How Do You Handle Private Money?

Question

So I have someone willing to give me private money to fund real estate deals. What is the best way to handle the money? Do they give me the money to put into my account and let it season for a few months? Or do they pay the title company directly? Or is there another good way to do this that I'm not thinking of?

Jacob St. Martin · Answer

One way that you can structure it is to form an LLC with this person and then form a bank account under the LLC that they deposit money into and you pull from. I would not have private money for real estate deals going through the same account as your personal finances for sure.

Eliott Elias · Answer

You find the deal, and let title collect it directly from the funder. Before you do this draft up a promissory note between the two of you or a JV agreement to be clear on who gets what. No need for the money to sit in your bank account

Andrew Freed · Answer

@Rachel Murphy - I'd set it up as a private note directly to you and provide a 8-9% return interest only distributed monthly or quarterly and the full balance would be due upon completing of the project, e.g the refinance or sale.

Robin Simon · Answer

You should do everything with a legal note and by the book - just having them transfer cash is asking for trouble and tears

Ned Carey · Answer

@Rachel Murphy The most common way is for the lender to send money for a specific property directly to the title company, and the title company prepares loan documents like a note and a mortgage to secure that note.

Any other structure risks running afoul of securities laws. Even this common way of borrowing, that I just described,  could be considered a security. However it happens so often without enforcement, I believe the risk to be minimal but it is still a risk.

Christopher Stout · Answer

Let’s ask a higher question. Do they want to be debt or equity? Will there be senior debt such as a bank or your buying it completely cash?

Rachel Murphy · Answer

I'm wanting to do it legal and by the book. I just don't know how it is done. The money would actually be from my father in law. My thought was to have him send it to the title company and then we write up an agreement for loan payoff between us.

Frank Greg · Answer

You, the relative lending the funds or whoever you guys use to draft your contracts, would draft the loan docs to reflect whatever your arrangement is on the private funds lent.

Who owns the investment property you are looking to buy and how many properties?

Jay Thomas · Answer

It's important to keep your finances separate and organized. By establishing an LLC with this person, you'll be able to properly manage the money for your real estate deals and make sure everything is documented correctly. Plus, it could help provide some tax advantages as well. Setting up a bank account for the LLC can help you keep track of the finances in an organized and secure way. It's definitely a smart move!

Ned Carey · Answer

@Rachel Murphy    "My thought was to have him send it to the title company and then we write up an agreement for loan payoff between us."

Yes, but the Lawyer at the title company (or another Lawyer) should write up the legal documents. You need a "promissory note" this is normally just called the "Note" this is evidence of the debt. You also nave a "Mortgage" or in some states a "Deed of Trust". This second document is the security agreement between you and the lender that makes the property collateral for the loan. This Mortgage or deed of trust gets recorded in the land records.

You should not be the one creating any agreements, legal documents, or doing the recording, leave that to an title company. That is one reason you pay the title company. Both you and your lender should get title insurance. The title company handles that also.

The part you and your lender do, is to come up with the terms of the NOTE (loan). This means the length of the loan, the interest rate, and repayment schedule. The repayment schedule can be Monthly, yearly etc. You can also do interest only with a balloon payment after a number of years, or any other terms you can think of. Then the attorney will write up the documents based on the terms you have decided on.

How Do You Handle Private Money?

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