Updated almost 8 years ago on . Most recent reply
Process to lend to partners with interest (WA state)
Me and my partner do BRRRR on properties locally. For most of those properties, we take HML and refinance once rehab is done. Now, I have some money coming in which I want to lend to buy a property and charge some rate of interest. Below is the process I am thinking of doing
1. Open a LLC and bank account.
2. Transfer money to that LLC from my account
3. While buying the property, lend from this LLC to fund the purchase and rehab cost. Create Promissory Note and Deed of trust and document everything.
4. Have partners (and me) pay interest for the period of rehab.
5. Once rehab is done, refinance the property to take the money out.
6. Rinse & repeat
Does this sound like a plan? Do you see any challenges? Do I need to have license to lend money to our own partnership? I am in Washington state.
Most Popular Reply
This seems a bit complicated. From what I'm hearing, you're acting as both a lender and a partner on this deal. So you'll collect a standard interest rate and a share of the profit?
Why not just state your partnership terms in your LLC with your partner(s), or in a JV Agreement? Something like:
Partner 2 will pay Partner 1 an interest rate of ______% on a loan amount of $______ in addition to a _____% of the profit (which is calculated after paying the interest rate).
That way you can avoid having to open a new LLC, bank account, and some extra legal fees / closing costs of doing it as a separate lender. Also keep in mind that some hard money lenders don't like 2nd lienholders on the loan too.
Although I can see the benefit of doing what you're proposing in order to avoid the 6-month seasoning for cash-out refinances.