Rules for receiving funds for private money loans

[Elliot Tan]

Hi everybody! 

My partners and I are starting a REI company. We will be flipping and purchasing rental units. Goal is to slowly scale into medium-sized multi-family apartments. Our strategy for funding is to find private money lenders to fund our flips and rental units, then cash-out refinance the rental units in order to pay back our private money lenders (BRRRR). We are starting out with our immediate circle (ie friends and family). Then as we get better at the REI game, we will look to expand our network of PM lenders as we do bigger and bigger deals.

I have several questions in regards to the rules and regulations of receiving funds for a private money loan.  I haven't been able to find any concrete answers to several of my questions.  So I've come to you all for help!

1. What's the difference between syndication and private money borrowing?  I can't seem to find a straight answer comparing the two.  From all the podcasts and articles/books I've read, I get the feeling there is a difference.  Just not sure WHAT the differences are, and WHY I need to differentiate between the two.

2. Can I simply receive funds from a private money lender transferred directly into our business bank account? What is the typical route we would take when it is time to receive the funds in order to purchase our deals?

3. We plan on using a promissory note from here: https://eforms.com/promissory-... . Is this good enough, or do we need something more? What other documents would we need in order to protect our lenders and ourselves?

4. Here is an example scenario: we find a property for $100,000 that we intend to flip.  Rehab will be $20,000.  We cannot find 1 individual to loan us $120K.  But we are able to find 6 friends/family to loan us $20,000 each.  Is it legal to create a promissory note with each individual, then pool all that money to fund our flip?  If it is legal........how do we then get that money to the seller, closing attorney, agent, contractors, etc...in order to successfully complete the flip?

I understand the CONCEPT of private money lending.  But the MECHANICS of it all is where I'm coming up short in understanding.  Thanks so much for taking the time to read my questions!  My partners and I will appreciate any and all advice given in regards to private money lending! Take care.

[Jerel Ehlert]

I am licensed to practice law in TEXAS, including related federal law.  I don't know where you are or where these properties are at, and that makes a difference.  Securities laws are generally governed under federal preemption and state law applies in certain other circumstances.  With that said, I'm not your lawyer.

In the world of capital, your capital stack will be composed of debt or equity or a hybrid instrument (a bit of both).  Any or all of these can be a security governed by state/SEC regs.  There are rules and case law that guide regulators in determining whether an instrument is a security or not.  Lots of great books out there to describe this and I invite you to do just that - read books on syndication.

DO NOT DOWNLOAD ANYTHING FROM THE INTERNET if you want to stay out of trouble.  Go see a lawyer in your jurisdiction.  Google is job security for lawyers.  The few hundred you spend getting a lawyer to do it right for you will save you thousands to defend a lawsuit on something you "downloaded" from the internet.

Any time you "pool" money, 99.999% of the time, it will be called a security.  Even loans can be a security (called a "bond").  Sometimes a loan is NOT a security, but regulators and the statutes they enforce start with the presupposition that all instruments are a security unless an exemption or exception applies.  You can have several lenders make a single loan and each have an undivided interest in the note and lien secured by real estate.

My private lending package consists of a deed with vendor's lien, promissory note, deed of trust (Texas), a business purpose affidavit or personal guaranty, lender's instructions to the title company (because I only represent the lender, even if the borrower is my initial contact), and letter of non-representation (explaining that I work for the lender and paid by the borrower).

The State Bar of Texas encourages its members to educate the public on areas of law, and in that light, this is for educational purposes.  I'm not your lawyer.  You need to find one where you are at.  Based on the questions, you should probably find a club or group where you are and talk to locals.  Maybe partner with people who have done this a few times.