Let’s assume that I have this great relative who sits on a bunch of cash and wants more then the stock-market/401K/Roth IRA/CD’s whatever can deliver in terms of ROI.
Enter me that investor who guarantees a return of 12% on his money if he/she lets me use them for 1 year, interest would be paid monthly/quarterly and the entire sum would be paid back after 12 months.
Other then drawing up the appropriate paperwork and having it signed/notarized what ever from both parties, how would this work?
Does my relative have to provide me with a 1098 for Tax purposes, do they need to report the interest income on their tax return etc? I understand that the relative has to for legal purposes report the interest income but if they do then I think I should be able to deduct my interest payments as well?
Just trying to get the basics down so that I have the ammo I need when I sit down and talk to said relative…
After securing the interested well off relative make a consultation appt with a Real Estate Attorney with this person…They should have a first position lien on the property you are investing…Including the money of your own that is in the project…And no you don’t handle their tax issue, their accountant does that…
Depends how you have this all set up.
If he is lending money to your business entity then the interest you pay becomes a business expense.
You should be a little careful about your use of the term “guarantee”. That makes it sound like a security which is subject to security laws. What is guaranteeing this? Are you providing collateral? Is this a personal guarantee?
What you seem to be talking about is an unsecured loan. Does your investor know he has no collateral?
The plan I had was to have him lend me the money on a one year term without me having a property under contract so in a way it is a “Unsecured loan”.
I do have the money myself in stock market, 401K, Equity in several rental properties (have at least 65% equity in all of them) etc but I don’t want to cash out or refinance at this point in time. The security for him is that he knows that if I have to I can cash out through refinancing or selling stocks.
The idea is that this would be a win win for both, I would get some cash to further build my portfolio and he would get a better interest rate then he could anywhere else.
I appreciate your comments, is there a “Best way” of doing this?
TXRehabber,
Congrats on nailing a sucker…Anyone who lends money on a unsecured deal deserves to lose it all…Unsecured lending is the equivalent to bunjee jumping with no bunjee chord…The paper the promissory note is written on is worth more than the loans collateral…
My question is this…You are offering to pay %12 on the loan and you claim to have stocks,401k etc…I’m %100 sure your equity portfolio isnt up %12 on the calender year 2010…My next question as you may already have guessed is this…Why don’t you use your own capital vs paying %12 for money when you aren’t making %12 on your portfolio???..And why not offer up collateral on your vast portfolio as security for this loan if you claim to have nothing but the best intentions to make good on this loan if it goes bad???
I tend to lean Rookie’s way on this. I know in theory it seems like a win/win, but these things just have a way of going south.
He is right, if your stocks are not consistently returning more than 12% then it makes no sense to borrow at 12%. Cash the stocks, the transaction costs are negligible.
You mention you don’t want to refi the properties, but why? If you are eligible to refi, borrow as much as you can at the low rates we have now. It also makes no sense to not refi with a bank, but borrow at 12% instead.
Otherwise, give your lender collateral. But you have to see if he is ok with junior liens on your property. I wouldn’t be, Rookie wouldn’t be, but maybe your guy is ok with it.
I have no issue in offering up existing portfolio as collateral if that is what is recommended.
What he has that I lack is liquid funds, what I have the he lacks is a little bit of experience in finding good properties both for long term holds and quick flips to other investors. I am by no means as experienced as half the people on this board but I have done a few deals and not lost any money yet.
We did do a deal together last year when he funded part of the Rehab on one of my rentals, we both agreed that we disagree too much on what we thought were the right things to do to make the rental profitable so we know we shouldn’t be partners.
I don’t think that would disqualify him from being my bank though? I was simply trying to find the best way to write this up so that it is beneficial for both parties, I am in no way out to scam him (I married his daughter so I can’t really cut any ties anyway :))
I understand from your harsh words (appreciated by the way, that’s how I learn best) that some collateral needs to be included. I will make sure that it is…
Stocks and or equities are highly liquid…So I apologize for saying this but Im confused…How are you planning to payoff this loan if it goes the wrong way if you cannot liquidate some stocks?..
Never implied you were trying to scam him,but lending unsecured is damn good incentive to get started in it…
My advice to you is pledge through a joint account and a contract your portfolio equalling the loan amount plus interest in the event of a default…Have a valid attorney make out a surrender of rights agreement and hold that in escrow just in case you default…If you dont ,its all good…That would show how confident you are and make your father in law very comfortable…
And no I would NEVER take a second position lien on a property…If you have free and clear properties you could easily pledge those properties as cross collateral on your deal/loan…
Father-in-law?!?!?! Dude you are playing with fire. You already say you don’t see eye to eye with him and couldn’t be partners.
Well, if he lends you money you ARE partners. I would bet he will still give you plenty of opinions on what you should do if you have his money.
If it were me, I would sell my stocks, refi my properties and even take cash advances on my credit cards before I even thought about doing this. Your “cost” could end up being ALOT more than 12%.
