First private money loan

[Nicholas Z.]

A friend recently offered to loan me the down payment money on a rental property in return for consistent interest-only payments over the course of the loan. It's the first time either of us has done a deal like this, so I did a bunch of research to figure out the right way to structure everything. I'm buying the property as-is, with no additional construction or rehab. I want to make sure my friend's money is protected as much as possible, and so far this is what I've learned:

1.The money should be loaned to my LLC and I'll add a personal guarantee to it
2. Money should be wired directly to the title company (I should not receive a check)
3. Add lien to the property in second position
4. Add the lender as named insured on the landlord insurance policy

Are there any other important things I'm missing here?

I will, of course, go through a real estate lawyer to formalize all of this, I just want to make sure I know what I'm talking about when we have that conversation.

Thanks!

[Kyle J.]

@Nicholas Z.  If you want to make sure you friend's money is protected as much as possible, then two additional things that immediately come to mind are: 

1) A Lender's title policy, which the borrower typically pays for (it's not that expensive if you buy it at the same time as your Owner's title policy)

2) Make sure the interest rate charged, including all points, is within the legal limits (you didn't mention how much your friend is charging you but just make sure it doesn't violate any usury laws because all of the risk with a usurious loan is on the lender)

For a more complete list, check out the response from Jeff in this post: 

https://www.biggerpockets.com/forums/49/topics/413352-private-lender---forms-required 

Lastly, you also didn't mention how you intend to pay your friend back, but that's definitely something you guys should discuss to make sure his expectations are in line with your exit strategy.  After all, since this is a rental property (as opposed to a flip) and you're making interest-only payments, in theory you could make payments for 20 years and never have paid any money towards the principal.  So have you discussed when/how he'll get his money back?  Do you know when he even wants/expects it back?   Will you refi out of your loans?  What will you do if the property value drops and you can't refi out of both loans (since I'm assuming there's a first given that you referred to the loan from your friend as a second)?  These are all things to think about and discuss with your friend up front.

But congrats on having found someone to loan you private money, and good luck!