By raising capital to invest in multiple real estate structures, we have analyzed the structures' advantages and disadvantages and the optimal investing method. The following information will increase your knowledge of investing, but legal advice is best attained from our attorneys.
A private debt instrument is the simplest method of increasing capital. It is like a personal loan between two people where the collateral can be any item as long as there is mutual agreement. Many lenders prefer collateral to be an item of stature like hard assets (assets that are valuable and physical). Private debt instruments are convenient for temporary investments; however, other suitable options have greater advantages.
For example, a hotel owner finds an investment opportunity: a duplex for sale. A lender will provide the money to buy the property at an interest rate of 6%. The hotel owner will renovate the duplex and sell it for an 18% annual rate of return. There is a yearly difference of 12% between the gross profit and loan interest. Therefore, there is a net profit of 12% annually due to the raising capital as debt. This method is called arbitrage, where an item is bought and sold for a slightly higher price, so profit is derived from slight price differences.
In a joint venture partnership, two or more businesses collaborate on a project with some
degree of decision-making authority. This is the ideal corporate structure when dealing with
investors that desire an active position in company decisions.
This investment structure involves multiple investors combining funds to make greater investments in a venture than they may have made separately. The syndicate is usually an LLC with general partners, the partners that oversee the operation, and limited partners, the passive investors. Because of the multiple passive investors, syndications are regarded as securities that have to follow rigid guidelines set by the United States Securities and Exchange Commission (SEC). Securities across multiple states will have to follow each state's laws also. To avoid legal challenges, a distinguished attorney should give counsel about the specifics of securities.
To determine if an investment method is a security, the four components of the Howey test are used:
1. Money has been invested
2. Profit is expected
3. Money is invested as a common enterprise, where investor gains rely on the labor of those offering the investment opportunity
4. Profit is derived only from the promoter s labor, so the investors are passive
Securities are required to register with the SEC, but some exemptions exist. Exploiting the exemptions in Regulation D will relieve the registration costs and reporting requirements.
The most common are 506(b) and 506(c).
For 506(b) exemption, the security can be any amount with an unlimited number of selfverified accredited investors and up to 35 non-accredited investors. The offering cannot be advertised and shown only to investors with a substantive pre-existing relationship. Information the issuer chooses to provide to accredited investors must be the same for nonaccredited investors, but the issuer should be available to answer questions from potential investors. The security will not have to register with the SEC but must file Form D.
The 506(b) exemption requires potential investors to have a "pre-existing relationship." The SEC wants the issuer to understand the investor's financial situation and maintain records that the relationship was present at least 30 days before the offering. The investor should also research the issuing firm. One suggested plan to follow these guidelines is as follows.
First, the issuer publicly advertises the investment company without providing any information about the specific offering. The investor gives the issuer their contact information and informs whether they have accredited status. Then, the two parties will have a thirty-minute or longer meeting to discuss the investor's investing background. Throughout these steps, the issuer should refrain from mentioning the specific offering. It should only be discussed 30 days after the investor first provides their contact information. Finally, the investor will self-verify accredited status by checking a box while signing legal documents for the offering.
For 506(c) exemption, the security can be any amount with any number of accredited investors but no non-accredited investors. Third-party verification of accredited status is strongly suggested. The issuer can advertise the offering in any manner to any potential investor. The issuer chooses what information is provided to accredited investors, but the issuer should be available to answer questions from potential investors. The security will not have to register with the SEC but must file Form D.
This exemption allows public advertising, which provides an efficient and straightforward investment process. One suggested plan is as follows. First, an investor sees an advertisement from an issuer for an offering and self-verify accredited status to see offering documents. The investor will send the legal documents and a third-party accredited status verification letter to the issuer, who will review it. Once the issuer has accepted it, the investor will contribute their funds to the offering.
At Avant Plus Capital, we suggest taking advantage of the 506(c) exemption. In our business dealings, we are able to advertise any offerings publicly. Additionally, online services, like Verify Investor and FundAmerica, provide third-party verification in less than five minutes. The verification process has also increased in popularity, so most investors have the required documents ready to be submitted from previous offerings. Our website is incorporated with an online portal with various services like recording an investor's actions and notifying investors about post-investment communications. The portal facilitates the investment process for our plethora of investors and expedites our administrative duties.
The main disadvantage of capitalizing on the 506(c) exemption is the lack of non-accredited investors, increasing the difficulty for beginner syndicators. However, non-accredited investors typically make the smallest investments, create the greatest problems, and contribute far more significant investments in your product than they need to from a portfolio allocation perspective. Accredited investors are also able to recover from any loss on the principal investment.
For those who want to provide opportunities for non-accredited investors, Regulation CF and Regulation A+ are worthwhile exemptions to review. Make sure to consult an attorney or other real estate professionals about which exemption is best for your circumstances.
Once you are confident you can raise capital from investors, you should form a legal structure with the government. You should consider mobilizing your investor network if you are not attracting dependable investors.
The optimum business structure will not hold you personally liable for the actions of your real estate syndicate. The entity that governs the investment vehicles for which you acquire funds should be duly established and maintained. The limited liability company (LLC) is the most flexible structure, but other options may require less effort. To find the best business entity based on individual circumstances, consult with Avant Plus Capital. We can help you choose which filing entity and state has the most advantages and even file for you. It is possible to create an entity yourself, but proper knowledge is needed to do it accurately. Frequently, legal processes have determined various improperly constituted companies to be null.
Delaware and Wyoming are currently the most beneficial filing states for limited liability companies. The table below shows how both compare. A Series LLC is a business structure that maintains multiple entities under one single LLC to reduce personal liabilities. Keep in mind that state laws are consistently amended, so consult with Avant Plus Capital to receive the most recent news on entities and states.
|Protection from Personal
|Yes, by significantly
reducing fiduciary duties
|Yes, by significantly
reducing fiduciary duties
|More expensive due to
the multiple state taxes
|Less expensive due to no
income or franchise tax
|Allows Series LLCs
|Yes, provides a very
protective Series LLC
|Yes, but a single-member
LLC has better protections
than a Series LLC in
Overview of the company model
Waterfall: the precise manner in which the LLC's members are compensated
Process of making or withholding distributions
Depreciation Tax Write-off: operating income from real estate investments is tax deferred until the end of the holding period due to depreciation. Appropriately allocating depreciation among investors can maximize your tax savings.
Rules on additional capital from investors
Shares transfer guidelines
Liquidation process of assets
A Private Placement Memorandum (PPM) is a document that describes the content and risks of the investment in intricate detail, and it can include the Operating Agreement. However, hiring an attorney to create one can cost around 25,000 dollars which is not ideal for beginners in this industry. It is acceptable to have an Operating Agreement if the investors are close friends or family or if the total investment is more than 500,000 dollars. There is a greater chance for legal troubles when either increase, in which case a PPM should be drafted. Double-check with an attorney to confirm according to your circumstances.
1. 3012 Texoma Parkway, Sherman, TX 75090
2. 600 Rowlett Rd, Garland, TX 75043
3. 1200 Westpark Way, Euless, TX 76040
Avant Plus Capital has valuable experience in this field of investment. Please review our
portfolio to see our past projects.
Avant Plus Capital is one of many businesses under Avant Group of Companies. We provide specialty services for taxes, insurance, and investments.
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