There are many choices when it comes to structuring your private money deal. In fact, there are almost “too many” choices and it can be confusing, especially if you are fair beginning to raise private investor capital for your loyal estate investments. Therefore, what I’d like to do here is atomize down for you the different ways in which you can bring private money into your investment property deals.
First of all, the structure of the deal depends on a few factors, such as:
* Type of investment property (house, apartment, mini-storage, mixed expend) – the reason this is essential is because each deal has different financial performance characteristics
* Time frame of investment – how long will the deal capture from funding to completion? is it a fast flip or a long term own?
* Private investor objectives – what does the private investor want? are they looking for accurate 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 advance into the portray with the property?
Now that we know some of the drivers of exact estate investment deal structure, let’s witness at some of the ways you can structure the private money investment:
1. shrimp 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 (unprejudiced like a mortgage company) . Investors that are LLC members part in the profits and cash flows. LLC’s work well for many sincere estate investment projects, from houses to apartment buildings. You can place up different classes of members in your LLC, with some getting preferential distributions of cash or proceeds from asset sales.
2. small Partnership (LP) – You could bring your private investors in as unit owners in a microscopic partnership. LLC’s have replaced LPs in many cases, but there are calm some instances where LPs earn more sense (when liability issues with the general partner advance into play) . Many people have heard of LPs before and there are also publicly traded puny partnerships as well, so there is a general investor awareness. Since they have been veteran 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 immense c-corp – you would bring your investors in as shareholders (or lenders to the company) . You can have different classes of shareholders (popular stock, preferred stock, class A or class B preferred stock) . Private investors would receive their returns in the develop of dividends from distributed profits or when they sell their shares for a bigger amount than their cost basis. Double taxation is an command 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- place up the same as an C-corp in invent, but no double taxation. You can only have one class of stock and you are shrimp in the number of shareholders you may have at 100.
When you match up the deal factors with the investment correct 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 pick succor or facilitate the sale of the investor’s stock to return their capital) – you can query to have a tougher time putting the capital together.
Carefully recognize deal structures and work with first-rate professionals (attorney, CPA, securities lawyer) to state everything up the lawful method. top-notch professionals do reach with some billable hours, but they are worth their weight in gold when they protect you and your investors and effect the deal easier to complete.
This writing is for informational and educational purposes only The contents of this post and of this website do not constitute true or tax advice. Before conducting any transaction, please consult qualified right and tax counsel.