Structuring/terms of small unsecured promissory note

[Brian Alterman]

Hi BP!

I'm new to investing and have joined my local REIA. Learned a lot and have done some great networking to help me get into this business and learn.

I came across an opportunity  to work with another investor in our group to provide a private loan. Investing is somewhat new to me, although I've leanted a lot, but lending is even newer! I'm comfortable with the people, their experience, and their deal. I just want to make sure my bases are covered so I can get repaid and to know I'm getting a good return. 

I need help structuring the Promissory Note and verbiage. It's a small loan, $10k, that has a Promissory Note tied to a current flip they're almost done with. Expects to go on market in 1 week. Loan would be for 6 months. 

My questions are: 

1. This would be unsecured, first lender for entire project has 1st mortgage. And my Promissory Note wouldn't be recorded. It says in our Note that I will be repaid in full upon sale of this property. Is that enough to protect myself? Should I have other wording in it or take other actions to better protect myself, like have the property as collateral (even though I'm not the main lender) or a Personal Guarantee (loan is to their LLC)?

2. What is a typical Interest rate for this size loan that is unsecured and for 6 month terms? Interest only, no points, and no payments. Just principle and interest repaid when property is sold (up to 6 month terms) and then it jumps to the legal limit of 18%. 

Any help or advice on structuring this or wording it would be greatly appreciated!

[Darren Eady]

Brian, I've been lending private money for nearly 20 years. You're setting yourself up for failure with your current structure with no recourse to recoup your investment. You need to secure your investment with either a notice of interest filed against the property (at minimum), to even get repaid, or a 2nd mortgage, or a joint venture with the first private lender and a new LLC to lend to the borrower in 1st position. Also, not having a payment each month sets a bad precedence for getting repaid. Make the payments start 30 days from the day you lend money at 12% interest rate, or higher, and make the penalties stiff if they do not pay on time, or early. I've "given" too much money away to know that even a deal that "sounds" good will turn ugly without the correct documentation and leverage.