is this possible, private lending

[John Sandcastle]

I'm wanting to fund a friend with RE deals and not quite sure how to go about it. If im using the term correctly, it would be a private lending situation but these would be for rehab and hold rentals. Now my idea is to provide money for the purchase and rehab but want to be "bought" out so I dont have to deal with the rental side of things. essentially i help him build his rental property portfolio while getting a good rate of return on my money. I trust he can find good properties and do the rehab, he currently has 4 properties now that he has rehabed and rented which are cash flow positive and Ive done a few flips with success but always self funded so not sure about the investing/lending side. Is this even possible/legal? What are the tax implications? Can he refi to get the money to buy me out?would be looking at about 15-20% return within about 3 months. does this make sense? What would be the best way to go about this? partnership, llc, etc? If llc would he then buy me out after refi so the property stays in the llc name?

Sorry for being long winded just have no idea about this side of things.

[Jon Holdman]

Sure. You make him a loan to buy and fix the property. Its secured by the property. At some point in the future, he refinances with a different lender and pays you off. He would own the property. You would be the lender. He would give you a mortgage or deed of trust (whichever is used in your state) and a promissory note. Get with a lawyer to make sure you're covered all the bases in these documents and that your terms are legal. You also want to be sure you're in first position and that there are no liens behind you. And that you understand what will happen if they borrower defaults and the foreclosure process in your state. Up front, you should make the assumption the borrower will default and address that thoroughly and in writing. Hopefully it doesn't happen. If it does, you'll be glad it was discussed up front.

Now, doing it in three months is going to be tough, unless he's willing to use the price paid as the value. Banks will want to see at least six months ownership, most will want to see a year, if he wants to use a new appraisal.

If you mean actually making 15-20% return on your cash in three months, then you've found an incredible deal. That's a 60-80% annual return on your money. IMHO, that moves this from a reasonable deal out into "you're being conned with highly inflated numbers that will unlikely be met" range. That would mean a very high increase in value and the new lender will be skeptical of such a large increase. Now, if you really mean 15-20% annual return for a three month period, so 5-7% return on your cash for the time its invested, then you're in a reasonable range for a hard money deal.