Today’s REI Classroom Lesson
Michael Blank explains about the various ways to structure a syndicated deal with multiple investors involved. He provides tips that can help you get started in multi-family investing.
REI Classroom Summary
Listen in as Michael Blank shares the pros and cons of different structures and operating agreements between you and the investors in the deal.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Michael: Hi there, and welcome to the REI Classroom. My name is Michael Blank and I’ll be your instructor today. If you’re in the right spot, if you want to get started with apartment building investing, and today’s topic is going to be all about how to structure the entity to syndicate apartment building deals.
Mike: This show was sponsored by passiverental.com.
Michael: I talk a lot about getting started with apartment building investing. In order to do so, we need to be able to raise money, right? And so that’s called syndication. Now what I want to focus in on today’s call is basically, how do you structure the real estate deals with regards to entity and your investors? And there’s different ways that you can do it, and there’s pros and cons to either.
So let’s start first with the fundamental thing. It’s never buy anything in your own name. Always do it through an LLC. I know this is basics 101 real estate but there are plenty people out there who are buying stuff in their own name, so don’t do that. So generally, what I do is I set up a separate LLC for each deal. Now, if I’m flipping houses, no. But if I’m doing an apartment building deal, each apartment building is going to have its own LLC setup.
Now, you could have your LLC setup, you know, called Michael Blank Capital, LLC, which is kind of your investing LLC, that’s what you put in your business cards and your website, and that’s fine. You can run expenses through there. But that entity is never going to take title to anything and it’s probably not going to make money either, right, but it’s there for, kind of, for outward facing purposes. But each apartment building deal is going to be its own entity. So that’s number one.
Number two is you have different options. You could, number one, borrow the money from your investors. So you have all these investors. Now, how do you structure the money coming in? Number one is you could borrow the money, right? So basically, let’s say, I’m buying an apartment building for, you know, $500,000 and I’m getting a $400,000 loan from the local bank and then it has $100,000 investor money in there. So how do you treat that $100,000?
One way to do it is to treat it as debt, right? So especially, you have the loan and then your $100,000 is almost like a second mortgage. Now, the advantage of that is very simple. The documents are very simple. You have an LLC, you’re the sole member of the LLC, and then you have promissory notes. You have one for the bank and then let’s say you have one investor and then they get a promissory note for the other $100,000.
The advantage is that you own 100% of the building. So you’re paying interest and any profit you make, you get to keep. So that’s the advantage. But be careful on that. You’ve got to make sure that the cash flow supports 100% financing because that’s kind of what you’re doing. So you’re 100% financing on that. You got to make sure there’s cash flow there. You have to make sure you have to be able to service that debt.
Now you could address that by maybe having a construction loan which is interest only for a period of time. And maybe you defer any kind of payments to the investor for 18 months until you start to have . . . maybe until you have a chance to fix up the apartment and refinance and cash everybody out. So if you have a value-add deal, this might be a great way to do it. It’s very simple and you get to keep most of the profit which is fantastic. So option number one is to simply have your investor treat it as debt.
Now, option number two is basically to have them as investors in your LLC and there’s different ways that you can structure that. But normally, what happens is there’s typically two roles in an LLC. There’s the manager and then there’s the members. So you’re the manager, you’re the syndicator, you’re running everything, and there’s the members or the investors. I want to call them members in the case of an LLC. If it’s a partnership, it would be limited partners and you’d be the general partner. But let’s talk about managers and members. Managers and members.
So those are your two different roles. So normally, the way we structure the deal is that you as a syndicator, the manager, is you retain equity in the deal, typically between 10% and 30% you get for putting the deal together. And I’ve talked about this in other episodes about raising money. So that’s just the kind of the equity that you get, it’s kind of called retained interest, that you get for putting the deal together. And then the rest, basically, are the members or the investors that get the rest of the deal.
Now, your operating agreement, that will dictate the decision-making in that LLC. In other words, how much decision-making do your members get versus what you get, and that is wholly dependent on how you want to do these things and your investors. So on the one extreme, on one end, you can all be . . . let’s say there’s five of you. There’s four investors and you. You can have a very simple operating agreement where all five people are essentially equal members. The votes are equal.
So that actually puts you in the minority because the other four, technically, if they got together, they can easily outvote you and you have the same vote as the other four, right, pro rata. And that doesn’t give you any . . . now, you are also the manager so your decision-making is very small because everyone has an equal vote. Okay. So that’s kind of a simple operating agreement where everybody has an equal vote.
Then, there’s kind of the other extreme where you have potentially multiple classes of members. But in the middle is the normal scenario, or the more normal scenario, where you have more operating control and the members have less and less. And there’s a spectrum there, of course. I like to give my investors, my members, more voting rights, specifically, around selling the building and refinancing because I feel it makes them comfortable and it’s fair.
If they want out in five years and they get the majority vote, then, well, I need to listen to them, right? I don’t want to . . . there’s lots of syndicators who don’t do that. And I’ve been part of some of those and it just makes me very angry when I can’t assert any kind of control in that way. So that’s kind of what I do but you can also have your members be very silent. So they only get to vote on matters that reduce their voting rights and their distributions. All right?
Then, you can have a little more of an extreme, a more complicated operating agreement where you have multiple classes of members. Let’s say you have . . . you’re raising a million dollars and you have a really big investor that puts in $800,000 and then you have four other ones putting in $50,000. Well, the $800,000 investor might want additional rights that the . . . or even a different profit distribution than the riffraff investors do, right? They have less voting rights and they have, maybe, get less profits or are less preferred. So you can set up multiple classes of memberships.
Now, if this overwhelms you, don’t worry too much about it because you’re going to be working with an SEC attorney, okay, which, if you syndicate a deal, you need to be working with an SEC attorney. And I can recommend one to you if you contact me but it’s very important, number one, to have an attorney handle the stuff. And number two, you don’t have to know all the details. You don’t have to be all-concerned about all the SEC laws because the attorney is going to do all that for you.
They’re going to sit down with you. They’re going to ask questions about some of these things I just talked about. How do you want to structure it? Now, do you want more voting, less voting? What are the returns? All that kind. They’re going to ask you these questions. These are business questions that you’ll be able to answer because you know just enough to be dangerous.
They’ll take care of all the details, okay? So don’t get yourself too concerned about that. But there’s different ways now that you know that can structure a deal all the way from debt to LLC. And then within the LLC, different structures and voting rights within that as well. So hopefully, you’ll find that useful for syndicating your next deal.
All right. Hope you found that useful for syndicating, raising money. If you want additional resources, please visit me on my website, themichaelblank.com. And there, I have free e-books in raising money, blog articles, YouTube videos, and podcasts all about raising money, and other things, of course. But today’s topic was around raising money. So that might be useful for you. Anyway, thank you for your kind attention and I’ll catch on the next episode of the REI Classroom. All right. Take care.
Mike: Passiverental.com is your source for turnkey, done for you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Are you a member yet of FlipNerd.com, the hottest real estate investing social community online? If not, you can join for free in less than 30 seconds and get access to hundreds of off market deals, vendors in your market to help you in your business, and you could start networking with thousands of other investors just like you. Get your free account now at FlipNerd.com.
Please check out the FlipNerd family of real estate investing shows where you can access hundreds of expert interviews, quick tips and lessons from leaders across the real estate investing industry. They’re available at flipnerd.com/shows or simply search for “FlipNerd” in the iTunes store.
Michael: Hi there, and welcome to the REI Classroom. My name is Michael Blank and I’ll be your instructor today. If you’re in the right spot, if you want to get started with apartment building investing, and today’s topic is going to be all about how to structure the entity to syndicate apartment building deals.
Mike: This show was sponsored by passiverental.com.
Michael: I talk a lot about getting started with apartment building investing. In order to do so, we need to be able to raise money, right? And so that’s called syndication. Now what I want to focus in on today’s call is basically, how do you structure the real estate deals with regards to entity and your investors? And there’s different ways that you can do it, and there’s pros and cons to either.
So let’s start first with the fundamental thing. It’s never buy anything in your own name. Always do it through an LLC. I know this is basics 101 real estate but there are plenty people out there who are buying stuff in their own name, so don’t do that. So generally, what I do is I set up a separate LLC for each deal. Now, if I’m flipping houses, no. But if I’m doing an apartment building deal, each apartment building is going to have its own LLC setup.
Now, you could have your LLC setup, you know, called Michael Blank Capital, LLC, which is kind of your investing LLC, that’s what you put in your business cards and your website, and that’s fine. You can run expenses through there. But that entity is never going to take title to anything and it’s probably not going to make money either, right, but it’s there for, kind of, for outward facing purposes. But each apartment building deal is going to be its own entity. So that’s number one.
Number two is you have different options. You could, number one, borrow the money from your investors. So you have all these investors. Now, how do you structure the money coming in? Number one is you could borrow the money, right? So basically, let’s say, I’m buying an apartment building for, you know, $500,000 and I’m getting a $400,000 loan from the local bank and then it has $100,000 investor money in there. So how do you treat that $100,000?
One way to do it is to treat it as debt, right? So especially, you have the loan and then your $100,000 is almost like a second mortgage. Now, the advantage of that is very simple. The documents are very simple. You have an LLC, you’re the sole member of the LLC, and then you have promissory notes. You have one for the bank and then let’s say you have one investor and then they get a promissory note for the other $100,000.
The advantage is that you own 100% of the building. So you’re paying interest and any profit you make, you get to keep. So that’s the advantage. But be careful on that. You’ve got to make sure that the cash flow supports 100% financing because that’s kind of what you’re doing. So you’re 100% financing on that. You got to make sure there’s cash flow there. You have to make sure you have to be able to service that debt.
Now you could address that by maybe having a construction loan which is interest only for a period of time. And maybe you defer any kind of payments to the investor for 18 months until you start to have . . . maybe until you have a chance to fix up the apartment and refinance and cash everybody out. So if you have a value-add deal, this might be a great way to do it. It’s very simple and you get to keep most of the profit which is fantastic. So option number one is to simply have your investor treat it as debt.
Now, option number two is basically to have them as investors in your LLC and there’s different ways that you can structure that. But normally, what happens is there’s typically two roles in an LLC. There’s the manager and then there’s the members. So you’re the manager, you’re the syndicator, you’re running everything, and there’s the members or the investors. I want to call them members in the case of an LLC. If it’s a partnership, it would be limited partners and you’d be the general partner. But let’s talk about managers and members. Managers and members.
So those are your two different roles. So normally, the way we structure the deal is that you as a syndicator, the manager, is you retain equity in the deal, typically between 10% and 30% you get for putting the deal together. And I’ve talked about this in other episodes about raising money. So that’s just the kind of the equity that you get, it’s kind of called retained interest, that you get for putting the deal together. And then the rest, basically, are the members or the investors that get the rest of the deal.
Now, your operating agreement, that will dictate the decision-making in that LLC. In other words, how much decision-making do your members get versus what you get, and that is wholly dependent on how you want to do these things and your investors. So on the one extreme, on one end, you can all be . . . let’s say there’s five of you. There’s four investors and you. You can have a very simple operating agreement where all five people are essentially equal members. The votes are equal.
So that actually puts you in the minority because the other four, technically, if they got together, they can easily outvote you and you have the same vote as the other four, right, pro rata. And that doesn’t give you any . . . now, you are also the manager so your decision-making is very small because everyone has an equal vote. Okay. So that’s kind of a simple operating agreement where everybody has an equal vote.
Then, there’s kind of the other extreme where you have potentially multiple classes of members. But in the middle is the normal scenario, or the more normal scenario, where you have more operating control and the members have less and less. And there’s a spectrum there, of course. I like to give my investors, my members, more voting rights, specifically, around selling the building and refinancing because I feel it makes them comfortable and it’s fair.
If they want out in five years and they get the majority vote, then, well, I need to listen to them, right? I don’t want to . . . there’s lots of syndicators who don’t do that. And I’ve been part of some of those and it just makes me very angry when I can’t assert any kind of control in that way. So that’s kind of what I do but you can also have your members be very silent. So they only get to vote on matters that reduce their voting rights and their distributions. All right?
Then, you can have a little more of an extreme, a more complicated operating agreement where you have multiple classes of members. Let’s say you have . . . you’re raising a million dollars and you have a really big investor that puts in $800,000 and then you have four other ones putting in $50,000. Well, the $800,000 investor might want additional rights that the . . . or even a different profit distribution than the riffraff investors do, right? They have less voting rights and they have, maybe, get less profits or are less preferred. So you can set up multiple classes of memberships.
Now, if this overwhelms you, don’t worry too much about it because you’re going to be working with an SEC attorney, okay, which, if you syndicate a deal, you need to be working with an SEC attorney. And I can recommend one to you if you contact me but it’s very important, number one, to have an attorney handle the stuff. And number two, you don’t have to know all the details. You don’t have to be all-concerned about all the SEC laws because the attorney is going to do all that for you.
They’re going to sit down with you. They’re going to ask questions about some of these things I just talked about. How do you want to structure it? Now, do you want more voting, less voting? What are the returns? All that kind. They’re going to ask you these questions. These are business questions that you’ll be able to answer because you know just enough to be dangerous.
They’ll take care of all the details, okay? So don’t get yourself too concerned about that. But there’s different ways now that you know that can structure a deal all the way from debt to LLC. And then within the LLC, different structures and voting rights within that as well. So hopefully, you’ll find that useful for syndicating your next deal.
All right. Hope you found that useful for syndicating, raising money. If you want additional resources, please visit me on my website, themichaelblank.com. And there, I have free e-books in raising money, blog articles, YouTube videos, and podcasts all about raising money, and other things, of course. But today’s topic was around raising money. So that might be useful for you. Anyway, thank you for your kind attention and I’ll catch on the next episode of the REI Classroom. All right. Take care.
Mike: Passiverental.com is your source for turnkey, done for you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Are you a member yet of FlipNerd.com, the hottest real estate investing social community online? If not, you can join for free in less than 30 seconds and get access to hundreds of off market deals, vendors in your market to help you in your business, and you could start networking with thousands of other investors just like you. Get your free account now at FlipNerd.com.
Please check out the FlipNerd family of real estate investing shows where you can access hundreds of expert interviews, quick tips and lessons from leaders across the real estate investing industry. They’re available at flipnerd.com/shows or simply search for “FlipNerd” in the iTunes store.
