Need your advice: should I loan money?

[Jeanie H.]

Hello, 

I am a new investor and I want to use some of the equity on my home to do investing.  I have two people coming to me with offers and I'd like to get your opinion.

First, a little background. My brother and I own the house I live in together, each of us 50%. I recently took out a line of credit for $100k and the house appraised for over $400k. There is no mortgage on the home and my only other debt is my car payment at 1.9%. I don't have a lot of extra cash laying around because until now I've been putting all of my money toward my retirement accounts (Roth IRA, IRA, and 401k).

Offer #1
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Provide $60,000 loan for a company who does lease to own properties. They have a property in escrow that is set to close around 6/27/16.  Once it closes, they will try to find someone to sell the property to as a lease option.  They are also contributing part of the funds.  If they sell this as Lease Option, then I would get $266.66/month income for 2.5 years.  At the end of the 2.5 years, I would get my principle plus another $5,000.  Over the 2.5 years it comes to 30% earnings (annualized less than 12%)

If they instead try to do a flip, then the annualized income would be 8% but I wouldn't have any income during the time the property is being held.  And the 8% is calculated on a holding period of 90 days (I think).  I have to check that.  

I have no control over what they choose to do and my concern is that I am borrowing this money for 2.24% this year and then it goes up to 3.85% (or could go higher if the gov't raises rates).  At the 3.85% rate, I'd be at a negative cashflow during those 2.5 years if it is a lease.  I don't really like that.

Offer #2

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I don't have the exact amount to be borrowed but it would be around $100k (probably a little less) and I would be in 1st position on a 4-plex.  The borrow has been in real estate since 2002 and is considered one of the experts in our area.  He does work and speak for some guru but it was someone I hadn't heard of so I don't remember who it was.  They want to finance the property and hold it for a year in order to minimize their income taxes.  They would pay me 12% interest-only payments for the year, approximately $1,000 per month.  My payments to my bank would be $468.81/month when it switches to 3.85% interest and right now I'd pay $381.74/month until February 2017 (without Fed rate hikes).  They could turn around and sell this property sooner if they got a really good deal and pay me back even sooner, but it would have to compensate for their income tax so I don't know if that would happen.  I've asked for the property address but don't have it yet.  I just requested it about 20 minutes ago.

My thoughts:  The second deal is a better deal as I'd have first position on the property and receive a cash flowing payment each month.  Netting 8% or so per month is pretty good, I think.  The investor is very experienced and has a great reputation around here.  My only real concern is that it's the entire credit line and I don't have any experience.  This is my brother's property, too, and I'll do whatever I have to in order to protect his interests, including getting a second job to pay it off.

I really don't know what I'm doing and this terrifies me! And I don't want to risk losing my home or putting my brother in any bad position on it. I do have enough money in my Roth IRA that I could pay off the entire loan if it ever got to be that severe. But only $30k of that can be withdrawn without any penalties.

What are your thoughts? What's the right way to do private lending?

Thank you in advance for any advice you guys might have!  

Jeanie