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

Answers:

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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