How To Legally Pool Money With Friends To Invest In Real Estate | Ep 74

James: What if you and a few trusted friends could pool your money together to buy real estate in a way that is both ethical, legal, and in tax your friendships? Well, today on the Furlo Capital Real Estate Podcast, that's the intricacy that we're gonna be diving into as we try to equip people to invest wisely in both properties and people.

Even if it's in a group. And we're trying to do that because I don't know, because we want to build wealth. I'm totally off. Because, because we wanna build wealth and improve housing. And that's what we're all about. Wow. That's what

Jessi: we're all about.

James: I got totally off track.

Jessi: I, you know, I was thinking in my brain I've been kind of wrestling with, I'm, okay, here's the backstory.

I'm meeting with a group of like, you know, 20 something year olds and the premise of our conversation is explaining hard topics to like children, you know, putting it in terms that a five to 7-year-old could understand, and we're talking about like spiritual things. But this made me think like, okay, what if you had to give your intro and this was like a kid's podcast?

Yeah, yeah, yeah. About real estate.

James: Yeah. So today we are talking about real estate and investing smartly so that you help people while at the same time getting money for doing that help.

Jessi: Right.

James: And sometimes it's fun to do it. As a team. Oh yeah. As a group of people.

Jessi: It's way more fun to, to do things with friends.

James: Yeah. Yeah. So that's what I'm, that's what I'm talking about.

Jessi: I mean, that's what it makes me think of. You said pool money and I was like pool party.

James: Pool party. Yeah, a hundred percent. Yeah. And that's because I've had this situation arise a few times, so this is 100% selfish. I have, I have people who will come to me and say like, Hey, I would love to invest with you.

I'm like, sweet minimum's, like $50,000. And they go, oh, okay. And it's 'cause they've got somewhere between like five and 10,000. Right. So this podcast episode is all about find four other friends who also have $10,000 and then bring it together. Yeah. So that you can invest as a group. You gotta be careful.

Mm-hmm. There's some red flags. You can't

Jessi: just throw it into a pot and call it good. Yeah. It turns

James: out, but it's not as crazy hard as you think it is. All right. So there is this thing, it's called a fund of funds. A

Jessi: fund of Of funds,

James: yes. Yeah, exactly. So the idea is it's you create this investment fund. Okay.

A pot of money like you were talking about. Yeah. That is. Multiple people's bringing together funds. Let's see here. You pull your money together into a singular thing. Mm-hmm. And then that singular thing goes off and does the investment.

Jessi: Mm-hmm. So yeah, that's kinda the idea. Which makes sense, because otherwise then it would be the individuals putting their money.

Correct. You have to have to turn it into, but

James: sometimes you get sponsors like me where I'm like, dude, I don't wanna deal with five small people. I just kind want like one big one. Sure. And there's a way of getting around that. Now, oftentimes in the official, like. In the big boy investment space, what they'll do is they'll bring together like 10 people who all have a hundred thousand dollars each.

Yeah. You know, something like that. And then they'll say like, and then they'll go to a sponsor like, Hey, what if we drop a million dollars into this deal? Can we get some, some better rates and stuff like that. Yeah. And so, but that's not, we're talking about We're like this more Yeah. But more beginner because you need to be careful if you don't, if you.

Because you're technically selling shares. Mm-hmm. This now goes into the security laws area.

Jessi: Mm.

James: And so so you gotta be careful. So what you wanna do. Here's how you do it. You create a club, a real estate investment club. Okay. And, and, and maybe you have like, you have three main goals. The, the first one is, Hey, we're gonna learn about investing together.

Mm-hmm. It's kind of education base. You also are going to like, do market analysis and, and underwrite deals and look at deals. Alright? And you're going to invest. Do you have to do

Jessi: those other things?

James: No, but my recommendation is if you're, like, if you're in that position where you're like, I would love to get into this, but I don't have the funds, it's like, ah, spend the time doing the education.

Especially since you are doing it as a group. Yeah. Well, it could be bad. Yeah. I mean, you'd wanna know, like, this looks

Jessi: great, let's go. You wanna know what you're getting invested in if Yeah. With other people or.

James: Yeah. Now my parents growing up were part of a stock investment club. Mm. And it was very similar idea.

It was a group of people every, it was like every single week or month or something like, we'll say a month. I don't know. They all contributed some amount of money. Mm-hmm. I have no idea what it was. Let's call it 20 bucks. Sure. But maybe there was like 10 people in the group and that was part of the hey, to be part of this club.

And I think they were like in a, a nonprofit or, or maybe not, but it was like they had a checking account. I know that. And it was, everyone always puts in money and then they would. Analyze stocks and say, Hey, this is the one. And then as a group they would go, they'd say, Hey, let's allocate, you know, whatever, a thousand dollars to go buy this.

Hmm. That's the kind of thing where people do that all, all over the place. And again, it's a great education type of venue and in the stock world. 'cause everything is kind of. Private already. You can kind of fly under the radar in terms of like selling securities and stuff. Like it's, it seems to be fine.

So it doesn't

Jessi: really matter if it's multiple people's money or if it's just your money. No. 'cause

James: you're invested in the stock market, so it's all publicly traded anyways. Oh. Which really cares. But in real estate, that's different. Yes. Real estate is different. You are potentially creating like a partnership or an LLC or or a.

What, what's the word I'm looking for? Or our security. Okay, so here's the thing. Hmm. Here's the thing that makes it like, you gotta look out for, like, don't do this if there's even one person, okay? So let's say it's, it's you and four other friends, right? Mm-hmm. If there's one of you who's making investment decisions on behalf of the others, that's bad.

So like, let's say I'm like, Hey, I wanna do this fund and this other deal. Gimme your money, and like you'll just make all the all the decisions. Yeah. I'll just decide that's a no go. Or if it's one person who's handling all the pooled money, give it to me. I'll put it into my account. I'll make sure that it goes out.

And no one else has access to this. So one of the investors

Jessi: can't have control over the investment money, but the sponsor can.

James: Yeah. Sponsors. Totally. Well, so we'll talk about that. That's,

Jessi: that's a little weird. So that's,

James: so that's the thing, right? Like in a syndication? Yes. You have a sponsor and you have passive investors.

Jessi: Mm-hmm.

James: But you can also do that like not officially, like it can be unofficially where, 'cause the sponsor is the person who like I'm managing everything. I'm doing everything. Mm-hmm. And passive people like, don't they just provide the funds and they walk away? Right. You can unofficially do that as well where you have one person who's like really into it, Hey, I'd like to do this.

And you get some friends who go, yeah man, I support your dream. Lemme help you out. But they're effectively passive. That's a red flag where if like an SEC securities person would look at that, they go, oh, you're effectively operating as if this was a fund to fund syndications, not an actual club.

Jessi: Hmm.

So that's a little nuanced if you ask me.

James: I think it's a, but it's, that is the differentiator, like that's the critical piece. How

Jessi: do you even do that as a group of friends, like. Wouldn't you want some there to be? Oh, I'm so glad you asked a designated person that you're like, you are the one who is collecting all the things and talking to the sponsor, and then you disseminate information to us.

James: This is so amazing. I'm glad you asked that. No, you don't. Here's how to structure it in such a way where you don't get into legal, go to jail problems. Okay, so first you want to make sure that you invest together so you could form an LLC form, an official like. An actual like company type of thing. And it's pretty easy to set up an LLC and you wanna have some sort of written operating agreement saying, Hey, this is what we're doing, this is the purpose.

And what you wanna do is you wanna make sure everyone is actively involved with defined roles. Hmm. So you might have a treasure, you might have a secretary, you might have a research person, you might have someone who does the taxes. You might have someone who writes the email update to the group. Mm-hmm.

But effectively, you're, you want to demonstrate no, everyone is active there. There's no one here who, so you can just gave your money and said. Go for, you can do different jobs, but you have to have a jobs. Yes. And ideally everyone has access to the bank account. Mm-hmm. And if you decide to do something, everyone votes and has a say and says, interesting.

Yes. We're doing that. Yeah. And should be said like, it's probably smart to work with a, a real estate attorney or tax professional set up all the, to make sure that up right.

Jessi: Yeah.

James: Typically to do a syndication, it's like it's thousands of dollars to do. Mm-hmm. This shouldn't be that. This should be a lot less.

'cause you're just essentially forming a partnership. In the form of an LLC. So it's not interesting. Still could be a thousand bucks, but it's not nearly as much. Again, some of the benefits behind this is just lower berry venture, right? Mm-hmm. Like you can, you can get in for a lot less. And the nice part about it is you got this group of people who you're like, Hey, we're learning.

We're supporting. We're, we're trying to get better at this, and it,

Jessi: if you create,

James: gives you access to bigger deals. If

Jessi: you create that LLC and you, you have this core group of people and the new people want to join, is that a thing? Mm. Could potentially cause a problem as well? Oh

James: yeah.

Jessi: So you, so once you create your pool, that's it.

Like people can't go in and out. It,

James: it can happen. It just, it that becomes, it just becomes a lot harder because now you have like, well, what shares what and who's sharing and what are the va, what's the value of the property? You can do it. It's now, but now you're gonna hire someone else to help.

Interesting. Manage the structure and the costs start to go up a lot,

Jessi: huh?

James: My recommendation would be get a group of people who you go, Hey, let's invest in this deal together. Mm-hmm. That's an LLC. It's what it is. We all have to find roles. Awesome. If later on you're like, Hey, let's do it again. I'm like, make a new one.

Take that LLC paperwork. Copy it, change the names of stuff and whatever. Interesting. And just reuse it and create a separate entity.

Jessi: Kind of like a hassle, but,

James: well, I also get it. Yeah. And I mean, and if that, once that group is done, like once that investment's done mm-hmm. They can rinse and repeat if you wanted to.

Jessi: So I have a, like a backup question. Why is there a minimum investment in the first place for sponsors? You know, which creates this issue of like, if you don't have enough, then you have to pool with other people.

James: Yeah.

Jessi: You know why, why don't sponsors just allow someone to give 10,000 or 5,000 or a million?

'cause there

James: is a limit to the number of non-accredited investors you can have. Mm-hmm. In a deal before you have to actually register with the SEC and that costs a lot of money.

Jessi: Oh, so it's not worth it. Yeah. Financially it's like, oh,

James: let's see if I can remember the numbers off the top of my head. It's something like 20 total.

As a sponsor. Interesting. Like if you're raising $2 million right? You go Yeah. Minimum's a hundred thousand dollars.

Jessi: Right. 'cause you can't have a more than that.

James: You can technically, you can have an unlimited number of accredited investors, but they're not doing this. Yeah. They're, I would imagine. You could have maybe a fund of accredited investors and now you're an accredited fund, and then you can go off and do whatever.

But again, none of those people are gonna have like small numbers. Right, right. It's once you're accredited, you've

Jessi: hit Yeah. A level which the

James: whole accredited unaccredited is dumb. It's like, it doesn't, it's, well, it's defined. You're accredited if you're considered a sophisticated investor, but it's, but your sophistication is defined by your net worth or how much income you make, not your knowledge.

Jessi: Interesting.

James: Yeah. Which I think is, I mean, part of it say, Hey, I have enough money, you can risk it. That's kind of a Sure, yeah, yeah. Or you're smart enough to not gonna cost a problem, aggregate that much money so we can trust you. It's a weird Hmm. It's weird. All right. So what, there's one thing that is complicated, or at least worth talking about, is when, like, you're paying your taxes mm-hmm.

And stuff like that. I think, yeah, we wanna be in an LLC, but you're gonna have. A K one, which is kind of like the official, I'm a, I'm a member of this thing. Mm-hmm. And so you're gonna pay that out. And you just want to keep track of like capital contributions, like who put in how much. Sure. They don't technically have to be, even if you don't want 'em to be like, maybe I've got 20,000, someone else has 10, another person has 10.

Then maybe, I don't know, we'll just say, make my life easy. One more that has 10. Mm-hmm. Like, cool. I can do two fifths. One fifth, one fifth, one with, you know, 40%, 20. 2020. Like, that's totally viable. As long as everyone has a role and they're all making decisions. Right. Interesting. And then the other thing that's really important is just tracking all of your expenses.

Mm-hmm. Throughout all this. So, you know, we fire up a cookbooks thing, which in theory should be super easy. It's like money came in. That was it. And then eventually you get paid out and you check that.

Jessi: Yeah, you shouldn't necessarily have a bunch of expenses, I guess.

James: Yeah. So now a question that I think people get would be, okay, gotta do tax stuff, can I do it myself?

So I actually got two scenarios of two types of things that you can invest in. So the first one, scenario one, your investment club. It forms an LLC, right? And it lends money to a sponsor for like a rehab. Mm-hmm.

Jessi: So,

James: We're doing a flip and we're saying, Hey we're looking for $50,000 loans. Mm-hmm. You go, yeah, cool.

So let's do that. So it's paying you interest, right? Mm-hmm. That's actually relatively straightforward from a tax perspective. Tax perspective because your LLC, it earns interest income and then that just gets split via the K one to its members. Mm-hmm. And there's actually like tax software, like TurboTax and whatever, like.

They don't handle that pretty, pretty well. It's pretty straightforward. And you

Jessi: just get taxed on the whatever profit you make, Uhhuh. Mm-hmm.

James: Yeah. Yeah, exactly. And it's just interest income. Mm-hmm. And so so all you do is you track your contributions and the interest payment, like I said, maintain good books and you can file this very specific form.

And it seems straightforward, K one so very easy to do. Mm-hmm. That actually be my recommendation. It's also nice 'cause it's kind of. You're, you're backed on the amount of interest you're getting. That would be my like, yeah, let's start there.

Jessi: Hmm.

James: Scenario two is a little bit more complicated. So same thing, the LLC becomes a limited partner in a syndication.

Mm-hmm. So just like any other investor like we were talking about. Right. Yeah. And, and so now these things get tricky. So the syndication issues, a K one to the club.

Jessi: Mm-hmm. '

James: cause now it's not just interest income, now it's ownership income. And so now your LLC must issue K ones to your members, and the K ones are not just interest income anymore.

Now there's depreciation, there's rental income. Oh, there's other components to it. And so now your syndication needs to file all the proper forms, but it's just built off this more complicated thing. Mm-hmm. And so that's the one where it's like. If you know what you're doing, you can do it, but the recommendation is like, no, you should hire a pro to help you out for that one.

Now the good news is it's not gonna cost thousands of dollars, but it might be like a grand,

Jessi: and it's not as straightforward as like the, you know, the sponsor, the syndication gives you your payout and you just, you can't just divide that like you did with the other one, which like you did correct. Two fifths.

You get that much, you did. One fifth, one fifth, one fifth.

James: It's, I know that was kind of my like, it feels like it should be that straightforward. Yeah. And apparently it's not. It's a little bit more complicated than that because again, you're not just getting like a straight single number. You're also getting Right.

There's other factors, but it

Jessi: seems like you'd be able to like. Factor all that in, and then be like, and there's your portion. But yeah, part of the issue

James: is tricky. Like there's a software Divine designed to help with that. Yeah. So like, if you're comfortable with spreadsheets right. And filling stuff out, you're like, you can figure all that out, but, but you don't get a lot of help out.

Jessi: It's not the normal way to Yeah. Do math,

James: which again, that, that could be someone's role. It's like, I'm gonna learn accounting. I mean,

Jessi: that kind of makes sense because typically you would have a single investor. Who's, and, and the sponsor is like, that's where things pool together, right? You don't have a mini pool jumping in the big pool.

Yeah. Which that's what you're talking about here, so,

James: yeah. Yeah. Yeah. It's a weird, yeah, it's kind of a no, a hundred percent

Jessi: a pool, a pool party. In the pool party. In

James: theory, you could like, you could really get this thing complicated where like maybe you've got your group of friends, you're just getting started.

You create a fund to join a fund of funds with then joins on a massive syndication. Like you could really, you could nest all this thing

Jessi: so meta,

James: but yeah. But again, but it's just that idea of, so here's like. Big picture idea, right? Let's say you want to invest with me or another syndication. Mm-hmm. You don't quite have enough money.

Maybe you have some trusted friends and you can go, you know what, let's form a club. Let's form a group this LLC, and we're all gonna go in it together. The goal is to learn what we're doing.

Jessi: Mm-hmm.

James: So that as our income goes up, we'll just be smarter investors as we as we're going. And I think if you do that, that's a really good way to get started and to get involved.

It opens up access to bigger deals, like things that I'm doing that like. You just, you can't always get access to if you don't. Hmm. And and again, there's the trick is make sure everyone is actively involved mm-hmm. Documented and in actual. Yeah. And if you do that now you're all active investors. You don't have passive investors.

Mm-hmm. Because it's when you have that, that manager doing things right, that's where all of a sudden securities are like, whoa, what's happening here? It's more like a joint venture type of Yeah. More partnership

Jessi: kinda makes sense because then you, you've got people who. Know what they're getting into and they're bought in and if they're aware it's not, there's less opportunity to be, have people taken advantage of, so, correct.

Yeah, yeah, yeah. If you're just like, I don't, I didn't know, like I gave my money and then. It took. Yeah.

James: Yeah, a hundred percent. So there you go. That is how to pull your funds together with your friends. Yay. So if you liked, if you are, if you are considering that, we would love to talk to you and help you invest in something with your group of friends so you can learn more about investing with us at furlo.com.

And so with that, thanks for listening. Have a great day.