If this deal is financed by a lender, they will want to know the source of your down payment and closing costs. Fannie Mae, Freddie Mac and most commercial loan providers (with the exception of certain bridge loan providers) don’t allow subordinate debt. They will likely require that the investors become members of your buying entity.

Regardless of whether you offer investors a share of profits or fixed returns, it is still a common enterprise (everyone pooling money to acquire a single property) and if they are passively investing and relying on you to generate their profit. What you are offering will likely be considered an “investment contract” (which is a security), so you still have to comply with securities laws.

A former SEC commissioner once said that when someone asks whether something is a security, the SEC finds in 95% of the cases that the answer is “yes.”


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