Raising money from family and friends

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Raising money from family and friends

Benton Moss
Durham, NC · Member since 2016 · 37 posts · 11 votes

Hello BiggerPockets Community!

I wanted to reach out to the community because I am mulling over raising some outside investor money from family and friends to invest on their behalf. I have had several of my family members who have asked me to invest money on their behalf, but I wanted to do it the right way. In general, I want to align my incentives with my family's, avoid situations where I have a deal and could take it down myself instead of passing it to my investors, and have some skin in the game alongside my family. So, I wanted to ask this very broad, general question - how do I structure a fund (or family of funds) that gives me the following:

- a profit split on excess equity and cashflow created

- has a long dated term on the money invested (preferably 10-15 years+)

- allows me to scale without mixing deals/money and allows me to coinvest (to put my money where my mouth is)

- allows for refinancing/rolling funds into new deals/properties

- helps me easily deal with partners who wish to withdraw funds at the end of a designated term

- broad flexibility in property type (SFR, MF, SS, and others)

- easily accommodates raising new investment capital as time passes

I am thinking of some sort of LLC or GP/LP structure (almost private partnership/hedge fund like, except with no asset management fee, just a profit split), but want to figure out those 'unknown unknowns' from folks like you! It would be especially helpful if you could provide examples of how you structured your fund or how funds you are invested in are structured.

Thanks and I look forward to discussing!

Benton

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Jason Hirko
Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
7y

@Benton Moss Short answer to your long question, but when I started taking money from family and friends, I was sure to give them right of first refusal on everything. That is a big ask once you really get going that you may not feel costs very much when you;re starting out. But without that, I worried every deal I did without them would leave an opportunity for them to feel like I was cherry picking the deals.

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  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    @Benton Moss Short answer to your long question, but when I started taking money from family and friends, I was sure to give them right of first refusal on everything. That is a big ask once you really get going that you may not feel costs very much when you;re starting out. But without that, I worried every deal I did without them would leave an opportunity for them to feel like I was cherry picking the deals.

    3Reply
  • Benton Moss
    OP
    Durham, NC · Member since 2016 · 37 posts · 11 votes
    7y

    That is great @Jason Hirko! 

    And I want to make sure I handle my affairs with the highest integrity possible - meaning that I'd give them the first look. The best way I thought of setting up incentives was that I would be 'forced' by my docs to co-invest something along the lines of 10-20% of the equity so they knew I was putting my money where my mouth was. What do you think of this?

    Also, did you begin by raising money for a 'fund' structure or more of a deal by deal basis? 

    I own several SFR right now am looking to continue expanding the portfolio - just want to help my family in the short run, but set it up to be a long term business opportunity for outside investors as well.

    0Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    7y

    @Benton Moss 

    Dealing with family and friends could be tricky especially at the beginning. A general rule of thumb if you want to borrow money from them in a form of debt, you offer them a fixed rate of return. On the other hand, if you are bringing passive investors on a deal and giving them a piece of equity, you're essentially selling a security and in a lot of cases translates into a syndication which is very pricey and may not be worth the effort in some cases.

    You have to reach  out to an attorney to discuss various legal structures that would work best in your case.

    1Reply
  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    @Benton Moss I would (and do) do it on a deal by deal basis. Unless your plan is to raise a large sum of money for numerous small assets (i.e. a big C class rental portfolio for example), I'd present each property as a unique investment opportunity. That way they also have a say in what their money is spent on because they can say 'yes' or 'no'

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    First thing to do is talk to a qualified lawyer. This is not something you would consider without a lawyers advice and having a legal contract drawn up. Last thing you ever want with family or friends is any grey areas.

    0Reply
  • Benton Moss
    OP
    Durham, NC · Member since 2016 · 37 posts · 11 votes
    7y

    @Alina Trigub I was thinking that potentially setting up a 'hard money' operation for family with fixed returns may be easier than offering equity precisely because of your reasons, but that is great advice. 

    @Jason Hirko That seems to be the advice I keep hearing from others I have asked offline because of how complicated one fund with a portfolio of assets could be with refinancings, rolling capital into new assets, etc.  How do you typically get your investors their money back? Refinancing in 5-7 years? Also, do you essentially own the property after the refinancing your partners out of the deal? 

    @Thomas S. amen to that - which is why I'm asking you guys for all this great (free) advice before I do so haha. 

    0Reply
  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    @Benton Moss It depends on what the investor wants to do. Most of the time, I pay back their investment before any distributions, and then we own the property 50/50. Sometimes they want the money reinvested in other projects, sometimes they don't. 

    If you paid them back and then you owned the property outright, that would be debt as opposed to equity participation, which is what you've been describing.

    1Reply
  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    7y

    @Benton Moss what's your track record thus far?  How many deals have you done? Funds get far easier when you have a track record. If not, it's likely more feasible to find a deal and raise direct investment dollars.

    all the best!

    0Reply
  • Benton Moss
    OP
    Durham, NC · Member since 2016 · 37 posts · 11 votes
    7y

    @Jason Hirko I see. So even if you promised an X% preferred return and they got it over a 10 year period and then you refinanced their entire investment back + cumulative preferred return, they would still own an equity % of the project? I'm guessing you spell this out in the PPM or investment deck?

    0Reply
  • Peter TverdovBusiness Member
    Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
    7y

    I don't see someone giving you money to lock up for 10/15 years. That's a very long time. 5-7 is more likely the time frame. 

    [email protected]732-289-3823
    0Reply
  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    @Benton Moss You could set it up that way - and a lot of people do, but I see that more with experienced developers that are taking on investors, as opposed to the family/friends partnering approach. Look at preferred returns, waterfall structures, promotes, and the like to see if there's a repayment strategy that fits your and your investor's goals. At the end of the day, if you both agree to it, it's good

    2Reply
  • Theo Hicks
    Rental Property Investor · Tampa, FL · Member since 2015 · 1k+ posts · 969 votes
    7y

    Option #1: Offer an interest rate for a certain number of years, at which point you return their entire investment

    Option #2: Set up a syndication and offer a preferred return plus profit splits.

    Most syndicators start by raising capital from family and friends, and eventually progress to raising capital from accredited investors. 

    As others have said, I would speak with an attorney to go through your options.

    0Reply
  • Benton Moss
    OP
    Durham, NC · Member since 2016 · 37 posts · 11 votes
    7y

    @Jason Hirko I think the best way to go about it will be 1) talk with my attorney and 2) ask family and friends what type of returns and structures (debt vs. equity like returns) they are looking for, just as @Theo Hicks mentioned. Thanks guys!

    I also found an interesting post here on BiggerPockets that answered a lot of my questions and had some valuable information for anyone else interested:

    https://www.biggerpockets.com/forums/432/topics/454892-raising-capital-from-friends-and-family

    2Reply
  • Theo Hicks
    Rental Property Investor · Tampa, FL · Member since 2015 · 1k+ posts · 969 votes
    7y

    @Benton Moss exactly. Once you know the projected returns on your deals, I would ask people what types of investments they have and what returns they are getting. Then, mention that you are raising money for deals with projected returns of X, and ask "If I find an opportunity with X returns, would you be interested?

    0Reply
  • Benton Moss
    OP
    Durham, NC · Member since 2016 · 37 posts · 11 votes
    7y

    @Theo Hicks great advice - would you rather structure it as equity or a debt product? Just curious!

    0Reply
  • Theo Hicks
    Rental Property Investor · Tampa, FL · Member since 2015 · 1k+ posts · 969 votes
    7y

    As a syndicator, I'd love to have debt investors, because once I refinance and return their initial investment, I own the entire deal! But, equity investors are more realistic in general, but definitely when first starting out. From my understanding, deals with one or a few of large investors can be structured as debt, because they want a place to park their capital to beat inflation.

    0Reply
  • Benton Moss
    OP
    Durham, NC · Member since 2016 · 37 posts · 11 votes
    7y

    @Theo Hicks I'd rather have debt I think as well, but again, as you said earlier, it will depend on what their needs at  the time. Thanks for sharing Theo!

    1Reply
  • Michael Rodriguez
    Real Estate Investor · Thornton, CO · Member since 2015 · 65 posts · 42 votes
    5y

    @Benton Moss Just came across this family and friends capital raising thread and I see you started this thread 2 years back. Can you share how things went?

    Thanks,

    MRod

    0Reply
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