Private lending from family members

[Anthony King]

Are there any rules/regulations regarding private lending from family members? How are people structuring these deals? I have been doing flips/BRRR's with my own money and would like to bring on family members to earn a return by loaning to me directly (not tied to a specific deal), at a fixed interest rate payable in one lump sum similar to a CD with a bank.

If I do a promissory note through a title company attorney is this enough? How do I provide the investor a 1099?

[Jeff S.]

At some point, your friends and family will run out of money for your deals, @Anthony King. Plus, once you do enough flips or BRRRRs, you’ll inevitably overrun, mess up, or otherwise lose money on one. Nothing will change your relationship faster and for the worse, than when you do business with friends or family. I know they might be easy to borrow from, but you might want to look at more professional funding sources in the longer term. If not, at least protect your friends and family like other lenders would want to be protected. OK, lecture over.

Don’t do anything that could create unenforceable loan documents. Borrowing from multiple investors on one note creates a security that likely requires a registration or some other form of exemption. This is not anything you want to get involved with at this point. Both you and your family members should meet with a lending attorney who understands lending law in your state.  Lending attorneys are not the same as real estate attorneys. This is a more specialized field. It’s possible your multi-beneficiary plan might not be legal.

The idea is not to scare anyone but to help everyone understand the risks you’re all taking and how to protect yourselves. This will require a set of professionally prepared loan documents. You and your family can generally set the terms, but the attorney should prepare the documents. He or she will also explain licensing, usury restrictions, and a host of other requirements. You’ll also need owner and lender's title insurance as well as the standard fire and liability coverage, which I assume you already buy. Don’t forget the personal guarantee. I’m not kidding.

I know this is more complicated than you intended, which is one reason to look at professional private or hard money lenders (sorry, still lecturing), but you owe it to your investors to protect them and ensure they know exactly what they’re getting into.

Best of luck to you and your lenders, Anthony.