Private Money - Necessary Paperwork? How to Present it?

Question

Hello Everyone!

When presenting the idea to family & friends about them lending their money to you to invest into real estate how do you do it?

Do you have a pre-drafted contract that shows what guaranteed money they will get?

What does the paperwork look like? I am interested in seeing an example if anyone has one.

I understand that the variety of opportunities will determine if they want part ownership or a simple fixed rate of return, but I don't know how to present the options to them.

As you all know a lot about real estate is proving your credibility and making other people comfortable and confident in your ability so I am trying to figure out the best way to do that...

Thoughts?

Thanks for all the feedback! I seriously love this community. Being able to talk openly about these types of topics is so useful.

Alex

Jeff Copeland · Answer

Wisconsin being a lien-theory state, for a private mortgage, you would typically have 1)  a mortgage, and 2) a promissory note.

For the most part, these will look like any other mortgage documents. Except instead of saying "Bank of America", they would say "Aunt Sally and Uncle Joe".

The documents are typically drafted by an attorney and executed at closing. You can google "sample mortgage and note Wisconsin" and find plenty of examples/samples.

On a $100k mortgage, amortized over 15 years at 5%, you would pay back Sally and Joe their $100k principal, plus $42,343.00 in interest, with fixed payments of $791. This can be derived from any mortgage calculator.

Obviously, you want to start with the benefits of being the private lender ($42k in passive income) when presenting the idea.

Keri Middaugh · Answer

@Marcia Gilad, for your lending learning...

Casity Kao · Answer

@Alex Witte  I would start by asking them what type of interest they would be happy with, and then break down what that number looks like.  So for example with my family, we did not bring them into investing with us until we have done quite few flips but when we asked my sister in law what type of return she wanted he said 6%. So we broke the numbers down and showed her what it was and she said "that's it?."  Knowing what we made off the deal she thought that was small so we then showed her what the interest in her savings account was making her and she realized it was a lot better return, so then we decided to give her 10%.  It's hard money loan rates but for the hassle of no junk fees which really is the biggest expense and no issues on underwriting it was a no brainer.  Lastly, if you do really well on a deal, don't be greedy and share in some of the profits with the family.  I will not tell you how easy it is to get a loan from family now when they want it because we have always paid them our more than what they were asking, or if you don't want to 1099 them maybe pay for their family vacation or get all the kids the gifts they wanted for Christmas.  With our family surprisingly we don't have a predrafted contract but we only bring them into no brainer deals.  If you think you may need one I honestly would question whether you should do it or not because there is no reason to ruin the relationship with close friends and family, and we would never risk that.

Alex Witte · Answer

Thank you both for the feedback! It is much appreciated.

What about in a situation where they aren't lending you the full amount?

What if you are asking a friend for $25k that I can then take to a bank and use for a down payment?

That is more of the situation I am trying to work out.

Jacques Cyr · Answer

@Alex Witte, Jeff has provided you with some great advice. My suggestion to you would be to know your audience. I've done a few debt position loans here in the Grand Rapids, MI market. Essentially, straight 10% (early loans / projects - Higher risk and all...), with perhaps 7-8% simple interest on later projects. Another approach is a straight 50/50 equity position. (Or better to borrower on later projects). Again... this would be for shorter term plays. For Buy & Holds, we've then refinanced via traditional lending institution once the property is stabilized - which is often quite quickly once rented and forced ARV appreciation.

As for the positioning with your Friends and Family, I'd suggest asking what their goals are. Perhaps they'll be open to even more favorable terms (towards your benefit), but I suggest being fair, and "having as much skin in the game as you can comfortably withstand". Also... the rehabs are almost always more than originally budgeted. Just sayin'... I can share some of the first person loan position documents we've used; however, as Jeff mentioned... it sounds like WI is slightly different than the West Michigan regulations. Not in my wheelhouse. Hope this helps.

Private Money - Necessary Paperwork? How to Present it?

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