How to write a promissory note and 2nd lien on a rental property

Question

Hey,

Does anyone know how to write a promissory note and a 2nd lien on a rental property on Ohio. I'm looking for investors so I can scale up my rental portfolio. I currently have one unit, but I'd like to bring on an investor so I can get almost all my equity out and use it for a down payment on a 2nd property. Basically, I want to borrow 35K at 12% interest and pay it back over 6. This would bring my HELOC loan to about zero, so I'm liquid to put a down payment on a 2nd property. To pay off the 35K would require about 75% of my cash flow from my 1st rental, leaving 25% for wiggle room.

Please let me know what you think.

John Bongers

Don Konipol · Answer

Investors writing promissory notes and related mortgage or trust deed documents almost guarantee future litigation.  Real estate attorneys and or title companies produce these docs, usually quite inexpensively.

Shiloh Lundahl · Answer

@John Bongers you have 2 issues I see here.

1. The promissory note is a legal document and the liability of writing it correctly should be done by the individual lending the money or by an attorney.

2. You’re new and you want to take out all your equity in a property with a second position note.

Don’t get me wrong, I use second position notes all the time and have raised millions of dollars doing so. So I believe in the concept. However, I don’t strip all the equity out of a property. I don’t like to leverage a property higher than 80% if I have someone in second position. I want my second position lender to feel secure knowing that there is still 20% equity over and above their position. Secondly, I have a proven track record and I keep reserves. This allows for us to weather the ups and the downs responsibly. investing with low reserves and leveraging higher than 80% to buy more properties with thin cash flow will scare away most sophisticated investors or private money lenders.

Learn how to do it more responsibly and develop a track record and network. That will help you attract more private money lenders.

Eliott Elias · Answer

Get a lawyer to do this.

John Bongers · Answer

Shiloh,

Thanks for the response. If I went forward with this, I'd only be taking out 80-85% equity because I found a decent deal and used the BRRRR method. Also, I do have some cash reserves and  my W2 day job makes enough to cover any potential issues. The primary reason I might do this route is to begin a track record. I've got to stary somewhere and this potentially seems as safe as I can make it (for me and the potential investor).

Does this sound reasonable for a beginner? In speaking with others I've also come to realize that I definitely need an attorney to draw up the documents. Additionally, is placing a 2nd lien on a property as simple as contacting a title company and doing it through them?

Thanks

John

John Bongers · Answer

Looking a people's replies, I agreed that a lawyer needs to do this part for me.

John Bongers · Answer

Don,

Does that mean I'll get in legal trouble or does that mean I should have a real estate attorney draw up the documents.

Thanks

John

John Bongers · Answer

Kevin,

I'm looking at that route as well, but I just bought the property in September, so I won't be able to refi. Also, by the time I hit the 6-12 months where I can refi I'm worried that rates will be higher and that housing prices might start slipping down. I did a mini version of a BRRRR on the property right after I bought it and it was a decent deal, but I don't think a refi would get all my cash out. If this is the case, I won't be able to come up with a down payment for a 2nd property unless I get some creative financing.

I thought using my current cashflow and cashflow going forward as 2nd loan payments, I could get the money for my next down payment much earlier.

I'm new to this stuff, so I'd really appreciate your thoughts.

Thanks

John

Kevin Sobilo · Answer

@John Bongers, just to be clear you aren't looking for an investor to partner with. You are just looking for a private mortgage.

Why would you use the proceeds of this loan to pay off the HELOC? I would guess your HELOC is at a rate much lower than 12% and likely has more flexible payment requirements.

Why not just do a cash-out refinance with a local lender? Many offer adjustable rate mortgages that will adjust down if/when rates lower.

How to write a promissory note and 2nd lien on a rental property

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