How would you structure this private money deal

Question

Hello AllI have private money (family and im ok with that) for a deal i have a offer in on $58k purchase $35k rehab $140k-$145k ARV and PM will fund 100% with only a 18mo promissory note. I am looking to BRRRR this Property. Here is where i need help, the PM does not want there name on any thing in fear of being sued buy tenants. How could i structure this to protect both our interests? How can i cash out refinance without a mortgage on the property? Any help would be greatly appreciated!!

Account Closed · Answer

You're both better off with a mortgage. Her because the note is secured, you because equity is stripped thus making it less likely you would be sued if something did go wrong. As far as the LLC question, it makes perfect sense for the property to be titled in a LLC because that essentially makes it a business purpose loan (lender doesn't have to comply with RESPA, TILA, etc), for her to have a LLC probably doesn't make sense unless she plans to be in the lending business.

Jeff Rabinowitz · Answer

The mortgage adds a lot of protection for your lender. What if something happens to you and you cannot pay the loan back? The mortgage allows the lender to sell the property to recover their investment (if there is enough equity). I know, you have every intention of paying this loan back--nothing will happen to you. You eat well and take your vitamins so you won't have a stroke, heart attack, or cancer. You look both ways when crossing the street so you won't be hit by a car. I wish you all the best but the reality is that we are all vulnerable to events we cannot control. Do you wish your family member to be wiped out if something happens to you? I hope not. If the lender is concerned about privacy their name need not be anywhere in the loan documents. If an LLC is formed, only the name of the LLC need appear. (If they want more privacy a registered agent can be used for the LLC.) They could also form a trust and have the trust named as the lender. If they are able to start a self-directed IRA the account number of the SD IRA can be used as the lender. A Solo 401k can also have a name that does not identify the lender personally. There are many ways to avoid advertising that they are lending if that is the concern.

Jessica Zolotorofe · Answer

You don't need a mortgage on a property to cash out refi, you just need sufficient equity in the property. If I was the lender, I would never lend on a property without a mortgage. The only person with liability to tenants is the person on the deed, not on the mortgage. A mortgage is just a security interest to make sure that you can't sell the property without paying the loan back. Just like if a contractor put a mechanic's lien on the property, they wouldn't have liability to a tenant of the property. I have zero idea why her lawyer would require her to set up an LLC, other than to get extra legal fees to form one, and (if you have read any of my past posts, this will be pretty obvious) I am a MAJOR advocate for forming LLCs for protection, but I just don't see the need here. A lender is not subject to liability just by taking a mortgage if you have the documents drafted properly. Provide a full indemnity and offer to add your family member to your insurance policy as additional insured, if that makes them feel better.

Kevin McCann · Answer

Thank you all for the input. We are going to do it as simple as possible, promissory note with no mortgage lent to my LLC . this is a learning curve for me as this is my first private money venture! Learn as you go!!

Kevin Siedlecki · Answer

@Kevin McCann - 2 things. 1) You do not need a mortgage on the house to refi. You can cash-out a free and clear property, or to pay off any other liens, as long as the refi will be first position lien. 2) If you get a mortgage and her name is on the purchase, then she is much more likely to be liable than if she is the lender. If she is the lender, then there should be a clause in the contract, like all mortgage agreements, that she is not liable for anything.

Kevin McCann · Answer

I just now found out that her attorney told her she needs to set up an llc to do this transaction to protect her from anyone coming after her! Say we went the mortgage route and did it in her name where is she liable?

Wayne Brooks · Answer

You'll need a mtg on the property I believe to refi. The mortgage holder of course has no liability to the tenants/others. You probably just need to have an attorney talk to your relative to assure them there is no risk.