Structuring a Private Money Lender Deal

[Adri Jusczak]

Hi! 

I have a private money lender giving me 25k for 4 months at 10%. They are just going to write me a check for the 25k. My question is, can I just write them a check after the 4 months of 25K plus the 10% on top? Or is there a 1099 or some sort of tax doc I need to fill out to make sure I'm following the correct process? Thanks! 

[Beth Johnson]

@Adri Jusczak

The legal and safest way to do it would be with a written, signed promissory note (and deed of trust/mortgage, if you want to make the loan secured with real estate) with the interest rate and maturity date, along with any other terms you both agree to, included in writing. And yes you would want to provide a 1099-INT for interest earned at end of year so you can claim the interest you paid on your taxes as well.

Plenty of people do these types of small loans together without the legal paperwork but I find it leads to a lot of resentment when things go wrong. For example, I had a friend upset because they couldn't get their money paid back from a friend that they lent on a project. Without a maturity date on a written contract, the borrower kept the money after he sold the flip and put it into another project he got under contract. And since there was no default interest discussed, let alone put in writing, the lender didn't have much she could do to get her money back when she expected it.

The best way to find and keep truly private individual lenders in your inner circle for the long run is to help them understand how to safely and securely protect their principal investment with you. If you show them you know how it's done properly and formally for their protection, regardless of your personal relationship, they will be more understanding and trusting when hiccups occur that aren't in your control.