Logistics of private money for rehab

[Dan Hertler]

Hi all, I have a SFR under contract that will be closing in the next week, and I will be doing a BRRRR once tenant moves out (next few months). I am funding the down payment myself, but I would like to obtain private money for the rehab.

My question is surrounding the exact logistics of making this possible if I do not currently have an LLC.

Qualifying question: do I explicitly need an LLC to do this type of transaction without setting off IRS red flags?

If no...

Once the promissory note and other loan documentation is in place, how exactly do I take this cash in? Does the lender wire to my checking account, then I pay the GC or tradesmen directly? And once I complete cash-our refi, I would wire loan proceeds + agreed upon interest back to the lender?

From an IRS perspective, can I receive/pay out loan proceeds from a non-business checking account? e.g. I ONLY use this checking account for real estate purposes, but it’s not considered by the bank to be a “Business” checking account.

Reading Matt Faircloth’s Raising Private Capital and while being a great book, still need some more info regarding the operational aspect of the transaction

Thanks & Happy new year!!

Dan

[Rick Pozos]

If you get a construction loan for 50k remodel of your home they will record a loan for 50k. BUT you will not get any money at closing. They will probably hold all 50k until the contractor needs a draw. They send someone to see if they did 10k worth of work, then they release 10k. This process happens 2 or 3 or 5 times to get to the 50k. Some draws might be for 10k or 25k or whatever work contractor has done and needs a draw for.

The same would happen with your private lender. They would put a 2nd lien on your house for 50k (or whatever your rehab is), but you dont get money right then. You ask for the money as work is done. They write a check, wire or however you guys are doing it. Then you pay the contractor that money.

When I first started, I was doing most of the work so I got a draw for 15k and only had to pay out 7k or 8k and got to keep the rest for my work or sometimes I just requested less money so that my loan balance was not so high at the end of the project.