All Forum Posts by: Anderson Charles

This is a great question and likely something you are running into with the attorney is that the loan terms are considered illegal in that state. Each state has a set of laws called usury laws that outlines the legal maximums for interest rates and fees. Most states break down the limits according to the type of loan. For example, if you are an LLC lending to another LLC for a business purpose loan, that is likely going to have much higher limits (or none at all!) versus someone obtaining a loan for their primary residence. If the attorney you reached out to is familiar with lending laws in your state, and they are saying the loan is above those usury limits, you are treading into water that could lead to the loan being forgiven without repayment or the lender repaying all the fees to the borrower because it is an illegal loan. This is not a great scenario for the borrower or the lender, especially if the lender/borrower relationship is friends or family. Everyone is happy and thinks positively at the beginning of a loan, but when things go wrong, people get real ugly real quick when money is involved. Either consult another attorney to double check the loan terms are legal, or proceed with caution knowing this loan could be deemed illegal if ever challenged in court.

If you are borrowing from friends/family and plan to pool their money together in an LLC that is not secured, you will need to research state and federal law related to this type of activity as that could be considered a security in your state and/or potentially subjected to SEC regulations associated with a pooled mortgage/debt fund or private equity fund (syndication). Additionally, you should consider how long your friends/family are willing to have their money out to you. If you use DSCR loans as permanent financing, you could be locking yourself into loans with stiff prepayment penalties that usually have a 5-year prepayment step-down penalty. If your capital investors want their funds back before year five, consider how you might be able to pay them off earlier than your refinance would allow.

While borrowing from friends and family is typically the starting point for most people when finding private money loans, it's also the quickest way to sink relationships, if not done correctly or as a true business transaction. I find a lot of people just assume that since they inherently trust their friend/family member, a lot of the "what ifs" and worst-case scenarios are not hammered out in fine detail which can lead to confusion and personal interpretation after the deal is closed, which it should have been addressed pre-emptively before the money was lent out.

So my recommendations are 1) get an attorney involved so you know what your able to do legally and s/he can draft up the proper legal documentation to support the path forward, 2) consult with DSCR lenders to understand your prepayment penalties and bake that into your exit strategy with your private lenders, and 3) consider the cost of capital in relationship terms rather than monetary since that matters more than getting the money. You don't want to burn any bridges by miscommunications or not properly addressing resolution paths, buy-outs, exits, etc. in a legal manner on paper and signed by parties. If you and your family wants to become more educated in how to transact this loan safely, you could check out BP's newest book - Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending. I happen to be one of the co-authors and an experienced private lender. Bottom line, if you plan to pool funds so that you don't have 2nd, 3rd, 4th liens, then you will need to tread lightly and ensure all parties involved are on the exact same page so that no one gets hurt/annoyed/disappointed/angry after funds are already tendered.

BiggerPockets has a new book out about private money lending. I highly highly recommend reading this before accepting capital for a real estate transaction, especially if you are borrowing from friends or family. There is just a lot that COULD go wrong, and if the deal goes sideways that could make for some very uncomfortable Thanksgiving day dinners if you know what I mean. I also wrote an article recently about gap funding from relatives and what the different scenarios look like.

The book can be found here: https://store.biggerpockets.com/products/lend-to-live

Please also note - to be safe - this should ONLY be for non-owner occupied (ie investment property). Doing loans for properties that are owner occupied (such as a MF house hack or a STR that will be occupied by the owner more than 14 days a year) have regulations for consumer protection at the federal level, that often are much more restrictive on the loan terms, who can originate the loan, etc.

Hi Amy! Not sure what your interest might be in real estate, but mortgage processor is something that can be done 100% remotely. If you can get tied in with a few private lenders, they may be really happy to have someone who is consistent, attention to detail focused, and motivated to learn more about real estate.  You will get to see transactions from the other side of the table, versus representing a buyer or seller in the transaction.

It would be a smart idea to shadow a private lender to see how they underwrite properties. Ask plenty of questions and see what it's like on a day to day basis. Books can only take you so far. And remember, It's your money you are lending out, so make sure you know all the legalities involved. 

Hi Anderson! Welcome to the private lending family! And I hope you enjoyed the book!

In the book, we actually have a personal risk assessment exercise in the first step of our CPR method to private lending. It's a PDF worksheet you can print off and start really putting pen to paper and figure out where you are financially, risk tolerance wise, and timelines. I can recommend starting there if you haven't done that already. It is the first thing we talk about in the supplemental materials for the book.

Second, if you bought the book through the BiggerPockets bookstore - in your Bonus content area of your account is a video about risk mitigation. In that video Beth and I talk about the four most common risks new lenders need to mitigate, and how you can change the terms of the loan to help mitigate those risks. I'm not saying you can get to zero risk, but it's more an exercise in seeing what COULD go wrong and how you can avoid it.  Life happens, and even with the best underwriting, if your borrower gets hit by a bus three days after closing that will be something you have to contend with. I don't want to leave you with the idea that this is a risk free way of investing.

As far as the mortgage part of your question. Depending on your cash position right now - if you have a smaller amount to lend now - say from a retirement account, a 401k, of even a bunch of very low yielding CD's at the bank - you can try your first loan with that capital. Basically start the process with training wheels, see if you like it, and then you can talk about the process of equity harvesting from the rentals you already own. One thing I will point out is that if you get an amortized loan on these properties to shore up cash flow - while yes you may be borrowing it at 5% or 6% - it's amortized - so the payment is going to be much higher than a fee simple (interest only) payment. You can find amortization calculators online really easily to play around with the numbers to see what your monthly payment could be (with PITI) and what you could potentially get returned to you on a monthly basis in the form of a payment from a borrower of those funds. While it sounds awesome to borrow at 6% and then lend it out at 12%, there are other factors that will affect what your actual cash flow is on a monthly basis.

I hope that helps and I'm looking forward to others comments on this!