How exactly does one set up financing with private investors?

Question

Hi! My sisters and I are forming a partnership and buying rental properties. We want to find some private investors to finance the down payments, in the form of loaning money to us at an annual 10% or so rate.

How do we draw up a contract? Do we use a notary?

And how do they give us the money? Do they write a check for us to put into our partnership's bank account?

How do we assure them that we will be accountable to them for their money and that we will accomplish our goals even though we are newbies?

If you can advise me on specific concrete steps to take and forms to use, I would greatly appreciate it! Thank you!

Kristin Towle · Answer

Thank you, Tom! I just found a great attorney on Friday! So step one is done. Now on to the forms themselves, as well as working with "unconventional" lenders!

Tom S. · Answer

@Kristin Towle  Specific concrete steps include contacting an attorney and having them draw up the agreement.  Shouldn't be a huge amount of expense - maybe $500-$1000 tops.  Obviously items like interest rate, payment terms, length of loan should all be included.

Keep in mind for the best rates on rental properties, conventional financing is the way to go.  However, conventional lenders generally prohibit borrowing the downpayment.  That question will be asked on the mortgage application form and they're going to request the source of your funds.

You may have to explore commercial or portfolio lending (banks that keep the loan in house), although rates are typically higher and terms shorter.

Welcome to BP too!