How to structure private money deals?

[Ken Yearwood]

Hi BiggerPockets,

I am a newbie looking to purchase my first rental property in the Greater NYC/NJ/CT area this year. I have a significant amount of interest from private investors and see myself being able to raise 100-200k.

I'd like to learn more about structuring such a loan.

(1) Are there clauses I should definitely include, or be made aware of?

(2) When having a lawyer draft the contract (which I assume resembles a mortgage), what are questions I should be asking?

I appreciate any advice you all have to offer.

[Bill Gulley]

Welcome Ken!

I know this is tempting to do, but there are endless ways to get into trouble if you don't have a lending background.

The Securities and Exchange Commission has regualtions concerning accepting funds from "investors" and how loans can be secured.

State laws also dictate the number of investors you can deal with in addition to the SEC.

If you borrow from others and provide the loan you make as collateral for the loan they gave you, you are skirting on a securities violation, like a corporate bond.

To provide loans as a business enterprise, you will need to have a license. So you need to be in compliance with federal and state mortgage brokerage laws.

You and your investors could form an LLC and they could provide money through the Operating Agreement and the LLC could make a loan, but that LLC will be limited to the number of loans and will need to be registered as a non-supervised lender. And,you will again bump into the mortgage broker license requirements.

It might be easier for your investors to make a direct loan on a property, but they will be limited individually depending on how the SAFE Act is implemented in your state. From a federal view point, anyone making a loan on a residential property will need a license with few exceptions.

It will probably be easier for you to find an existing mortgage broker and work with them.
While recent laws were enacted with a consumeristic public cause, they really help limit competition and alternatives that benefit banks.