subject: How to pool private lender funds for real estate [print this page] How to pool private lender funds for real estate
When it comes to working with private lenders, it's possible to jump into pooling them any time of year. Pooling money is different from working with individual private lenders and takes a different approach. In most states, it's legal to pool money after you've filed some paperwork and structured your real estate business properly.
This means doing business differently and it takes a different approach in complying with the SEC. Each state has its own laws and regulations, as does the federal SEC. If you only work with private lenders in your home state and only buy and sell properties in that state, your focus should be on complying with your state SEC. Although this article can't give you detailed information on each and every state, it should help you get a general understanding of what's involved in pooling money from your private lenders.
Pooling money means you'll be mixing together funds from two or more private lenders on the same property, which should allow you to purchase more expensive properties. It makes sense to use a corporation or limited-liability company (LLC) to pool money.
Why do this? In many states you must use a business entity to pool money and to file paperwork allowing you to pool money. Using a business entity to transact business also can give you some protection from business liabilities, allow you to save on your taxes and build your credibility.
There are some steps you'll want to take when you pool money. You'll need to file some paperwork in your state to pool money. You'll need to disclose certain information to your private lenders, telling them about your business, your plans, your background, your company's finances and the risks and rewards of lending money to the company.
Then you'll form a new corporation to manage your other companies and let's call this Corporation 1. Corporation 1 will manage your other corporations. Next, you'll form a new corporation for each property you want to invest in.
You'll offer your private lenders shares in each corporation they lend you money for. This means your private lenders will own shares in these corporations and these shares are equity securities. You should lay out each private lender's rights and responsibilities in the articles of incorporation and the bylaws of the corporation. You may want to limit each private lender to certain areas of decision-making, so you can run the company the way you want to.
You should also make clear in the company's bylaws and offering materials what you are promising to each private lender, especially what their return on investment will be and how and when they will receive this return. This return on investment would probably be a share of the profits in proportion to the amount of money they have lent to the corporation.
The same principles apply when you use an LLC instead of a corporation, except that LLCs use units instead of shares and these units are also securities. Each private lender would be a member, not a shareholder. You need to choose whether to have your members manage your company or just managers. A 'manager-managed' company would allow you to keep more control over how your business runs. Your private lenders would receive their return on investment in proportion to their investment in the LLC.
