Lending cash for interest

[Pavan K.]

I'm very new to this and would love to get your thoughts on this and are there any downsides to the process? What kind of documentation I need to get so I don't lose my capital.

A neighbor of mine came with this ask of funding for building houses . He is one of the partner ,there are many others In this partnership,as in, they all pool the money to buy land and build large single family homes . As of now , they have the land , the permits and city approval to build the houses. Grading is set to begin once weather gets better.

Bank loan is also part of this but  they also are asking known friends to fund the project in return of higher interest rate .  There will be a promissory note drafted for the amount and the duration and interest rates.

Is there a risk involved? 

[Randall Alan]

Quote from @Pavan K.:

I'm very new to this and would love to get your thoughts on this and are there any downsides to the process? What kind of documentation I need to get so I don't lose my capital.

A neighbor of mine came with this ask of funding for building houses . He is one of the partner ,there are many others In this partnership,as in, they all pool the money to buy land and build large single family homes . As of now , they have the land , the permits and city approval to build the houses. Grading is set to begin once weather gets better.

Bank loan is also part of this but  they also are asking known friends to fund the project in return of higher interest rate .  There will be a promissory note drafted for the amount and the duration and interest rates.

Is there a risk involved? 

@Pavan K.

Risks?  Let me count the ways!

First - if there is a bank loan - they will insist on being in first position.  So now if anything goes wrong, you are not at all guaranteed to get your money back - or put another way the bank gets first dibs.  Lots can go wrong... It could be anything... a mistake in estimating, a cost overrun, or something like the place burns down and the insurance wasn't properly taken out, or theft (of the money outright) or theft of materials along the way.    

My buddy just got burned by someone borrowing from multiple people where the others weren't aware of each other and they thought they were the only one lending, etc.

It all comes down to how well you REALLY know each person in the deal, and then, "do you REALLY know them?"  It is hard to even know where the problem could come from.  The fewer people involved, the better.   I would be asking, "If there is a bank loan involved, why do they need MY money?  I'm guessing for the down payment?  Which translates to, "I can't afford to really do this, let me spread the risk."

My friend who got burned would say, "Don't lend any money that you can't afford to lose."  I would say, "Deals like this go fine all the time... until they don't!"

All the best!

Randy