Rental Property Investor · Milltown, NJ · Member since 2014 · 131 posts · 130 votes
Hi All,
I know there is a lot of legality around borrowing money from people and soliciting business for borrowing. I have some family and friends that are interested in holding notes on my rental properties. What is the process that I need to go through with them to make sure everyone is protected. Also what if some one who is not in my inner circle wants to invest in a note on my property? Do they have to be accredited? I want to make sure that I am doing this the right way.
@Michael Ganovski in general there are 2 main methods to help people feel comfortable with lending money for real estate:
Drafting a Note - a note is the document that places in writing the terms and conditions to your loan. You can have this signed by all parties and even notarize it too.
Securing a Lien - A lien is the documented loan placed on the property. So if the property were to ever get another loan, or sold, that lien holder would be paid FIRST. If the worst, absolute worst thing to happen....which won't happen...but if you pass away...they are still protected because their loan is documented on the deed of the property and filed at the county courthouse.
And these are the main 2 areas that people use when lending/borrowing money from each other. Hope this helps!
Hi Rich, I think the rules and processes vary from state to state. You should either find an attorney or accountant here on BP that is licensed in your state, someone who has done it in your state or go to your local attorney/accountant.
I wish I could be of more help but I have never done it myself nor do I invest in your state.
hello - it seems that there was not much dialog here, i'd like to BUMP it back it this does it. Similarly, I am seeking fudning from 3 or 4 people, to equate to $100K, for a flip and rehab, to pay them back at the end with interest. Curious how to structure that? Are there significant legal issues here, or just them first position lien in the property?
@Michael Ganovski in general there are 2 main methods to help people feel comfortable with lending money for real estate:
Drafting a Note - a note is the document that places in writing the terms and conditions to your loan. You can have this signed by all parties and even notarize it too.
Securing a Lien - A lien is the documented loan placed on the property. So if the property were to ever get another loan, or sold, that lien holder would be paid FIRST. If the worst, absolute worst thing to happen....which won't happen...but if you pass away...they are still protected because their loan is documented on the deed of the property and filed at the county courthouse.
And these are the main 2 areas that people use when lending/borrowing money from each other. Hope this helps!
Yes, I agree with Andrew. We have done this structure with all of our flips as we borrow funds from friends and family. If you are having multiple people share in a first lien, you have to document that in the mortgage instrument and the note and make sure they each acknowledge and agree to it in the note. In the event that they have to foreclose they will have to work together to do so.
What you are not doing is creating a new LLC with all of you as members! That is a totally different structure. In the structure you need, they are lenders, so they are lending to you pursuant to a promissory note and getting a security interest in the property as collateral through a mortgage. The note should clarify that the interest accrues and principal and interest are payable at the earlier of the resale of the property or whatever the loan period is (usually 12 months). Hope this helps!