How Do I Structure Private Money Line Of Credit?

6 Replies

I am trying to figure out how to structure a deal with a family member and was wondering if anyone would have advice for me. My uncle wants to invest in real estate with me and has a lot of cash. He is willing to put the cash in a CD at the bank giving me access to a line of credit for rehab's to flip or rehab's to keep and rent.

Is it a good idea to approach it this way or just get a loan from him every time we want to do a deal? What is a fair interest rate to pay him if we went the route of the LOC? I was thinking 8-10% interest a year based on the amount I need for each deal. i.e. If the project was 200K, the interest rate was 10%, and we had the loan for 60 days - I would owe him $20,000/12 months = $1666.66/mo and multiply that by 2 months which would be $3,333. Is that a fair set up?

Or... is it more realistic to give him the full 10% for the loan?

Also, do I put him on the title or does he put a lien on the house? What kind of legal document do I offer him? A promissory note? Do I draft or an attorney?

I am obviously new to private money lending and really could you some advice to fairly structure this for everyone.

When you make an investment you will purchase it through an escrow account, typically one that is organized by a title insurance company.

Most title insurance companies have 'template' docs that they will give you for free or as part of the escrow process. If you call up a local company and ask for 30 minutes of someone's time, you are apt to get it. Explain what you want to do and they should be able to give you something you and your uncle can review together.

Your uncle would get security to the property like a bank would. A deed of trust or similar.

It sounds correct to break up your 10% into 0.833% per month. The note from the title company should spell out interest calculations.

Tom, as I understand it he wants to deposit the money in a CD and use that as the collateral for a line of credit from the bank, correct? If that is the structure, the bank is going to arbitrage the money. I personally would not want the bank involved, why pay them if you don't have to. I have a similar situation with my father in law (which started my investing career). He lent me the money at 6% back in 2009. I make interest only payments to him every month. I use the money for purchase + rehab and either sell or refi the property to cash out. At that point I ask him if he wants all or portion of his money back or roll it back in. He likes the monthly income and has not asked for it back yet. I don't mind paying him 6% because I am able to deploy it for much higher returns. I signed a note for him back in 2009 securing it with personal assets. This structure cuts down on paperwork and cost at settlement.

Always pay him on time... good luck...

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here