Private Money $$

[Daniel H.]

Just looking for a little clarification on possible ways to use private money to purchase property. I am not looking for partners, I want to own 100% of the property.

Lets say I have 5 people committed to loan me money for investment property. $200,000 in total. Could I set up all their loans to be secured by the property? Or would they have to be more of a personal loan?

When it comes time to use the money to purchase a property, should I call on everyone to send it over before closing? Other ways to set it up so that the money is ready when I need it?

[Jon Holdman]

You have several choices, none great.

One choice is the five people, on their own and without any intervention by you, for an entity. The five of them contribute money into the entity. The entity then makes the loan to you. The entity is secured by a deed of trust (or whatever) and you make the payments to it. The entity then distributes returns to the individuals, files a partnership return and gives K1's to the individuals. Because the five of them are dealing with the entity, you don't have any security issues (other than the long-standing and highly debated "is a loan a security" question.) They may, but you don't.

Second choice is to do five separate loans, each with its own deed of trust. Trouble those will get recorded in some order. First in time, first in line. So one of the lenders is in first position, someone's in fifth position and the others are in between. If you default, the guy in first position has first crack at the property and the others can suffer a total loss. Its more complex than that, and if you default and the guy in first position foreclosures and it sells at the auction, then probably more than one person will get paid off. But the guy in last position is very much at risk for a total loss.

The fact these borrowers can't fund the entire deal is troublesome. You're probably not dealing with "accredited investors" (a IRS term, google if for specific requirements) or even "sophisticated investors" (a less well defined term.) These are probably not the sort of people you want to be borrowing money from, especially if you have to have a bunch of them involved. What Jeff S says about "one property, one loan" should be your rule. At most, do a first and second, realizing the guy in second position has MUCH higher risk.

Also, usually the way this works is the lender wire their money to the title company just before the closing.