Pragmatics of Private Lending or Family/Friend Money

[David Waldy]

Good afternoon Bigger Pockets Fam!

I'm in the beginning stages of my REI career and cannot seem to find the answer to what I feel like should be a pretty straightforward process.

When using private money or family/friends money what are the actual steps in acquiring, holding, or distributing those funds when needed.

For Example: (Hypothetical)

Say my uncle Joe or my friend Suzy wants to earn more on his/her $50k than what the bank is giving him in a money market savings. They don't trust the stock market or other more exotic investment vehicles and don't want to fool with land-lording or the process of acquiring real estate etc...

Trust is not a barrier and they see me as a vehicle for which they can make a good return on their money, of course understanding the normal risks. They trust me and are supportive of the idea of my purchasing a rental (using their money for a downpayment/repairs/etc - basically however I see fit) and then handling the actual day to day. They want to be as hands off as possible other than providing capital and earning some interest on their money.

My question is this: How do I physically use those funds in various transactions like down-payment, closing costs, contractors, property management, etc etc... From what I understand, it's not as simple as him writing me a $50,000 check and then me dispersing it. 

So where does the money "sit" until it needs to be used? I feel like this should be obvious, and I'm sure my ignorance is showing, but I cannot seem to find a clear answer...

--Do we need to set up a joint account?

--Do I need to have an attorney help us set up a special account?

--Does they just write me a check?

I want to make sure we are doing everything legally and with minimal tax implications. (avoiding gift tax, etc) and we would need to keep it separate from his/her personal finances for accounting and tax purposes....

Also, do things change if I have an LLC and use private investing the same way as listed above? Does this start to move into syndication??

I don't want legal issues due to a misstep with the SEC.

Any advice would be greatly appreciated!!!

[Simon W.]

Create another LLC that will have the operating agreement to show them as members, their % of equity, rate of return, how often will the distribution will be, how will their principal get reduced, and etc.

Consult with an attorney on setting it up.

The money will sit in a checking account for the LLC.

Make sure you are coding them in the balance sheet correctly to keep track of their contribution when distributing profits, interest, principal, and if you do a cash call for covering expenses that the income can't cover.

Different ways to go about it. If it's just a loan, then a promissory note will suffice. Keep track of the loan balance and interest.