now I am offering a monthly payment for return, focusing totally on cashflow.

The question has come up about what happens when the investor has had a 100% return and also the exit strategy.

I am wanting to make sure I am not giving away the farm on negotiations. Do you have any creative suggestions on the end game for investors in my buy and hold business?

[Tod R.]

Hey Greg B., For a passive investor, I would try to structure it as a loan. Especially if they are looking for monthly payments. But I agree with Will that they probably want their loan secured by the RE that's providing the cash flow.

If they want to participate in the profits, then I would put together an LP or LLC with them. Everyone's capital would earn a smaller preference(interest) that would be paid as cash became available, not regular payments. Then once all partners got their capital and preference returned, any distributions should be disproportionate in your favor to reward you for the expertise and sweat equity. This basically puts the cash contributions in a higher priority compared to your sweat equity.

Sounds like you are getting ready to expand the empire!