Updated over 2 years ago on . Most recent reply
Lend via LLC?
To create an additional income stream, I have decided to privately lend (gap funds under $50k for my first) amongst other members of the REI flip method coaching program to which I belong.
I have already formed an LLC for my eco flip to sell / rent business.
My question to those more experienced is: should I lend as myself or should I have the LLC lend? The money I'll be lending is personal savings and not tied to an SD IRA or solo 401k. I do imagine if I lend it as the LLC, the loan amount and interest return would be considered a capital contribution...
Thank you in advance for your time and advice!
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#5 Private Lending & Conventional Mortgage Advice Contributor
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#5 Private Lending & Conventional Mortgage Advice Contributor
- Lender
- Los Angeles, CA
Compared to real estate ownership, the liability risks of lending are relatively low, @Elizabeth Watmough. Whatever direction you decide, make sure your lending is separate and distinct from any real estate owned. There’s no reason to expose your lending portfolio to something that could happen in a rental.
Separately, and not trying to divert, but I’d be super careful of anyone suggesting it’s ok to lend your (non-replaceable?) retirement money for gap funding. These are second-position loans and are easily wiped out in foreclosure or bankruptcy. Did your flip method coach explain this to you? Hmmm. There are much safer ways to lend retirement money for flips, such as first-position purchase money and even syndications. Of course, you’ll be using a professionally prepared loan document package that includes a personal guarantee. Right? I’d hate to see anyone get taken advantage of by a coach.
Talk to some local hard money lenders and ask which lending attorney they use. This is not the same as a real estate attorney. He or she should be able to explain MA lending law to you, including usury and licensing as well as the risks if you must foreclose, if a borrower declares BK, or otherwise contests a loan. Lending attorneys will also provide a set of loan docs, written in your interest, that will protect you. A coach, perhaps someone who is also borrowing from you (???), might not be as knowledgeable or forthright. Sorry -- just reading between the lines.