What do I need to do when I have a private lender.

Question

Ned Carey · Answer

The most important thing to do if you have a private lender is:

Pay Them back

The most common arrangement is the lender has a mortgage on the property you are buying. The most important things you need to agree on are:

• Loan amount
• length of loan
• interest rate
• Amortizing or interest only
• Is there a balloon
• Is there a draw schedule and how is it handled

The settlement attorney can draw up the docs (well most can) and will handle the details if you give them this information.

J Scott · Answer

There are two documents you'll need:

1.  Promissory Note:  This lays out the terms of the agreement -- the amount to be borrowed, interest rate, payment schedule, length of loan, etc.  You'll want to hammer out these details with the lender upfront

2.  Trust Deed:  This is also called a mortgage in some states.  This is the document that secures the loan with the property.  It basically says, "If you default on the loan, the lender can foreclose on the property."

Both of these documents can generally be drawn up by the closing attorney (if you're in a closing attorney state), or by a contract or real estate attorney.  In fact, for a basic secured real estate loan, these documents are pretty boilerplate.

Btw, that's your agreement with the lender.  You'll probably want a separate agreement with the other investor/partner...and you'll probably want to make sure your lender understands the relationship.

Sabrina C. · Answer

Hi @Diego Delacruz , now that you are mentioning 401(K), you should definitely look for some more knowledgeable/professional advice. For what I understand after the property gets sold the not taxable money will have to return to the 401(K) account. I have not used this strategy but you can always create another forum with more question on investing someone else 401(k) in a flip, and also get paid your share, and start having an idea of how it works

If the money will be taxable as soon as he(Private Lender) pulls out of his 401(k) then it is his play money, so the contract will do it.

But please do as much research as possible.

Hope that helps.

Sabrina C. · Answer

Hi @Diego Delacruz  that's great that you have a private lender already lined up. Now, you need to put a contract between all parties, where expectations, costs, responsibility, etc will be stated. If something doesn't go according to plan whatever is stated in the contract will be already explained on how it will be resolved. You can use the service of a specialized real estate lawyer, or it can pull out an contract from the internet and altered to cover all necessary areas agreed.

I would highly suggest the use of a lawyer if there is large a large sum of money involved, and account for the lawyer's cost as a planed expense for this project.

Hope that give a bit of light. Good luck!

Dmitriy Fomichenko · Answer

@J  Scott yes, to lend out of the 401k you have to have a self-directed account. (can't do it with conventional 401k).

J Scott · Answer

Keep in mind that this would have to be a self-directed 401k -- I don't imagine there are any traditional 401k providers that would allow funds to be loaned on demand.

Dmitriy Fomichenko · Answer

Many of our clients use their 401k funds to lend money to others.  This is perfectly legal and all profit goes back into 401k account tax-deferred or tax-free.  What you are describing here is not a "withdrawal" from the 401k (in which case the person would incur taxes and penalties), what he is doing simply using his 401k to lend out the money, not him personally.

Diego Delacruz · Answer

Thank you all!!! This forum is awesome. I will keep building my knowledge and do my research. This helps a lot .. Best wishes everyone!

Sabrina C. · Answer

Hi @Diego Delacruz  whatever @J  Scott says listen! He is a pro :)

Diego Delacruz · Answer

thank you very much!! That helps a ton! I'm actually about to head over to his house and talk more about his plans and my plans. So when we go through the process you mentioned, have you ever encountered a private lender that withdrew his or her money from a 401k account?

What do I need to do when I have a private lender.

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