This is it.

This is the big one, Elizabeth!

So sayeth Fred Sanford 30 + years ago. But I still heard his words echoing in my head recently. I wasn’t having a heart attack or anything like that. It wasn’t life threatening at all, really. Well, maybe it could be life threatening if left untreated.

I’m talking about major control issues.  Not control issues like you may be thinking of, but important and could lead to disastrous consequences. It all started with a phone call I was on with a hungry Michigan real estate investor.

Here’s what happened…

I was on a call with a Michigan real estate investor that is part of my mentoring program. This particular real estate investor had a private money investor in his sights. He wondered what the best way to structure his deal would be; should he have the person be a private mortgage lender or an equity investor in the project? After we determined which direction he should take, the real estate investor asked me: “Won’t I lose control of my real estate project by having a private money equity investor?”

Hmmm…

I could definitely see where he was coming from. After all, if you watch shows like Shark Tank on NBC, you’d probably think that some private investors want a big stake in your company or may want to have a say in the operations of your business. Maybe you’ve watched CNBC or other business shows where they talk about ‘taking over’ control of a business by acquiring a large block of shares or other equity stake.

I am going to answer this question once and for all: No. You do not have to give up any kind of control in your business or real estate investment projects when you bring in an equity investor.

While in some cases you may not own the majority of the equity in a particular real estate project or deal, you will still retain control over the project. You will retain this control through management contracts, operating agreements, limited partnership agreements or by-laws. You should avoid setting up any private money deal for real estate where the investors have a say-so in the operations of the project.

The private money investors are there to bring the cash and get a return on their investment. Some of them may be able to bring certain expertise to the table or certain relationships that could make the deal go smoother. Don’t ignore these aspects – just make sure everyone’s role is laid out clearly at the beginning of the deal.

You, the real estate investor, are the one that should control the project from start to finish. From selecting the properties to managing the rehab and property management, your investors should not be sticking their noses in. Just because they invested money doesn’t mean that they get to vote on carpet colors or rent rates. That can be a recipe for disaster.

If your private investor insists on having a say-so in the operations of a deal, you have the option to turn their money away, find another investor(s) or re-arrange the structure so that everyone is happy. It’s actually quite rare that you’ll have a private mortgage lender or private equity investor that will want to let their feelings be known on the operations of a deal, but it is not un-heard of.

Again, the best way to handle this is to line up responsibilities and ownership at the outset of the deal. Your position as managing partner, principal or managing member of the LLC should be documented in writing and ownership, compensation and other responsibilities laid out before even one penny goes out the door for a deal. This is a good way to protect yourself and your private money investors from problems that may arise and jeopardize the profits of the entire venture.