All Forum Posts by: Chris Reel

Hey Lamont! 

Great technical question - one I've gotten in different ways a few different times. 

A bit of background... The SEC defines an accredited investor (who is a person) as someone with an annual income from the past 2 years at $200,000 individually or $300,000 if they are investing with a spouse. 

The alternative way a person can be categorized as accredited is if they have a net worth of $1million or more (excluding the value of their primary residence). 

What you've got going on seems like a bit of a hybrid. The $300k 401K would likely be considered part of their net worth and not part of their annual income. Plus, factor in that the $200k needs to be made for 2 years prior to them being accredited by way of their income. 

I'd say that the person you are referring to is not an accredited investor; however, there are other securities exemptions that don't address the accredited/non-accredited dynamic for investors that may be worth looking into. 

Best of luck! 
Chris 

INSERT FAMOUS DISCLAIMER HERE: This answer is for educational purposes only and is not and shall not be construed as legal advice. This answer does not create an attorney-client relationship. 

Hey Sergio,

Let me address the LLC question (more my lane). With any partnership, be it business, real estate, whatever, make sure your operating agreement (the governing document of an LLC) states a few key things.

1. Expectation of the members (owners of the LLC).

Since you both have your own portfolios it's important that you are both aligned in the expectation of what the priority is. A good example of this would be if you (or your partner) found another property you wanted to snatch up. As an owner of the LLC you have a 'duty of loyalty' to the company that basically says you have to place the LLC's interests over you personal ones. In this case, you'd have to bring the property to your partner to see if it's something he would like to be involved in. If he doesn't - all cool! Go ahead and snag it. The expectation should be stated, though.

One way to do it is to have a firm understanding of what the 'business purpose is'. If you are going to be buying up apartment complexes with this LLC and you are going to be building your own single-family portfolio, then there wouldn't technically be a conflict of interest since the portfolios are different. Does that make sense? The long and short of it is transparency.

2. How you guys can break up. 

It's so important to have an 'out' clause in your operating agreement. Without an 'out' clause it's very, very hard to get through to an amicable separation if things turn to sour grapes. This should include how to value each member's equity in the LLC, how that is calculated, how the separation of portfolio assets will go, among a whole host of other things (including what happens if you or your partner becomes disabled, divorced or passes away).

3. Compensation 

Everything has to go through the LLC, right? But how does that break down in terms of the distribution of profits? Are you going to reinvest profits into the LLC until you reach a certain multiple on your money (and at that time distribute percentages of profits)? Are you both bringing the money? If so, how much, respectively? How are taxes going to be handled? All of these questions can weigh in regarding how you are legally (as well as morally) capable of being compensated.

Just some input regarding the structure of your LLC. All, of course, being educational in nature and not legal advice! 

Best of luck! 

*Goes without saying, but this answer doesn't create an attorney-client relationship. Further it is not and shall not be construed as legal advice. 

No problem, Dentric! If you have any other questions I'm happy to help. Best of luck! 

Hey Dentric - congrats on taking the next steps in your real estate investing venture! My advice, get your first property into an LLC before thinking about developing a web of entities that hold all of your properties. Your first investment will show you a lot of things that books don't (and you will want to have the resources in place to be able to rectify those instead of being spread too thin with multiple properties).

Also, don't rush into thinking you need a new LLC for every property. Instead, when you're at the point where growing your portfolio is feasible, I would set a value threshold (total dollar value) for each entity. Once you reach that value threshold you open up a new LLC to hold your newer properties. So, for example, say your threshold is $200k and you're buying $50k properties. Once you have 4 properties in that LLC (totaling $200k in value) you'd create a new LLC to house your next properties. Another way to structure it is using an ARV threshold (so in the case above you rehab $50k houses and the ARV is $100k respectively... with 2 houses you'd reach your value threshold and thus create a new entity). Does that make sense?

This is advantageous from a tax-savings perspective, lack of confusion perspective and also allows underperforming properties to be kept above board by those that are doing well (this last point can be a blessing and a curse all at once, but for the sake of this answer we'll say it's a plus!). 

Hope this helps and I wish you the best of luck! 

Chris 

*Please note that this response is for educational purposes only and is not to be construed as legal advice or to have formed an attorney-client relationship. 
 

@Jillian Sidoti I have been preaching this to clients and real estate investors/entrepreneurs FOREVER. Thank you for sharing this. 

I always suggest either find an exemption that permits general solicitation, or develop a substantive relationship prior to any conversation about the investment. You are spot on... no one is the exception to the standard the SEC and State Securities Commission's place on those raising private capital. The SEC's latest complaint shows this in its truest form. 

You could explore the options of partnering with people in the states that can carry some of the financial/credit approval burdens. BP is a great spot to explore partnerships like this. The one thing that you'll have to explore is how you will bring honest and true value to a relationship with a US partner. 

If you are in Singapore, you might have to be the person who sources deals or "wholesales" and then farms them out to state-side investors for a cut. If you just source the deals, make sure that you are complying with laws surrounding realtors in the state you're looking at deals or make sure that you are actually involved in the entity that is buying the property. 

If you are exploring the lending side of REI, I have someone you can talk to about this who specializes in helping people "play the bank" when it comes to REI. Let me know if you want a connection to them. Sidenote, buying up notes on mortgages is not a bad way to start if your small capital amount is enough to buy one (or some).

Good luck! 

Hey Samuel, 

Welcome to the BP Community! You'll find a whole ton of really helpful and practical tips by engaging in the forums. If there's specific questions you have, just post it in the relevant forum and you'll be likely to receive a ton of different perspectives and answers. 

As far as referrals for attorneys (based off of the title to your post), it is going to depend on the state you are investing, and the dynamic of that investment. Most real estate questions are going to be state-specific, meaning, you will have to consult with an attorney within the state you are investing. 

Now, the exception (or add-on) to this is if you are raising money for investment in your projects from other investors. This is going to bring you into the federal legal realm and is something that someone who is knowledgeable and experienced in the area of securities laws compliance could help you with, regardless of the state the property is in. 

Since you are in Singapore, I would link arms with an accountant that has knowledge in the international taxation space. I have one colleague that comes to mind with this and would be happy to provide you with a referral if you'd like. 

Good luck in your REI endeavors!

@Ian Thomas No sweat, man! Glad it was helpful. Good luck! 

Regardless of how you structure it, you're taking investors money and investing it into something to generate a profit or ROI for them (and you). Securities laws are all over this, especially since they would be 'passive' in their involvement in the JV.

Like I said in my first response there are a few different ways to structure it. JVs could absolutely be one of them. Still, I would encourage (1) the investors pool into one JV partner entity per property purchased and (2) making sure you are compliant with securities laws. Pooling the investors dough into one JV entity makes equity management, profit distribution (waterfall) and carried interest (what you take on the back end) a whole lot easier to calculate.

I think the key for you really is developing that relationship before you talk to anyone and then, obviously, making sure your documents are all in order to provide them so they can analyze the deal and make a fully-informed decision. 

Hope this helps. 

I agree with you in almost every respect. I don't always recommend putting each property under its own separate LLC. If you are expanding your portfolio and each property is under a separate LLC it can quickly become confusing and less advantageous from an accounting and legal perspective. The confusion could leave an investor unknowingly piercing the corporate veil for misuse or commingling of funds from separate entities (i.e. mistakenly using one LLCs account to make payments for another). Two ways I have seen around this...

1) Have a financial threshold for each entity. Say you are investing in $30,000 SFRs that you rehab and rent out. Once that portfolio has an asset value of $120,000-150,000 (add the ARV of each property) you form a new entity for the next acquisition(s). This limits accounting issues and also allows you to carry loss-generating properties over to profit-generating properties for potential tax liability mitigation.

2) Hold each property under its own LLC and have every LLC roll up or be owned by a holding company which makes an S Corp election. The tax benefit here is that everything flows up to an additional entity before hitting the investor. You can carry the losses like in example one, and offset them against the profits, thus, again, mitigating tax liability. With an S-Corp election, you can also mitigate the amount distributed to even further mitigate tax liability on what would otherwise be completely pass-through.