First of all, the structure of the deal depends on a few factors, such as:

• Type of investment property (house, apartment, mini-storage, mixed use) – the reason this is important is because each deal has different financial performance characteristics
• Time frame of investment – how long will the deal take from funding to completion? is it a quick flip or a long term hold?
• Private investor objectives – what does the private investor want? are they looking for steady returns or will they defer for bigger upside?
  
• Tax impact of deal – what is the tax impact to you and your private investors? do accelerated depreciation, 1031′s or other factors come into the picture with the property?
  

Now that we know some of the drivers of real estate investment deal structure, let’s look at some of the ways you can structure the private money investment:

1. Limited Liability Company (LLC) – you could bring your private investor in as a member of the LLC or as a private lender to the LLC. Members have ownership interest and lenders are creditors (just like a mortgage company).  Investors that are LLC members share in the profits and cash flows. LLC’s work well for many real estate investment projects, from houses to apartment buildings. You can set up different classes of members in your LLC, with some getting preferential distributions of cash or proceeds from asset sales.
   
2. Limited Partnership (LP) - You could bring your private investors in as unit owners in a limited partnership. LLC’s have replaced LPs in many cases, but there are still some instances where LPs make more sense (when liability issues with the general partner come into play). Many people have heard of LPs before and there are also publicly traded limited partnerships as well, so there is a general investor awareness. Since they have been used for longer than LLC’s, LPs can have more traction with attorney’s and CPA’s who are working on the deal with you.
   
3. C-corporation – the big c-corp – you would bring your investors in as shareholders (or lenders to the company). You can have different classes of shareholders (common stock, preferred stock, class A or class B preferred stock). Private investors would receive their returns in the form of dividends from distributed profits or when they sell their shares for a bigger amount than their cost basis. Double taxation is an issue with C-corps, as earnings are taxed at the company level before distribution to shareholders, who then must pay taxes on dividends received. Dividends are generally taxed at lower rates than other forms of income.
   
4. S-corporation- set up the same as an C-corp in form, but no double taxation. You can only have one class of stock and you are limited in the number of shareholders you may have at 100.
   

When you match up the deal factors with the investment legal entity structure, you can stack the deck to getting private money more in your favor. If your deal structure is out of alignment – for instance using a C-corp to flip a property in 6 months (you’d be subject to double taxation and you’d have to buy back or facilitate the sale of the investor’s stock to return their capital) – you can expect to have a tougher time putting the capital together.

Carefully study deal structures and work with qualified professionals (attorney, CPA, securities lawyer) to set everything up the right way. Good professionals do come with some billable hours, but they are worth their weight in gold when they protect you and your investors and make the deal easier to complete.

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This website is for informational and educational purposes only The contents of this post and of this website do not constitute legal or tax advice. Before conducting any transaction, please consult proper legal and tax counsel.

You’ve established a strong and compelling need for private investors. You’re considering setting up a limited liability company (LLC) or a limited partnership (LP) to bring your private investors in.

One question now becomes…

How to attract the private money investors to you?

You need to drum up some serious cash and you need to go beyond your existing base of family, friends and associates (where some of those sweet securities registration exemptions exist). What to do?

In this situation, real estate investors hungry  for private money will consider advertising their opportunity to perhaps the broad general public (not usually a good idea) or a targeted group (a better idea). They might take out a place ad in a local newspaper or start running internet ads to drive traffic to their website. Sounds good on the surface, except…You’re probably in violation of a bunch of securities laws. Those of you that have dipped your toe in this water before know what I’m talking about. For those real estate investors that haven’t, here is what it boils down to:

You are generally prohibited from advertising your investment opportunity (your ‘security’) by SEC rules and Blue Sky Laws.

Bummer, huh?

Well, not so fast. You are allowed to advertise your security under certain exemption rules (such as with a Regulation A offering, but the guidelines are pretty tight) and you can advertise your security if you have gone through the registration process.

Ah…a chink in the armor. You can advertise, but…

Advertising for private money to people you don’t know or have a relationship with is called a ‘general solicitation’ by the SEC and it can land you in a world of hurt if you don’t do it the right way. The laws for what is allowed for advertising can be very confusing, and I don’t want to get into all the legalese here. Suffice to say: when you advertise for private money, your ducks need to be in a row with both Federal SEC and your state securities regulator.

Wait…Hold on…back up the truck…

“Adam, what exactly constitutes an ‘advertisement’ for private money?

Now, if you’ll allow me to punt that question over to your securities lawyer, they will be able to give you a much more specific answer to your particular situation. Here is what I have learned over the years: it has been told to me by various securities attorneys that an advertisement can be construed as any medium used to reach people to attract them to your opportunity. This means: direct mailing, Google Adwords, landing pages, classified ads, place ads, billboards, online video and the like. Basically, an advertisement can range from simple lead generation pieces to targeted direct response promotions.

Now that we know what an advertisement is, how do you know if it’s the right time for you to start thinking about doing it to raise private money?

Consider first what you want to accomplish. It ultimately depends on how much capital you want to raise and the time frame in which you need to do it. For me, I like to start raising money from private investors while operating under SEC registration exemptions. Regulation D exemptions (Sections 504, 505 and 506) are the ones I operate under the most. Learn more about how I generate private money for my business HERE.

Advertising could be the route for you to take if you need to raise a bunch of money from investors in multiple states and with different investing backgrounds (e.g. accredited, non-accredited, sophisticated). If big capital raises are on my horizon, advertising enters the picture and my securities attorney gets a call. Being proactive and planning are very important here. No need to set yourself up to scramble around trying to un-tangle the web of securities laws when you’re in the heat of battle (e.g. negotiating on deals, working with investors, moving money).

One thing you should absolutely not do is run out and put ads on craigslist.org or google.com or yahoo.com and scream “10% secured loans” at the top of your lungs. This is a surefire way to catch some unwanted attention from regulators. It’s also a very tired and less than optimal marketing strategy.

Bottom line is this: you can and should advertise for private money if you are raising enough capital so that it makes sense to go through the SEC registration or securities exemption hoop jumping that allows advertising. You must always be conscious of having the proper marketing campaign set up. Both of these qualifications will mean that you have to sink some money up front, in terms of filing fees and billable hours to your securities attorney. I see this as an “investment” instead of an “expense”, though and I think you should as well.

I think completely ruling out advertising your securities offering to potential private money investors can be short-sighted, especially if you want to raise $5 million or $10 million in capital or more. The more capital you are rasing, either in the form of private mortgage loans from lenders or private money equity investments, the more advertising starts to make sense. When you get to this level, you can have your offering fees and expenses paid for by the proceeds of the offering (of course, there are strict disclosure guidelines on this).

One thing I firmly believe is that you should not let the SEC securities laws red tape of Blue Sky Laws hinder your efforts for getting private money. We have rules in all aspects of what we do in real estate (property use laws, zoning, etc.). Securities laws for raising private money are just one component of what we have to deal with do generate huge wealth using other people’s money. It’s well worth the price of admission when you close on that $10 million condo high-rise or that $3.5 million mobile home park that will cash flow $350,000 per year for you and set your life on easy street.

Provided you take the necessary time and do it the right way, advertising for private money may be for you.