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Updated about 8 years ago, 10/03/2016
Private Money Lending Trust
Hello All!
I'm trying to raise capital to do some co-investing with experienced partners. I am new to the game but have done a fair amount of research, networking, and reading around the topic of realestate. I am 21 and have a decent paying software job for Fort Wayne IN, at $60,000 salary. I am able to set back about $33,000 a year out of this salary, but around $18,000 of that goes towards tuition for my wife and I each year. I am disappointed with such slow financial growth, and really want to get out of software and do full-time real estate investing. I imagine I'll have to keep my software gig for several years before I am able to do this.
In the mean time because I am only able to use about $15,000 a year towards realestate I thought of a creative financing plan to fund future partnership deals. The idea is you gather a series of private lenders and you put all of the loaned money in some type of entity. Each lender puts their money in at the same time, and the loan length is 5 years. The max debt I want to take from these lenders is around $80,000 combined, because if something were to fail, I could still make payments at this point. The entity that these lenders put their money in, will in return give them 7% compound interest (not amortized). In a way its kind of like an REIT. My LLC will control the entity that the loaned money is in. The lenders can't call their loans unless I miss payments of course.
My question to you, is if I were to set something like this up, what would the entity type be? Some type of trust? What are the legal consequences if any (I will still ask an attorney, don't worry)?
Seems like a lot of work!
First, you have to convince several lenders or more, to join in on what you propose. Not saying that this cannot be done. But, as how you explained it, seems it would be better to go get a conventional loan of some sort and start that way.
Next, why even build a Trust to have people put their money into it, while you can borrow from each individual lender and pay them that way.
Seems you are trying to minimalism your own risk taking and placing it on the lenders. If I can see this, they certainly will. You have mentioned an REIT, why not just handle it that way and tell each individual investor, that they are taking the risk and if the trust fails, they loose money.
Your "Plan" is most important - in this scenario you have painted here, seems it will fail at the door. You are a software developer/student? Then, it seems you can read! My suggestion is you read on this site a little more. See if you can come up with something more viable and reliable.
As far as legal structuring of whatever entity you like - again, come up with a viable business plan first!
#5 Wholesaling Contributor
- Real Estate Broker
- Naples, FL
I have no suggestion for setting this up if you decide to move forward. I do believe that finding a lot of investors willing to accept 7% may not be easy. I have a handfull but these are people known to me for 20+ years. I don't offer them equity positions. I give them 1st lien mortgage positions.
Thanks for all your suggestions!
@Nick Sabat I was told by an experienced investor that getting individual loans for future purchases could face legal consequences. Because it may seem that your using loans to pay off loans even though that's not my intention. These loans won't be tied to a specific property, their more like a line of credit for future deals. Maybe setting up an REIT would be the way to go.
@Account Closed
From my understanding there's a work around to this. You can put the property in a land trust and name the beneficiary the LLC. My intention was to have the lenders loan to my LLC directly though, most of these lenders would be family and I believe they would do this.
K.I.S.S.
I've went from 4 units to 63 units over the last 5 years in small markets north of you using nothing but land contracts. Most of them with no money down.
If I could do this in Kendallville, Angola, auburn, Albion and Lagrange with NO PARTNERS and basically NO MONEY, you can do it in a much bigger market. I could go from 0-100 units in Fort Wayne in one year. I have no desire to do that but I know that I could.
Keep in mind that I haven't been buying garbage SFR's either. Mostly small multi-family but as big as 12 and 16 unit complexes.
Buy some books on seller financing and property management, read them and start networking with local investors ASAP.
Best of luck man. It's a simple business that people constantly overcomplicate and that keeps from growing as fast they could.
#2 Innovative Strategies Contributor
- Lender
- The Woodlands, TX
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#2 Innovative Strategies Contributor
- Lender
- The Woodlands, TX
Its a total non starter. Your proposal is the sale of a security, and will have to comply with Federal Securities laws and regulations, state security laws, or both.
I gather from your post that you want to invest as a limited partner or passive investor in investment opportunities controlled and managed by others. The ability to successfully analyze these situations is vital to success. You can have 4 winners out of 5 and a disaster in the 5th can wipe out your profit in the other 4. Compounding this with borrower money can result in a long term disaster for your financial plans.
New investors usually have no idea how many people there are out there who "syndicate" real estate iinvestmentswho are either (1) unknowledgeable (2) inexperienced (3) undercapitalized and or (4) dishonest.
- Don Konipol
@Brandon Hicks great job on your expansion! I am really curious how you were able to do that with typical land contracts? From my understanding after so many years in a land contract you need to qualify for a loan to pay in full. Almost like a balloon payment. If that is the case, you would run out of credit quickly because banks will not loan typically on more than 5. It's hard to even get to 5 because of the income/debt ratio.
Not true with portfolio lenders...aka smaller local banks.
Brokers and big banks are for hobbyist investors...if you want to scale you need to go where they actually lend money not broker it.
@Brandon Hicks I forgot about portfolio lenders! I should have known, do you have any recommendations on portfolio lenders since you are around my area? I have excellent credit, and about 18k in assets, only 7k in cash. So I feel like I would be deemed reliable.
I use CSB but that was partly due the fact that we had already been banking with them for several years prior to buying my first property.
Really, any small bank that lends for their own portfolio would be a good place to start a discussion. Maybe attend a REIA meeting in Fort Wayne and get some suggestions from guys in town.
@Brandon Hicks I've been trying to do as much networking as I possibly can these days. I'm in the process of purchasing a residential property that has long-term commercial buy-out potential on the intersection on Dupont Rd next to Lima Rd, as my primary address. Unfortunately because of this I can't have my credit pulled by portfolio lenders, until after I close, but I plan to focus my energy on them until I can.
Since your semi-local to the area, I'd love to sit down and chat over lunch if you have some time!