What to ask borrower before loaning private money?

3 Replies


I'm new to loaning money for real estate deals and looking for advice on questions to ask the borrower.  A fiend asked me to loan him money for 3 properties that will be demoed and 3 row homes with 3 apartments each will be built.  After completion of the project, he plans to refinance the property and pay off my investment.  

What things do I need to do to cover my butt? Is it better to get a personal promissory note vs one from his LLC?

@Michael Rybas

I don't know much about Private lending, but I would be curious if your friend is asking you for the loan because he couldn't get others, or he just prefers to work with you? 

The second thought I have is that you can try connecting with lenders in the area that might be able to tell you if they would lend for this deal and how they would structure it. There are likely other local lenders that might be able to help you out. As a matter of fact, you might find such a lender on BP!

Good luck!

@Michael Rybas this question is pretty dangerous for someone to answer directly.  The liability of someone telling you how to approve a loan is pretty big.  I might suggest to do a BUNCH of research before partaking in something like this.  Often, people will partner with others to learn the process.  There might be an investor willing to show you the right way to do something like this but it is usually for a fee.

I will share with you a common method of underwriting and that is analyzing the "Big 3" - income, credit, and assets.

  1. Income - this is really just the ability to pay back a loan.  If someone has a stable source of income then it would be reasonable that they could have the funds to pay back your loan
  2. Credit - credit is a reflection of someone paying their debts back....not paying on time - but paying them BACK.
  3. Assets - the more assets someone has the more stable they are and the less risky they are to your loan.

Now the important thing here is how do the "Big 3" relate to one another?  It's not enough to just have a stable job....what if you are in debt up to your eye balls?  Most banks will consider anyone with 40% or more of their income going towards debts as an EXTREMELY high risk.  If you are at 50%, then most banks will decline you out right.

Same with assets, if you have good income and good credit...but no assets...then that is a sign that you cannot budget properly.  So if someone has to make payments for a period of time before their property can make money but they have no assets....how can they make payments?

The more risky someone is the more they have to put as a down payment.  Most lenders will want 20% down on investment properties.  And if someone is more risky, then more down is needed.

This is not the only method to underwrite a loan but I am pointing this method out for a reason.  If your friend is coming to you for a loan...that means they cannot get a loan elsewhere.  That right there is very important to understand.  

I hope this helps in some fashion.

@Michael Rybas you will want to borrow to LLC then get a personal guaranty so you can avoid Dodd frank.
Questions to ask (this is not inclusive) include
1. how many deals have they done
2. Show me a pro forma
3. Show me construction estimates
4. Show me comps for sale
5. Show me how much $ they are putting in the deal
6. Have a deed of trust and a note written up

It doesn’t matter if it’s your best friend or your mother , business is business and treat everyone the same.

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