Private Money Question

[Reuben Royal]

Ok so I've recently found someone who would like to invest some money in real estate, he said he has about $21,000 to invest. My question is how do I put this to work most effectively? From the deals I've run into, that amount would cover either rehab or a down payment on a property but not both... I was looking into hard money but I myself don't have money for the down payment on a hard money loan currently. Will hard money lenders allow me to use OPM to put as a down payment? Aside from finding other private money lenders, what are my best options here?

[Jon Holdman]

First, how much of this person's available investment money is the $21,000? If that's all the money they have to invest, I would not take it at all. If you lose it, and you MUST assume that is a possible outcome, you will badly hurt this person. And legal entanglements will follow.

If they have a significant portfolio, and this is one small chunk of their money, then it might be something to consider.

I have done deals as a lender where the borrower did borrow a small portion of the deal to cover their part. This money, however, was NOT secured by the property. A HML might allow this, but may not. This would be a second mortgage, and it weakens the HML's security in the property.

Finding other private lenders may be troublesome, too. If ones in first position and another is in second, the second mortgage position is much weaker. So, they have a much greater risk of a default. But if you pool their money, you're much closer to "selling securities" and all the baggage that entails.

So, if you're trying to do fix and flips, and this person really, really trusts you and you're confident you won't hurt them, then doing this as a personal loan may be the right approach. Then its "your money" as far as the HML is concerned. But do be aware the lender is in a very weak position to get their money back if things go south.