Investor · Plano, TX · Member since 2011 · 84 posts · 45 votes
I'm working through a broker that does all the underwriting/paperwork/recordings/foreclosure (if need be), where I only need to fund the transaction acting as the private lender on the note & deed of trust.
I personally don't want to lend out of my personal name since anyone can do a public search to find out how much $ I have in the bank. I've also been reading that lending from a LLC won't be a bad idea for asset protection (outside liability).
What entity have people been using for private lending, or are there any recommendations?
Are there any other considerations to factor in?
I understand that the interest earned is fully taxable. Is there any way to reduce my tax liability? I'm not a tax guy by any means but would it be advantageous to do private lending from an LLC that owns a rental property?
If you operate your lending as a business, you should lend from an entity. You will then be able to set up a solo 401(k) (talk to your accountant to see if you qualify) and lend from that as well. Similar to lending from your Self Directed IRA, so it's tax deferred or tax free if it's a Roth.
I do know people who lend in their personal name, but none of my attorneys recommend it.
Think about it - if you have to foreclose, you are then on chain of title and your liability exposure is higher than if you were simply the mortgagee.
If you operate your lending as a business, you should lend from an entity. You will then be able to set up a solo 401(k) (talk to your accountant to see if you qualify) and lend from that as well. Similar to lending from your Self Directed IRA, so it's tax deferred or tax free if it's a Roth.
I do know people who lend in their personal name, but none of my attorneys recommend it.
Think about it - if you have to foreclose, you are then on chain of title and your liability exposure is higher than if you were simply the mortgagee.
Another point - if your broker does all the due diligence and underwriting, how do you know it's a good deal for you? His say so?
I have investors for whom I perform the same service, in addition to lending out my own money. They all perform their own due diligence on top of mine. I wouldn't have it any other way, and two sets of eyes are always better than one.
There are lots of things that can go wrong - so trust, but verify.
Since I'm just starting off, I'll most likely won't mess with my retirement account but will eventually explore that as an option once I start lending from an entity.
Good point. Didn't think about the chain of title. I was most likely going to lend out of an LLC (for outside liability), but this is also another good reason.
The broker that I work with provides a list of properties with the loan amount and the appraised ARV. I just choose the from the list of the properties the one I would want to lend on. I do my own research of the properties evaulating them as if I were planning to put an offer on them (neighborhood, crime, rent comps, sales comps, etc.). I wouldn't lend on anything I wouldn't mind owning.
However, I don't get any insight (or at least haven't asked) to the actual borrower's financials or loan app docs. It would give me piece of mind if I saw all that information, but I figure that's the broker's job and are doing their job. Am I too naive to think that, and do I have the rights to request the borrow's loan app docs?
I'm interested to know how other hard money brokers work with investors and if this process is similar theirs.
I have been a private money lender for 23 years now, in fact I am almost done writing a book on it. Be Very careful, you can make a great income but you can also get slaughtered. I would not trust a broker, no offence to any of them. But they are probably getting a fee at closing. Yes you should do it in a SPE as well if its a business as apposed an investment you can write off normal business expenses. Again, the way to make money in private lending is not to trust, but to verify everything yourself and know the deal and market inside and out.
Care to share any stories or examples from your experience?
I'm pretty sure they're making money on closing. But is there a problem with that? At least in the arrangements that I've heard the monthly interest that the borrower pays goes directly to the lender, and nothing to the broker. I'm okay if the broker makes their piece of the pie on the origination side. Are there any other alternatives?
SPE stands for?
What other options do you suggest if not going through a broker, originate the loans yourself?
I would recommend and LLC. If you do get the property back at least you don't have personal exposer. The bigger question fornme is who services the loan, that if the borrower does not pay, who habdels the foreclosure, what about making repairs to the property and resoling it. Are you left on your own or do they take care of it. Also is there a financial indenture for them to take care of it. I have worked with what I call financial investors like for almost 10 years now. It is important to know who you are working with.
However, I don't get any insight (or at least haven't asked) to the actual borrower's financials or loan app docs. It would give me piece of mind if I saw all that information, but I figure that's the broker's job and are doing their job. Am I too naive to think that, and do I have the rights to request the borrow's loan app docs?
If you are not getting financial information, I would not assume that the broker is obtaining that. Especially if the broker handles hard money only.
True hard money - by definition - is asset based lending only. Recently hard money lenders have been requiring financial information from the borrower, but that's an individual requirement, and most certainly is not universally the case.
First, ask the broker what personal financials he obtains from the borrower and second, tell him you want to see that information during your due diligence. Don't assume he's "doing his job" since he may not consider that to be part of his job if these are hard money loans.
Another point to consider is that states have been changing their laws regarding hard money lending. I'd suggest calling your state's financial institution governing body to confirm usury laws, etc.