Using HELOC to finance acquisition of investment property

[Chad Green]

What do you all think of my idea of a family member loaning money from a HELOC to finance acquisition of investment property?

Background:

Mom owns two houses (primary residence and a second residence that is used by family) in CA free and clear. One is worth ~$2m and the other is worth ~$1.25m. Mom has good income and no debt. Mom wishes to provide financing to children who wish to invest in residential RE (children have experience managing residential investments). Children have some cash, equity in investment properties, no debt, but not much income.

All parties are on good terms and have the same goals, always have. I respectfully ask that you not post about how it’s not advisable to loan money to family, etc.

Idea:

Mom secures a $1m line of credit via HELOC(s) (I think two HELOCs would be necessary to achieve $1m because as far as I can tell most lenders limit HELOCs to $500k). When children come across a good investment opportunity, mom uses her HELOC to obtain cash which she lends to children who purchase the investment in their (children's) name. Children might augment borrowed money by putting their own $100k - $200k towards the purchase. The purchase would thus be made with cash.

To keep the IRS happy: Mom and children sign a promissory note documenting the terms of the loan, which would be interest-only and with monthly payments being equal to those that mom would be paying her lender. Children make monthly payments to mom according to the terms of the loan. Mom reports those interest payments she receives to the IRS.

Children refinance the investment property with a conventional loan at 70-80% LTV, thus paying off most or all of their loan with mom.

Reasons why the family wishes to go this route (compared to something more conventional):

Mom doesn't have any interest in managing investment properties but is happy to loan money to children for them to invest. In order to minimize the growth of her net worth (for estate tax purposes), mom does NOT want to be on title to any more RE. There is a preference for a LOC instead of a loan for the following reasons: don't have to pay anything while waiting / looking for a deal; then when the deal is found, money is available basically right away and can thus buy for cash.

Questions:

1. At a high level, does this idea make sense?

2. Should mom record a lien on the property the children acquire with money they’ve borrowed from her? (Only care to do this if the IRS cares.)

3. Considering mom pays interest to the bank and children pay the same amount in interest to mom, who gets to deduct their interest payments? Only the children on their Schedule E?

4. If mom records a lien on the investment property that the children purchase, does that pose any issues for the refinancing of that property?

5. Would the regular seasoning period (6-12 months) apply for the refinance of the rental property?

6. Instead of the children refinancing the purchased rental property, might it make more sense for mom to convert her HELOC to a fixed rate loan?

Any other input is also welcome.

(I'm choosing to post this post in the "Private Lending and Conventional Mortgage" forum category because I think that's mostly what I'm after. But as you see I'm also concerned about taxes and the IRS. Should I post my tax related questions separately?)