BiggerPockets

I would really love if someone could give me a big overview of how the private lending process works. I'm a beginning investor and i see the power of using private funds but i just don't know the proper and legal way of doing this.

now i know about talking to people you know, other investors, and marketing to other high net worth individuals, which all of this i would consider the first step in the process.

the second step i'm guessing some will say is working out the agreement/financial details with the your private lenders once they say they want to invest (which i plan on doing all this in step one, letting them know they're either going to invest as a lender or has a partner and this is what they'll get in either scenario)

but my questions are:

1. when do i have to worry about the SEC?
2. what paperwork will i have to provide to my private lenders for them loaning me money (well loaning the deal money)
3. do i have to file any paperwork with my state in order to use other peoples funds for my deals?
4. when does private placement memorandums come into play

Your investors will most likely want a mortgage on the property OR ownership in the LLC that houses the property. You have to give them something in exchange for their money.

Mortgage on the property is the easiest. Ownership in the LLC will require an operating agreement that will outline the investment.

Depending on how serious you are at approaching investors, you will probably need an attorney to draw this up. Maybe you can have the investor use theirs so they are comfortable.

I wouldn't worry about the SEC unless you are starting to get heavy into national advertisements and solicitations. Start small. Start local. Trust me, if you start reading the SEC rules on this stuff you will quickly find out that most EVERYTHING is against 'policy'.

I agree, attorney fees can add up very very quickly. Spending too much on an initial operating agreement can be a waste as you may never find an investor to use it with OR that investor may want the contract to be re-worked with changes.

My suggestion, and what I've previously done, is basically sit down for a week and do your best to construct your own contract. In my opinion, the operating agreement needs to outline the investment specifics best as possible and cover as many 'bases' as possible.

The agreement should hit these points:

• the members' percentage interests in the LLC
• the members' rights and responsibilities
• the members' voting powers
• how profits and losses will be allocated
• how the LLC will be managed
• rules for holding meetings and taking votes, and
• buyout, or buy-sell, provisions, which determine what happens when a member wants to sell his or her interest, dies, or becomes disabled.

You never know, keeping it simply may help attract more investors than you think. No one ever likes to think that the person that they are working with is more "lawyered up" then they are.

Coming up with something simple may save you a lot of money and give you a good foundation for going to an investor or an attorney to fix the holes.

Hope this helps

Hi Susan, thanks for the link your awesome. Susan i wanted to ask you do you have this same recording but in mp3 or other portable file format.

because i love to download audios like this to my mp3 player and listen to them through out the day.

Hi Susan,Jason &life students,
I sure was happy to find this forum. I am presently looking for private money and felt like I did not totally understand the process. I currently have 2 properties a 10 unit mixed use building and a 6 unit mixed use. I am placing an offer on a 45 unit building. Now in the past I used my own money for the 20% down but I want to keep my liquid money especially today. And after reading books and Teleseminars I come to realize I was actually wrong to use my own money. I will look at the link that Susan posted but when you use Private Lending of any sort what is the typical % rate? And what is the typical length of the term? I need approx $550K for this deal and would like to know all that I can prior to approaching a Private Lender. And Jason I like your concept on the Attorney you are correct keep the agreement simply understood but complete and precise. Thanks to all

Originally posted by Troy Mockridge:
And by the way, if you mainly go out and get private funding through networking and referrals you don't have to worry much about SEC stuff. And, just have your escrow company or attorney draft the mortgage, note, etc. for you. It's way cheaper and easier that way, trust me.

There are several states that REQUIRE you to file with them BEFORE the first private money transaction takes place in their state. No matter the amount, no matter how well you "know" your network. If they aren't family or "very close family friends" registration is required.

Be very careful, there is a lot of really bad information out there relating to registration requirements. Unfortunately, about the only time you will know you did it wrong is when you get served with the papers from one of the regulatory agencies covering this area. At that point, it will turn into a very expensive learning experience.

Originally posted by Jason F:
Keeping it simply may help attract more investors than you think. No one ever likes to think that the person that they are working with is more "lawyered up" then they are.

Coming up with something simple may save you a lot of money and give you a good foundation for going to an investor or an attorney to fix the holes.

It can also cost you dearly if you make a mistake! Not spending the money on proper documentation is a recipe for disaster. I would NEVER recommend anyone not consult with an attorney or use someone's contracts that has done so. You may save $ initially, but it could cost you much more down the road.

As far as what you need, a promissory note and a deed of trust (usually a first) will cover it. Forming LLC's is totally unnecessary for seeking private funds. They loan the money, and have the promisoory note and deed to guarantee their investment, just as a bank does. The only need to form an LLC is if you are creating a partnership in which case, you are not really using private money investors, but a "partner".

Matt asked where do you find PI's. You have to market for them. Word of mouth is a great place to start. Tell everyone you know, that you borrow money secured by RE and pay handsome returns. You can market to people with retirement accounts (IRA, 401k, etc), advertise in publications (be careful on your wording here as you do not want to violate any SEC rules), and you can hold small meetings or even one on one presentations either in your home or for a breakfast/lunch meeting. Social networks such as BP are also alternatives.

As far as %, I pay anywhere from 8%-18% depending on the investment.

Any investment club near or far is an opportunity to find private lending investors. It does not have to be local.