Pooling investors money for a cash purchase.

[Mitch Kronowit]

There was a topic on this about 2 years ago, but I wanted to update it with my own information. Plus, I think it's a very useful and relevant discussion for other investors out there, considering especially the current financing climate.

Those who have followed some of my more recent posts know we're looking for our 3rd rental property. Conventional and traditional financing is tough to qualify for as the ink on our lease for rental #2 is still drying, sending our DTI ratio too high for tight-wadded banks. Seller financing and buying "subject to" in my area is about as promising as mining for gold in my backyard.

However, I do have a few friends with money that would like to invest with me. They are getting pathetically low returns on their current savings vehicles and they know I do a good job fixing up properties for rent. Our idea is pool their money and, along with some of our own funds, buy a small condo or home for around $50-60k, all cash. Rather than bring in my friends as equity partners, we would like to simply borrow the funds from them and pay them a decent return. IOW, they would hold a mortgage on the property we buy and rent out.

The question is how best to combine the funds from 2-3 different people? Obviously, nobody is going to want to be in the 2nd or 3rd mortgage position, so I would like to place them all in 1st. I'm thinking the investors form a partnership and lend the money to our LLC. Our LLC purchases a property and hands the lenders a promissory note and a trust deed to secure the loan. We're thinking the note would provide a healthy return and be due in 5 years or so (we should be able to refinance by then). Sound good so far or are there other suggestions and recommendations?

Also, are there any federal or state regulations that are going to mess this arrangement up? Who can I use as a trustee (I've read some attorneys just list any prominent title company without notifying them that they're the trustee)? Our interest payments are still tax deductible, right?

Obviously, I am going to go over this with the professionals before anything official transpires. I just want to be armed with as much info as possible so I can have an intelligent conversation with my attorney and accountant.

Thanks everyone!