Structuring a financing deal with a private investor

[Zoe Cramer]

I’d love to get some advice on the best way to structure a private loan. The lender is a relative so she’s very flexible and is open to hearing my suggestions, however, I want to make sure I’m approaching her with a fair deal for both of us. She would be financing 100% of the investment with cash. The properties I’m looking at are all under $130k.

Partnership: One potential option is for us to be 50-50 partners on the property. If we did this approach we’d split all net profits evenly and when we eventually sell, she’d get her principal back first and then we’d split the profit after that.

Straight interest: I think she wants 10% interest if we do this route. She is willing to allow me to pay down the principal throughout the life of the loan too. I am thinking to pay her back $10,000 in principal annually if we go with this option and then the interest owed would be compounded annually, so I’d be paying less monthly interest over time since the principal is getting paid down. This option seems like the better deal for me, except for the fact that my $10,000 annually that I’m paying her back could instead be used as a down payment on a new property.

If anyone has any other suggestions besides these two, I’d love to hear them. A little more background about me: I own a condo that I bought a couple years ago with an owner occupied mortgage that I now rent out by the room to students and I also own a single family home that I live in (I converted the basement into an apartment for myself) and rent out by the room too. I can not qualify for another mortgage right now, which is why I reached out to my relative for a private loan from her. I should be able to qualify for an investment mortgage by next summer though.