My husband and I are working on preparing a promissory note form so that we can offer the opportunity for our friends and family to invest in our real estate business. I would love some examples of fair market terms and how people structure repayment of the principal.
Currently, we are planning to offer a fixed interest rate, paid monthly, with a pay off date being in X years. What interest rate and term are most people offering? And how do you go about paying off the principal? For example, if we offer an 8% interest rate, with a 10 year term, would you amortize that loan like you would a mortgage, or is it more typical to have an interest only payment until the payoff date, at which time you would pay off the lump sum principal amount? Any other ideas of structuring a note? Just FYI... we will be accompanying the note with a deed of trust.
I'm excited to hear what structures everyone uses. Thanks for your time in reading this!
Please seek the advice and counsel of a local RE Attorney to help you do this right. Terms are all negotiable between the parties. Paperwork and structure of the terms needs to comply with State laws..even for private money from friends and family. It's better to be safe than sorry. Its always wise to have an Attorney to guide you in the beginning...just my $0.02 worth.
@Charlie Fitzgerald - Yes, we are already talking to an attorney about the structure around the note, I am just curious what people are offering to their investors. We are going to have the structure all laid our in a contract, but I'm wondering about the negotiable deal points, what people are typically offering. Looking for "comps" if you will.
Its all negotiable. You would have to understand the person you are borrowing from and you need to understand your goals. On my flips I give my family 2 offers, 1. buy into the deal and get a portion of the profits, no guarantees or 2. I borrow the money for 6 months and pay 10% (APR of 20%) and I personally guaranty the loan (I ONLY do this for family). Most of my family is conservative and goes with the guarantee but a couple have bought in.
If it was a buy and hold then you would want to structure a long term loan but you could still use the same premise as above.
Beware and aware that people love options but too many cause analysis paralysis. 2 or 3 options is best
I have lent secured and unsecured anywhere from 7% to 19%, term ranging from 3 months to 18 months.
It all comes down to the specific scenario at hand and how comfortable you are with the risk.
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