Private money lending- loan structure

12 Replies

I run a real estate investing business in Florida, where we are acquiring properties through various channels, rehabbing and selling them. We started with a few per year, but have progressed to 1 per month at the moment. We currently fund 30-50% of all our properties and rehabbing etc, but do have 2 private lenders from whom we are lending from.

We are purchasing the properties and paying in full and then get them onboard after the closing to take a look and decide what they want to lend. We then record a note and mortgage for the loan and once we are done rehabbing and have it under contract, we need a satisfaction of mortgage from them and redo the mortgage to a new property.

The whole process doesn't really work well due to the increasing volume and was wondering if there is a better solution to structuring these loans with the lender feeling secure and a way of rolling over the money from one job to the next. The main reason it gets complex is due to the fact that each loan is only for a period of 3-6 months.

Is there any other type of loan or way they can secure their loan without having to do actual mortgages on each and every property. The fact they have never loaned before leaves me helping to structure the loans, but I just don't know enough about it.

They enjoy their cheque every month and the rates are better than HM and most other lenders, but I know they don't want the headache so any suggestions on doing this a easier way would help.

I have reached out to my attorney and cpa, but have not had a great response.

Thanks

I have adapted my lending on flips to lines of credit secured on the property. It seems to work better in moving from loan to loan.

John B.

We borrow with trust deeds too, but since we hold, it works a lot better for us. What is the temperature of your private lenders? Do you think they would be willing to accept an unsecured loan with a personal guarantee? Or perhaps you could set up a de facto line of credit with a big hitter of sorts. There will likely be some nerves about such a thing (I've never done it nor requested it), but if your lenders really trust you and you follow through on your word, it might work.

Andrew S.

I can't tell if the question was intended for me but i am a private invester/lender and my fundings can be both secured or unsecured depending on a # of factors. I use lines of credit for both real estate and small businesses.

John B.

@Andrew B. are you doing any buy and hold investing along with your flips?  If you are, you could pay off a property so you would own it free and clear (FAC).  Then have your PML secure their loan against that FAC property with a loan that can act as a line of credit (LOC).  You could then use the LOC for your rehabs and pay it back after you close on your rehabs.  Then use the LOC when you have the next project under way. 

Your PML could make the decision once to fund XX% of the value of your one property.  They wouldn't have to make decisions over and over about whether or not they want to fund your next property.

This is the same setup I'm arranging with my banker.  (I am a buy/hold investor.)  After some discussion with him, he explained the advantages and as soon as I complete the rehabs I have underway now, I'll get a LOC on each property and use that to buy with cash and then cash out of those properties when they are complete.

I do private lending but I prefer to pull my money out after each deal - that way I can evaluate the merits of the next deal. Of the 6 deals that I have funded right now, 5 are secured with mortgages / deeds, a Note and Personal Guarantees and 1 of the deals just has a Note / Personal Guarantee (i.e. no recorded mortgage).

Like previous posters have stated, I look at experience, loan size, duration, lien position, etc. to decide if I am going record the docs or if it is going to be unsecured.

If you are doing multiple deals with the same lender, you may also want to consider forming an LLC. You would then be partners with your lender(s), and you could determine the profit split via your operating agreement. You would serve as the general partner and make all decisions, but the company would hold title of the properties that you buy -- thay way they still have the security without the hastle. This can be very useful in states that charge taxes / stamps / fees for recording mortgages / deeds.

@Andrew B.  

The post is not all too clear but it sounds like the administration here is the real burden.  The current Investor/Mortgagee is comfortable with the security and the current Borrower (you) seem to be comfortable with the terms.  What I hear is perhaps the administration is too much.  That can be solved.

That said, the idea of having collateral to secure the loan will always be present, therefore having to encumber and un-encumber said collateral will always be needed in some fashion.  It is possible to structure a revolving capital facility where assets can be added and subtracted as collateral to said line.  In some cases that would provide for less paperwork to some degree but it's not zero.  The effectiveness of this type of structure will depend on how much capital the Investor is willing to offer on the line.  In general, you would need or want a function of 2 times or more (in general) the capital demands you have gone through over last X amount of deals, in line with your business plan.  

It is not clear if the two current Investors would ever be interested in working together but joining their efforts could also be an added benefit.  That is, post the barrier to have them agree to all the terms of joining forces of course.  Not all that hard or complicated if it is structured properly.

So far, the above ideas are treating the capital as debt.  There is a manner in which you could arrange the capital as equity and still offer good security and not cut too far into your bottom line.  This may be an interesting structure to contemplate if the future holds the capacity to continue to scale up your business.  The proper way to look at this would involve digging into the current debt structures and engineering an equity structure which mirrors the debt with add benefits and/or protections.  

The good news?  You have the business.  You have, in some form, the capital.  So all of this is possible, it is a matter of putting the pieces together in the most mutually beneficial structure for all interest parties.  To do so properly, confidential details would need to be shared, so I am not so sure you get it all from a forum post.  I would be willing to chat with you if you need/want.  Feel free to ping me.

Thanks for all the great advice. I'm defiantly leaning towards setting up a LOC, and will have 2 free and clear properties to tie them to, which I will hold and rent by the end of the year. My 2 PML are great people and friends, but a mortgage and note was the only real security I could give them. Im also going to mention just using a note/ personal Guarantee, but I'm certain in Florida you still pay the doc stamps etc, to record the note in order in to make it binding. I just need the flexibility. The idea of creating a Hold and rental portfolio will help support all the above suggestions too.

I

@Craig Rismiller I'm thinking of approaching a family friend as a potential private lender. But I'm not sure how these deals are commonly structured. Would you be willing to share with me some key points to focus on? What would make the relationship attractive/beneficial?

Hmmm.  I dont know about Florida, but I  do my own in Georgia.  My guy gives me the money to buy it, I give him a note that I create, then I go to the courthouse and file the deed myself.  Takes a few minutes to change the data and $24 here.  

if you are using your money to buy, the same thing should work.  Why would it be an issue to give them the money back and then re-borrow it?   Seems way cleaner from an accounting and relationship angle.

Saying that, there are a million ways to structure a private loan.  Its whatever you guys agree to.  I've done them with my guy without security.   Hell, he gave me $80k last week for "operating cash" not assigned to any property, but he's got security deeds on like 7 of the 10 houses I currently own so its not like we had to do a new deed to have him secured.

Personally, though, I like the deeds in place. Owning paid for property is foolish, just paints a bullseye for lawsuits. That security deed is added asset protection. What if someone falls off a roof and sues your LLC and the LLC owns the house outright? No bueno. Plus, I like for attorneys to think I'm broke. I was in a pretty bad boating accident in 2003 and they opposing atty's settled out for my insurance limits because they thought I was broke. Was worth like 2.5 mil at the time, but had nothing in my name. You just never know on that stuff.

The lenders also get all warm and fuzzy when the checks come and go like that.

Originally posted by @Darrell Shepherd :

Hmmm.  I dont know about Florida, but I  do my own in Georgia.  My guy gives me the money to buy it, I give him a note that I create, then I go to the courthouse and file the deed myself.  Takes a few minutes to change the data and $24 here.  

if you are using your money to buy, the same thing should work.  Why would it be an issue to give them the money back and then re-borrow it?   Seems way cleaner from an accounting and relationship angle.

Saying that, there are a million ways to structure a private loan.  Its whatever you guys agree to.  I've done them with my guy without security.   Hell, he gave me $80k last week for "operating cash" not assigned to any property, but he's got security deeds on like 7 of the 10 houses I currently own so its not like we had to do a new deed to have him secured.

Personally, though, I like the deeds in place. Owning paid for property is foolish, just paints a bullseye for lawsuits. That security deed is added asset protection. What if someone falls off a roof and sues your LLC and the LLC owns the house outright? No bueno. Plus, I like for attorneys to think I'm broke. I was in a pretty bad boating accident in 2003 and they opposing atty's settled out for my insurance limits because they thought I was broke. Was worth like 2.5 mil at the time, but had nothing in my name. You just never know on that stuff.

The lenders also get all warm and fuzzy when the checks come and go like that.

 Slightly unrelated question, but in regards to an llc owning a property outright, do you form a new one for each house?  I have a friend that does precisely that, but it seems like a bit more headache than necessary.   

Depends a lot on your risk tolerance. Like I said, the security deed serves as asset protection, so your protection is geared more towards equity than number of houses. If I had paid for houses, I'd have them in fewer LLC's, if I was 90% leveraged is bunch a lot together.

When I was doing high volume before the crash, I had an LLC for every $100k of equity or so. However many properties that was. Back then I used a lot of land trusts so could shift ownership without anyone knowing, though. Don't do Sub2 much anymore so do a lot fewer trusts.

I'm a lot more lazy now, I have a primary LLC that owns several houses and half of several other LLC's. Doing flips is a lot different than holding properties, though. Rarely own anything more than 6 mos. My threshold for how much in one entity grows with my overall holdings. Think I have 7 LLC's right now.

It's important to know how that stuff fits together and mix it up, but there aren't really any "this is best if you're doing this" rules,  it's a lot of personal preference.

I am a new investor and looking for secure trust deed investing with a return of 10-12% on my money. 

Currently, I have been offered a deal to lend 100K to a Turnkey company, but with just an escrow agreement and a promissory note.

I am not very comfortable with that. Any suggestions on how to find a similar investment opportunity being a first position lender with a security instrument as a trust deed or a morgage?

Create Lasting Wealth Through Real Estate

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

Start here