This is my first time loaning money, how do I protect myself?

[Thomas Elam]

Greetings,

I have been to Real Estate Expos and searched the web. There are plenty of ways to find out how to borrow money but very little about how to loan it. I need a sanity check please.

One of the members in my REIA (Joe) is trying to get started in real estate with buy and hold but has no money. I am trying to get started in buy and hold myself but am having a hard time finding that first great deal. I have an ample amount of money in my SDIRA. I want to work with Joe so we both can get started. I spoke with Joe and suggested that he rehab a few houses that I will finance so he can build up his cash reserve. I am looking for a short term financial commitment.

Joe is trained as an engineer so he builds spread sheets and knows how to crunch the numbers. He has found a house that is a a great candidate for his first project.

How do I protect myself?

Do I purchase the house in my LLC and finance the repairs, let Joe supervise the rehab and divide up the profits when it is sold?

Do I hold the note on the house? How do I create a note for the house?

Am I insane for even considering doing this deal?

My thought is that in the worst case I will end up with my first rental property.

Tom

[Jeff S.]

He’s never flipped a house and you’ve never loaned money? This could be a formula for disaster, Thomas Elam. Plus, it’s not clear from what you wrote that either of you have any real estate experience at all.

If your SDIRA allows check writing, that is you have an IRA-LLC, you could use it to buy the home and finance the repair thru it. You cannot form a separate LLC you personally own and then us your IRA to fund a property. That would be self-dealing.

Don't forget, you can't spend more than your SDIRA has. I could think of a hundred things that go wrong other than it ends up owning the property. Plus, do you know how to manage a property in your IRA?

The simplest, cleanest, and probably safest way to do this would be to loan the money by using a broker or lawyer to do the paperwork, depending on how it’s done in your state. Your SDIRA would be secured by the note - the best use of retirement money, in my view.

I think you’re on the right track but the wrong borrower, Thomas. Find some experience borrowers to loan to, get a good broker or lending lawyer, and go from there.

Jeff