I've found the house, found the private money, Now What?

Question

I found a 3 unit that I think will be a good investment. I can purchase and renovate for less than 75% of the ARV and the rental numbers look pretty good. I'm going to do a more thorough walkthrough with my contractor this week just to make sure we aren't missing anything. But my real question is this. How do I go about getting the money from the investors and ensuring that their money is secured by the asset? I am assuming I will have my attorney draft a private lender contract. Take it to a title company to have it recorded, have the money wired into our business account and then deposit the loan payments as agreed upon to the investors. Its seems simple enough, but am I missing something? This is my first transaction with non traditional lending and I want to do things completely legit and ensure my investors are happy with everything. So far they are very happy with the terms we have agreed upon and I could see this becoming a great long term relationship. Its up to me to make sure it goes well.

Jay Hinrichs · Answer

Il is a mortgage state and fraction ownership of beneficial interest is allowed. No need for anything more complicated or costly. Closing attorney there must do paper work to get title insurance @Rick Pozos

Nathan Waters · Answer

thanks Rick. By the way, San Antonio is my old stomping ground. That's where i grew up before joining the military. I've heard its a great market.

Rick Pozos · Answer

I think the only thing that was not mentioned was that the title company or an attorney that they choose will draft the deed, deed of trust and record everything for you. You will just have to let the title company know what the terms are that your lenders will be giving you. My title company wants a "lender commitment" from my lender. My lender and I drafted a document that spells out our terms of the loan. Then the attorney puts it into the basic form that makes it legal in my state.

Nathan Waters · Answer

It could be one or more people. In this case it's a few individuals.

Tom Jones · Answer

I think so. So, essentially private money means that other people (more than one party) are contributing towards an investment?

Nathan Waters · Answer

@Tom Jones

I have a few friends and co-workers that want to invest. The terms I am looking at are basically 10% interest only loan with no prepayment penalty and a 12 month balloon payment. I would have anywhere from 1 to 3 individuals contributing to the project. I have untapped equity in another recent house I have done that I can use to secure funding as well if necessary. It would be a similar type of investment but secured from another property that is already cashflowing. Does that answer your question? I wasn't sure if you referring to the source or the structure of the funding.

Tom Jones · Answer

Naive question... but what do you mean by private money?

Nathan Waters · Answer

@Kenneth Garrett

Thanks for the response. This is exactly the information I was looking for. Several of my coworkers are interested in what I'm doing. Mostly because I never shut up about real estate. And they are all relatively high income earners with a desire to diversify. When they overheard me talking to another real estate investor, 3 people all jumped into the conversation eagerly looking for a good rate of return with no involvement. This is my ideal situation. I want to cash out refinance after the project and pay them all off between 6-12 months. If things go well, I would like to do one of these projects every 2-3 months.

Kenneth Garrett · Answer

@Nathan Waters

I use private money all of the time.  The funds are typically wired to the title company on the day of closing to conclude the purchase.  Example would be if you borrow 100% of the purchase and rehab let say $150,000.  Purchase $125,000 and $25,000 for rehab.  You will receive a check from the title company for the difference of sale price v. rehab money.

Prior to the closing you will need a mortgage and note for the private lender.  If you have multiple lenders you will also need a JV agreement.  Every attorney is a little different.  You can set up a LLC for the project to ensure protection of money.  Its another layer of protection for the investor.  I generally only have the note and mortgage and JV when I have multiple lenders.  I have done a partnership before and then dissolve it when your done.  Its a pain I do not recommend it.

Hope this helps.