Private Money Blueprint Coaching Program Module 6 – Using IRA Money and Pooling Funds
Communicate With Us • Susan – susan@theinvestorinsights.com • Trevor – trevor@thereibrain.com • Patrick – patrick@mustknowinvesting.com
My Background • Started investing in real estate in 1994 • Started in mortgage business in 1999 • Opened my own brokerage in 2002 • Began raising private money in 2004 – First one to one, fractionalized then private mortgage pool to make rehab loans in CO – Funded more than $24MM in rehab loans in 4 years with private money all raised by me and one loan officer • Closed residential divisions of Lassiter Mortgage in September 2008 including the private lending division • Coaching, commercial consulting/financing, speaking and REI training. • http://www.TheInvestorInsights.com
Our Agenda • Pooling Money from Private Lenders • Pooling Vehicles • Using IRA Money for Your Investments • Self-Directed IRA’s (SDIRA) • Working With SDIRA Lenders
Pooling Money • BE CAREFUL! • Employ an attorney or professional advisory service • Three Best Ways to Pool – Fractionalized Note – Syndication – Private Placement Memorandum (SEC Exempt Filing)
Fractionalized Note • 10 or fewer investors in a trust deed investment • Check your local statutes • In CA, governed by statute Section 10229 of the Business and Professions Code. • Each investor receives certified copies of the original promissory note and deed of trust along with copies of the title insurance policy and fire insurance endorsement. • A Fractional Interest Note and Deed of Trust is held as an undivided interest with the investors named on the Note, Trust Deed and Title Insurance Policy. • No more than 10 persons who meet the criteria of income or net worth may be fractionalized in a transaction. • Qualifying questions are either: – My investment in the transaction does not exceed 10% of my net worth, exclusive of home, furnishings and automobiles, or – My investment in the transaction does not exceed 10% of my adjusted gross income for federal income tax purposes for my last tax year, or in the alternative, as estimated for the current year. • Regardless of the investment amount, the purchasers (investors) shall have identical rights to: – Lien Position – Foreclosure – Interest Rate (prorated) • Sample Fractional Deed of Trust in Resources Section
Syndicate • Syndicate! The REI buzzword of 2009. • Equity partner – gets a piece of your deal. • You and your equity partners form an LLC. • You are the manager (syndicator) and they are the members. • Make sure you spell out clearly in the operating agreement how distributions and disputes are handled. • You may get an “acquisition fee” and/or a management fee • This is how the commercial deals get done. • One of my clients raised $2MM from 9 equity partners to purchase 156 units in Kentucky
Private Placements - PPM • "Regulation D" is a United States Federal program created under the Securities Act of 1933, indoctrinated in 1982, that allows companies the ability to raise capital through the sale of equity or debt securities. • There are 3 basic "Rules" which are relied upon to raise capital. These rules allow for different amounts of capital, different types of investors and different methods for conducting an offering: 504 (up to $1 million), 505 (up to $5 million) 506 (ANY AMOUNT) • The Reg D programs were designed to provide an exemption to sell securities privately without registering the securities and also to provide the appropriate documentation for properly accepting and using the capital. • Online Resources: RegDResources.com, GrowThink.com, PPMFast.com
Types of Reg D Offerings • There are 2 basic types of Regulation D Offerings (which can also be combined) • An " equity " offering is where the company sells partial (or a majority) ownership in the company (via a security, stock or LLC membership units) to raise capital. The investors receive a return when the company profits and those profits are shared. • A " debt " offering is where the company raises debt financing by selling a promissory note to investors with a set annual rate of return, and a maturity date for when funds will be paid back to investors. A debt offering is much like a business loan, but instead of a bank providing the financing, a group of investors lends funds to the company.
Reg D Offering – Step 1 • Pre-Offering Stuff: Most real estate investors are not professional money raisers. Your credibility is key and a Reg D offering communicates professionalism. • The very first step in an offering is properly setting the structure • Structuring usually includes: – setting share price or note amounts – determining how many “units” or “shares” to sell – which Reg D program to use – setting the maturity date and rate of return for promissory notes (in debt situations) – share allocations to principals (so they maintain a set amount of control in the company) – minimum and maximum offering amounts which set the effective range of the offering, minimum amount of investment per investor, etc.
Reg D Investing – Step 2 • Document Creation: Preparing an offering involves the creation of the following Regulation D offering documents: – Private Placement Memorandum : The Private Placement Memorandum, or "PPM", is the document that discloses all required information to the investors about the company, proposed operations, the transaction structure, the terms of the investment (share price, note amounts, maturity dates, etc.), risks involved, etc. – Investor Questionnaire: This is completed to determine if they are an accredited or unaccredited investor, how much they plan to invest and where it is coming from. – Subscription Agreement : The Subscription Agreement explains the terms and conditions of the offering. It is the "investment contract" for purchasing the securities. Typically an investor will complete this document. and then attach a check for the investment. Promissory Note : In debt offerings you need to have a Promissory Note outlining the terms of the loan arrangement with the investors. The note is the actual "loan document" between the company and the investor. Form D SEC Filing : The Form D is the form filing that is sent to the SEC in Washington, DC. It notifies the SEC that you are using the Regulation D program and provides them basic information on the company and the offering. This is not an approval document or registration, it just notifies the SEC that you have a Regulation D Offering in place. State Form Filing : Most states require a specific form to be filed along with a copy of the SEC Form D and the PPM. Nearly all states charge a fee ranging from $50 to $495. In most states the form does not need to be filed until capital has been received from an investor in that state. After receiving the capital you typically have 15 days to file the appropriate documentation.
Reg D Offering – Step 3 • Marketing – Be Careful! • A fundamental requirement of Regulation D is that there be no general solicitation or advertisement used in connection with the solicitation of an investment. • NO ONE will give you a straight answer to “what is a general solicitation?” • You may not provide offering materials on a website, unless the offering materials are only provided to prospective investors who have a pre-existing substantive relationship with the issuer • Issuers establishing websites are advised to keep nominal information on the home page of a website, indicating the name of the issuer and requesting the viewer to provide their name and password to access additional information on any interior page. • The interior pages of the site are only available to prospective investors that complete a questionnaire establishing that they are "accredited investors."
Accredited or Sophisticated • In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following: – Earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income. – Have a net worth exceeding $1 million, either individually or jointly with his or her spouse. • A sophisticated investor is the type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity. – Typically, a sophisticated investor must have either a net worth of $2.5 million or have earned more than $250,000 in the past two years to qualify.
Plan Assets Rule • Plan Assets Rule • The rule is that if more than 25% of the fund is funded with pension plans (i.e. 401(k) and Profits Sharing), IRAs, Keoghs, SEPs, etc., the fund's assets will be treated as "plan assets" themselves. • Our attorney said that was bad. ☺ • We chose to limit our plan assets to 15% to be on the safe side since we had a dividend reinvestment option.
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