Private loan structure (LOC model)

[Gregory D Coburn]

I am looking for some advice on structuring a private loan.  

I have an interested party that would like to invest $100k into my business ( I have not yet created a LLC, but plan to). I have discussed some standard terms/structure that would work for both me and my investors.

To summarize I want to take the 100k and place it in an Ally or Discovery online savings account that will act as a holding account for the funds.  I would pass on the interest earned on the money to my investors.  This will basically satisfy the minimum IRS interest rate guidelines.  I would have access to these funds to purchase and rehab properties as needed.  When I withdraw funds from this account for a deal I would pay a higher interest rate (6-8%) for the duration of the loan and then upon refinancing the rehabbed property i would repay the loan which would stop the higher interest payment.  

My plan is to try and keep the money working for me so, there should not be long periods where the online saving account is siting with the full balance.  However, I would like to have an account setup for tracking all debits and credits to the loan account to make it easier for tax time.  

Questions:

Will I need to send a tax document to my investor stating the amount of interest earned in the calendar year?

Can the investor reinvest the interest earned into the account?  In other words can the interest be deposited back into the holding account (ally or discovery) to be used in future deals?  If so does this impact the taxation of the interest or will the IRS simply want the total interest earned for the calendar year?

Does the IRS require a flat rate of interest or can it be variable based how the money is being used? 

Will I have to claim the interest on the Online saving account as income even if its being passed through to the investor? 

With this type of loan structure, would this be considered a short term, mid term or long term investment?  Ideally this money would not sit in any one property longer than 6 months (seasoning period), but the investor would like to leave this money invested for the next few years.