Private Money Deal Structure Question

[William Price]

I have recently put a property under contract and I have a private money lender who is funding the deal. It will be a cash purchase with funds from the private lender.  This will be a long-term buy and hold.  The private lender wants to do an interest only loan for 7-10 years and does not want any equity in the deal.

I'm trying to figure out the best way to structure the deal and had 2 thoughts and was hoping for some feedback on the 2 scenarios or any other suggestions or advice.

Scenario 1:

I set up a single member LLC in my name and the private lender contributes funds to the LLC and I purchase the property with cash in the name of the LLC. I create a promissory note from the LLC to the lender specifying interest rate and terms of payment.

I'm assuming after the deal closes that I would record the promissory note as a lien against the property, but I'm not sure about the logistics of this.

Scenario 2:

I set up a LLC with both of us as members and could structure the operating agreement with guaranteed payments of the agreed upon interest rate to the private lender and all other profits and losses to me (this is what the investor wants). I think I could set it up so they are a 1% owner and I would be 99% owner so that we have the necessary 2 members and the profits and losses can be distributed according to operating agreement.

I don't see any advantage to Scenario 2 and I think that as long as am able to record the promissory note against the property in Scenario 1, that's the direction I should go.

Are there any holes in Scenario 1?  Any suggestions for other ways to structure the deal?  The lender is a family member and does not want the money for another 20 years so there is no danger of having to restructure the deal to pay back the investor.

Thanks for any thoughts or advice!

[Rick Pozos]

Hey @William Price, #1 is the way to go. I almost always close at a title company. They will draw documents up as you and the lender tell them to. They record documents and guarantee title for you and the lender. Your lender will be just that, a lender. When you give them a part of your LLC, they are now equity partners. Keep them a lender only.

I would amortize the loan at 20 or 25 years with a balloon at the 7 or 10 years. This way your loan balance will be lower and a new loan will be much easier to get after the 10 years.