How to structure private lending business

Question

Currently I have a single member LLC for LTRs and an S-corp for my flips and RE commissions. Im getting into a private lending deal… should I create a separate LLC or can I use one that I have?

Chris Seveney · Answer

I have my LTR and lending in one entity. Depending on the size and equity you have in your LTR, you may want another LLC, but if you are lending business to business then I do not see significant risk for needing another LLC

Alex Breshears · Answer

Hello there! As a private lender I'm going to tell you to go find an attorney familiar in lending to answer this question fully. The reason is that funding for non-owner occupied property (which should be the ONLY thing you lend on) is controlled and regulated at the state level. These rules are broadly known as usury laws. These laws outline the licensing requirements (if there are any) to lend in that state, who your borrowers need to be in order to remain compliant with keeping a license or not requiring one, what the upper limits of your loan terms can be for interest rate, fees and points, and a whole host of other considerations. For example, in VA if I do more than 4 loans a year as an individual, then I need a license in order to lend, but if I am an LLC lending to another LLC, then I do not need a license and there isn't a limit to the number I can do. So before you do anything related to lending, really know what state you want to lend in, and then become an expert in that state. From an asset protection standpoint I can't help you there as I am not an attorney, but if that is also a consideration as well, I would consult the appropriate legal counsel for that to help protect the other assets you already have in place.

We discuss this pretty extensively in the newest book on BiggerPocket's platform, which you can find here: https://store.biggerpockets.co...

Good luck! I hope that helps.

We discuss this pretty extensively in the newest book on BiggerPocket's platform, which you can find here: https://store.biggerpockets.co...

Good luck! I hope that helps.

J.C. Martel · Answer

I am based in Kansas but lending in Colorado just to one builder. 15 years ago I lent to one fix and flipper. We did around 8-10 deals over 4-5 years. Now I built a relationship with just one custom builder.

Jeff S. · Answer

It looks like you are in Kansas, @J.C. Martel. I believe Kansas is a mortgage, not deed of trust state.  Where are you lending?

Private loan documents involve a lot more than a note and a mortgage or deed of trust.  These include various state and federal disclosures, 1003, personal guarantee, a use of funds statement, and a few others.  Some documents are legally required, and some are not.  Some are also state-specific.  Plus, you must also consider lenders title and fire/hazard insurance requirements which you didn’t mention but I hope are included in your recent loan.

You get your loan docs from a lending attorney (please, not
a title company).  Understand that a lending attorney is not a real estate attorney.  Call some local hard money lenders and ask who they use.  Lending attorneys are as rare as hens’ teeth and you’ll likely hear the same few names.

You’re doing this as a business so it’s super important you develop written lending criteria.  For example, and this took time, but we have an email we sent to all prospective borrowers.  It defines the types of properties we lend on, how we define a good deal, location restrictions, etc.  It also defines borrower requirements such as minimum experience, type of experience, and financial requirements.  Last, it addresses the financial aspects of our loans such as points, interest rate, LTV, loan duration, etc.

Your lending criteria will change frequently at first and then very little over time.  It’s the blueprint that keeps you on track and from making deals up on the fly, which is dangerous.  Keep it narrow and simple.

Good luck to you, J.C.

J.C. Martel · Answer

I ended up lending through the same LLC that is holding my rentals. I figured it’s passive, like LTRs. Still not sure of the tax implications. I’m anticipating that the gains will probably be taxed at my ordinary income rate. I will probably ultimately create a separate LLC for private lending since it really should have its own systems separate from my other businesses.

As far as legal work (since that’s what respondents focused on), we use a promissory note that meet state requirements as far as maximum allowable interest rates and also secure the note using a deed of trust.

Nathaniel Dodson · Answer

Most states have exemptions on mortgage regulations for non-residential non-occupied properties. If this is going to a repetitive situation, then you should connect with legal counsel to make sure that you're protected from regulatory and operation risks on an ongoing basis. If this is a one-off transaction, then make sure you're working with an attorney to make sure you have a good set of security/loan docs in the states that you're operating.

How to structure private lending business

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