I’ve often been asked by friends if they can be silent partners in my deals. I’ve never accepted for a couple of reasons. One reason is that different people have different exit strategies. I tend to hold long term while other people may want to sell quickly. The longer you hold, the lower your transaction costs, amortized over the holding period. If you have a horizon of under two years, you may not recover your closing costs if values do not go up.
Another reason is that securities laws are complex. A real estate partnership would often be considered to be a security. I am not a securities lawyer. The definition of a security was provided by the U.S. Supreme Court in the 1936 case SEC v. W.J. Howey. The test involves asking whether someone will invest in a common enterprise with an expectation that profit will be earned substantially through the efforts of someone else. That sounds like a real estate partnership to me.
One way to avoid this issue would be to make sure all partners are involved in management. However, management is not something my friends usually want to do.
To make things more complicated, there are state securities laws as well as federal securities laws. The location of the investors, not the property, determines which state laws apply.
Registering an offering of securities with state and federal agencies can be expensive and time-consuming. Offerings are typically structured specifically to comply with one or more exemptions from registrations; e.g., “private placements” to accredited investors.
My understanding is that an accredited investor is one who has a net worth (excluding primary residence) of over $1 million, either alone or with a spouse, or who has an income exceeding $200,000 over each of the last two years ($300,000 with a spouse), along with a reasonable expectation to will earn the same amount during the current year. There is a definition here directly from the SEC: http://www.sec.gov/oiea/investor-alerts-bulletins/ib_privateplacements.html
In summary, before taking on a partner in a real estate deal, contact a securities lawyer.