Nuts and bolts of private money lending help!

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Nuts and bolts of private money lending help!

Rachael A. Tanner
Bay Area · Member since 2016 · 42 posts · 11 votes

I am preparing to raise capital and I would like help understanding how to go about structuring and writing the terms of the funds.

MY IDEA

I want a $100,000 interest-only loan. I would invest this into a BRRRR. Then I can keep recycling this money into one BRRRR after another. I would pay interest monthly and then in 5 years pay back the full $100,000.

MY QUESTIONS

1. How do I actually structure this loan? Do I need to work with a lawyer to draw up some terms and both parties sign it? Can we just agree to terms, put the interest and the payment schedule in writing and then both sign it? Maybe notarize it?

2. Is this a usual set of terms or unusual?

3. Are there other things I need to be aware of as I pursue this loan?

4. Should they lend money to me or to the LLC?

Just looking for some brass tacks on how to actually executive private money loans.

Thanks!

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Stanley Nguyen
Rental Property Investor · San Jose, CA · Member since 2019 · 78 posts · 23 votes
7y

@Rachael A. Tanner I’m looking to start in private lending as well and have funds avail. Would love to connect and chat more on

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  • Gary Harris
    Member since 2019 · 53 posts · 10 votes
    7y

    Hi @Rachel A. Tanner

    I have structured several deals like this over the years, but never for that long of a term.  I think you will have a very difficult time finding someone to lend you the money for that long of a time frame even if they are getting monthly interest payments.  Do you already have someone lined up for this 100k?

    1. Yes, use a lawyer to draft an agreement specific to this deal.  You could just put it in writing and agree but I think you both would be doing a disservice to yourselves.

    2.  This is an unusual set of terms due to length in my opinion.  Just recently I've asked for $300,000 for a 24 month hold time paying 15% annually in monthly interest payments plus a percentage of deals that I close and haven't been able to close the deal.  I'm not sure how experienced you are but I have closed several rehab deals but still very few bites.

    3. I would just speak to an attorney and your accountant on how to handle this.

    4. I'm not able to give legal or tax advice, but I've never had people loan me individually money as they have always lent my LLC.

    Good Luck.

    Gary

    1Reply
  • Rachael A. Tanner
    OP
    Bay Area · Member since 2016 · 42 posts · 11 votes
    7y

    @Gary Harris thank you!

    I have a relative with money to lend. It would make sense if the term is too long. Hopefully we can reach an agreement that word for him.

    Thanks for the reply!

    0Reply
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    7y

    @Rachael A. Tanner

    I just write up a promissory note and we both sign and notarize. I usually only do a year term with a ballon but if you’ve got someone ready to do 5 years with a ballon-awesome!

    It’s whatever you and the party doing the loan feel comfortable with.

    I’ve borrowed with my personal name.

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    0Reply
  • Rachael A. Tanner
    OP
    Bay Area · Member since 2016 · 42 posts · 11 votes
    7y

    @Lee Ripma thank you! It might be a good idea to start with one year and perhaps after a profitable experience then we can do longer.

    0Reply
  • Stanley Nguyen
    Rental Property Investor · San Jose, CA · Member since 2019 · 78 posts · 23 votes
    7y

    @Rachael A. Tanner I’m looking to start in private lending as well and have funds avail. Would love to connect and chat more on

    3Reply
  • Adam SchneiderPro Member
    Lender · Raleigh, NC · Member since 2012 · 957 posts · 639 votes
    7y

    @Rachael A. Tanner What is the reason why you wouldn't refi to a bank once the BRRRR property is stabilized?

    2Reply
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    7y

    There have been many discussions here on becoming a private lender, @Rachael A. Tanner. You might do a search.

    First and foremost is to protect your relative. What you are asking for is an unsecured line of credit. This is hardly safe, and it is unusual. If you defaulted on this loan, what collateral would your loan documents point to, to secure your relative so he could at least come out whole. What reason can you offer that you could pay this loan back in 5 years? What if you couldn’t?

    Short term loans (say, 6 months to 1 year), secured by a specific property, are the realm of private lenders. Any wise lender, be they a sophisticated San Francisco Hard Money Lender backed by a billion dollar hedge fund, or your relative, should confirm your ability to repay the loan. This would include a discussion about your experience and the quality the deal.

    I’m not trying to burst your bubble, Rachael. Just being realistic. You might think about and refine this a little more. Perhaps focus on one deal at a time along with a strategy to recover the cash to repay the loan after each deal. This would be easier and much safer for both of you.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Lee Ripma:

    @Rachael A. Tanner

    I just write up a promissory note and we both sign and notarize. I usually only do a year term with a ballon but if you’ve got someone ready to do 5 years with a ballon-awesome!

    It’s whatever you and the party doing the loan feel comfortable with.

    I’ve borrowed with my personal name.

    agreed unsecured Prom note is what you would do here.. of course Notary is not required on Notes but does not hurt to do it..  

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Stanley Nguyen:

    @Rachael A. Tanner I’m looking to start in private lending as well and have funds avail. Would love to connect and chat more on

    keep in Mind in CA your need a license to lend private money..  IE your in the business to do it.. .. there are some carve outs in most states for a few loans in your portfolio but if you advertising for borrowers and doing more than a few a year in CA you need to either have a broker do your paper work for you .. or you need a CFL license or full blown NMLS with state license. 

    I am a CA broker so I use that..  in Oregon I am state licensed and NMLS  mortgage banker.. ( inactive at the moment :) 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    @Stanley Nguyen  If you can get @Jeff S. to talk with you .. he is quite experienced in CA .. and Very detailed .. of all the folks I see posting about private lending and as it relates to CA he is the one I would listen to here on BP.. 

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    2Reply
  • Stanley Nguyen
    Rental Property Investor · San Jose, CA · Member since 2019 · 78 posts · 23 votes
    7y
    Originally posted by @Jay Hinrichs:

    @Stanley Nguyen  If you can get @Jeff S. to talk with you .. he is quite experienced in CA .. and Very detailed .. of all the folks I see posting about private lending and as it relates to CA he is the one I would listen to here on BP.. 

     Thanks @Jay Hinrichs.

    @Jeff S. Hope we can connect.  I have so much to learn!

    1Reply
  • Rachael A. Tanner
    OP
    Bay Area · Member since 2016 · 42 posts · 11 votes
    7y

    @Adam Schneider I will refinance once the property is stable. I would like to keep recycling for a little before having to pay the money back. It seems like being able to recycle the cash for a couple purchases could allow me to build up more savings and be able to then have my own $100k to invest.

    0Reply
  • Rachael A. Tanner
    OP
    Bay Area · Member since 2016 · 42 posts · 11 votes
    7y

    @Jay Hinrichs this is insightful. I am planning to purchase out of state and my relatives live in Georgia and Tennessee. I live in California.

    Seems like maybe this doesn’t apply?

    Definitely something to consider if I were to look to anyone in California. Thank you! Would not have known otherwise.

    0Reply
  • Rachael A. Tanner
    OP
    Bay Area · Member since 2016 · 42 posts · 11 votes
    7y

    @Jeff S. Thank you for your insight. Not bubble has been burst; so no worries there.

    Outlining the typical deal is very helpful.

    When you lend, do you work with a lawyer? Do you use a promissory note as others have suggested? Perhaps being in California there are regulations that dictate what you must do that may be different than other states.

    It might be wiser to start with one deal and a specific property as you suggest and certainly to make the case for why I’m a solid bet

    0Reply
  • Dylan VargasPro Member
    Rental Property Investor · Chico, CA · Member since 2016 · 633 posts · 336 votes
    7y

    @Rachael A. Tanner Welcome! I would think you need some collateral. Lien on your home or cash to put down and lien on the investment property. When I use a hard money lender they need some type of guarantee with physical property. I am not sure someone would just lend on a "plan" to BRRRR. What if something goes wrong? Maybe the private lending you are talking about is different from my experience. Most my loans are for 1 year and some are mandated I pay off at close of escrow on flip house. Hope this has some information to help. Good luck and keep us posted.

    1Reply
  • Rachael A. Tanner
    OP
    Bay Area · Member since 2016 · 42 posts · 11 votes
    7y

    @Dylan Vargas thanks for the insight. Makes sense to me. I am working on finding the deal. But I’d want to have developed a relationship and at least have openness to the deal before hand. Then once I find the deal, enter into the agreement.

    Thanks again! Very helpful

    0Reply
  • Drex Tanner
    Investor · GIlbert, AZ · Member since 2018 · 24 posts · 3 votes
    7y

    We use a couple different documents and agreements to make sure that all parties are fully aware of what is going on. I would recommend using a lawyer for this work, or at least having one look over everything (especially with family involved).  Usually the terms of our loans are from 6 -12 months with extensions available.

    Some of the docs we like to have when lending on these deals to make sure everyone is on the same page:

    - purchase contract (has the terms outlined)

    - "Detailed" Scope of Work (From Contractor, legible, preferably on their letterhead/invoice)

    - Comparative Market Analysis (From Realtor or Broker)

    - Itemized Rehab Estimate (price breakouts for what’s to be done)

    Hopefully that helps a little! @Rachael A. Tanner

    0Reply
  • Rachael A. Tanner
    OP
    Bay Area · Member since 2016 · 42 posts · 11 votes
    7y

    @Drex Tanner this is very helpful. Thank you for the specific, clear outline and advice.

    0Reply
  • Nicolas BeaujeanPro Member
    Boston, MA · Member since 2019 · 75 posts · 9 votes
    7y

    Have you considered using Hard Money to get the project done and refi out? 

    0Reply
  • Rachael A. Tanner
    OP
    Bay Area · Member since 2016 · 42 posts · 11 votes
    7y

    @Nicolas Beaujean this May sound a naive, how is that different than private money?

    0Reply
  • Nicolas BeaujeanPro Member
    Boston, MA · Member since 2019 · 75 posts · 9 votes
    7y

    @Rachelle Rodavia 

    Not a naive question at all! The key difference is that 'private' money is usually an investor you know in your inner circle and have lower interest rates or none at all because of they're friends and family vs. hard money is a firm that funds individuals such as yourself. It's a minor difference but an important distinction

    1Reply
  • Tariq Arriaga
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 6 posts · 0 votes
    7y

    @Stanley Nguyen i found a property that cost 600k, the numbers show 225k a year before expenses. which would give a 2.6year return based on (600,000/225,000=2.6years). the only problem is, me and my fiance have no finances for a down payment, and trying to obtain that type of cash, (60-70k) would either take wayy too long or be nearly impossible. we are looking for someone to do a deal with us to let us borrow 60-70k on a contract agreement so we could pay a down payment on a 600-700k loan. the property has been up for about 6years and the monthly income is around 15-18k a month. with me buying the property, it would only switch the owners from them to us. and the very next month after the month of purchase, the 15-18k would come directly to us and we would be able to pay back anything we owe to whomever does a deal with us. if anyone could help with this, id be glad to call or email you about more information on this property but only serious inquiries.

    0Reply
  • Rachael A. Tanner
    OP
    Bay Area · Member since 2016 · 42 posts · 11 votes
    7y

    @Nicolas Beaujean that is one that I am targeting. I think the same question applies which is the nuts and bolts of the terms of the agreements and the forms etc. I think others have answered that, though if you have any forms etc that you like to share I’m happy to receive them. :)

    0Reply
  • Rachael A. Tanner
    OP
    Bay Area · Member since 2016 · 42 posts · 11 votes
    7y

    @Drex Tanner thank you!

    0Reply
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