So after about 2 years of educating myself on BP on the forums and with all the amazing articles, guides, and podcasts, I'm finally to the point of taking action. I found a friend/partner who is also motivated. Another friend of mine is interested in partnering as a private money lender. He is willing to fund 100% property purchase and rehab costs to start and see how it goes. I'm still trying to figure out how to structure the deal. The first project we're looking at is a flip.
1. Once the structure is determined (straight APR interest for a fixed term or that plus share of profits), what kind of legal documentation is required? Does an attorney need to draft some type of agreement? For straight interest would it just be a promissory note?
2. Should there be one agreement or one structure per property deal? My other partner brought up the possibility of funding the flip, rehabbing, selling, and using that money to fund other projects while the agreed upon term of the private money deal is run out. But this seems complicated and tricky to me. Better to just do one loan per deal, sell the property, pay back investor's principle, and hopefully take some profits.
3. Once the lender agrees, where should the funds be transferred to? We don't have an LLC set up yet, and just have our personal banking accounts. Should my non-lender partner and I set up a new bank account in both our names or since we all know each other, and as long as we have some type of legal agreement document, it really doesn't matter where the money sits?
Thanks and I'll keep BP posted if the project looks good and we move forward.
Do it as one loan per deal. Less possibility of being accused of "selling securities" that way vs. the money guy investing a wad of cash and you using it as you wish. You can structure the loan as interest or appreciation or a combination. Document it with a promissory note and secure the loan with a deed of trust. Work with an attorney to prepare the documents, but then you can re-use them for subsequent deals. Lender's money gets wired to the title company just like any other loan. And gets paid back when the property sells.
If there is some money from closing going to your rehabbing company, that would show up on the HUD and you would get a check or wire after closing with your share of the cash.
If you and a second partner are actually doing the work, you want a bank account and some sort of entity. You have a partnership without it, but its better to formalize that. You and that partner are really running a business together where the money guy is just making you a loan. You and this partner should spend significant time writing up an operating agreement. You need to document how you make decisions and what happens in various circumstances. You MUST assume the worst - e.g. one of you dies, is sued and loses, divorces or marries, steals from the company, etc. If you cannot discuss these sort of things frankly now, you sure won't be able to if one of these things happens. As they say, "the only ship that won't sail is a partnership." Good pre-planning will help.
Jon Holdman, Flying Phoenix LLC
title company probably has your paperwork, promissory note and deed of trust, if you want have your attorney review.
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