How do I combine 3-5 investors money’s with mine to purchase real estate.

I am a lic Ca RE Broker and I am attempting to start and LLC and combine at a minimum mine and 3 other clients money’s in order to purchase real estate. Is this legal? What are the restrictions? Thank you

Asked on June 26, 2009 under Real Estate Law, California


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

Completely legal. Easiest thing to do is to form an LLC and have each person contribute their money as their buy-in of equity or ownership interest in the LLC--i.e. if you each put in $250k, say, you'd each own 1/4 of the LLC; or if one person put in $750k and the other 3 put in $250k ea., the big investor would own 1/2, the others 1/6 each.

Alternately, everyone could put some of the money they have to invest as equity, then loan the rest; the tax consquences are different, so you'd want good tax advice.

If you contemplate adding additional investors over time, you probably want to go with a different structure, such as a limited partnership or a corporation (including an S-corp possibly) where it's easier to add after-the-fact owners as well (while keeping control in the hands of those who formed it).

But the short answer is, it is completely legal and very normal to form a company, including using an LLC structure, for the purpose of real estate investment. Since you want the structure that will best support what you envision doing going forward--whether it's keeping it fully in the hands of the original investors, or opening it up to other investors--and also meets your tax needs, you should consult with an attorney experienced in setting up businesses and with someone, whether an accountant or a tax attorney, who understands the tax consequences. It's worth the investment of a few thousand dollars up front to set things up correctly.

Don't forget that you also need to plan for: (1) who controls the entity and how are decisions made; (2) what happens if a partner disagrees with business decisions or wants out--are there buy out provisions; (3) when, how, and who decides how partners are paid (including salaries) or otherwise take money out; and (4) any other restrictions on the business--can it invest in any type or real estate or only, for example, commercial? Can it hire partners (such as yourself) to perform services, or is that a conflict? Etc. The more you think about these issues up front, the better it'll go.

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