Using LLC to aggregate investors for private mortgage

Financing, Hard Money Lenders, Private Money
1

I’m a real estate invstor near Seattle WA and currently own 5 properties. I’m a ‘buy & hold’ investor and want to acquire more properties while prices are depressed. Financing is of course the current obstacle.

I’ve recently set up a Private Mortgage Lending company, loosely based on Alan Cowgill’s course and have done a luncheon which has attracted a handful of mostly retired folks who like the idea of getting 8% on their idle cash. Great, eh?

Now, the problem I am facing is that the first mortgages for homes in our area range from $150K to $300K, and these private lenders have funds ranging from only $30K to $80K. I know that I could put them in line in a first/second/third deed of trusts based on their loan amount, but I think the folks in the 2nd position and up may not feel real secure on their note.

One suggestion from a fellow investor is to have 3-4 of the interested lenders create a LLC, then they fund the LLC with their cash and the LLC then loans the money to me. The LLC has the first deed of trust on the property and it also is the Holder on my promissory note. I pay the interest to the LLC and principal belongs to the LLC.

Has anyone done this, or do you have any thoughts on weather this could work or violates any SEC regs? My research shows that according to the state of Washington, it seems that a “one lender to one note” is ok, but I’m not sure if that translates to an LLC being the “one lender”. Below is the applicable exemption from their website at http://apps.leg.wa.gov/RCW/default.aspx?cite=21.20.320. Your thoughts/comments are appreciated.

–Bob

[i]Any transaction in a bond or other evidence of indebtedness secured by a real or chattel mortgage or deed of trust, or by an agreement for the sale of real estate or chattels, if the entire mortgage, deed of trust, or agreement, together with all the bonds or other evidences of indebtedness secured thereby, is offered and sold as a unit. A bond or other evidence of indebtedness is not offered and sold as a unit if the transaction involves:

(a) A partial interest in one or more bonds or other evidences of indebtedness secured by a real or chattel mortgage or deed of trust, or by an agreement for the sale of real estate or chattels; or

(b) One of multiple bonds or other evidences of indebtedness secured by one or more real or chattel mortgages or deeds of trust, or agreements for the sale of real estate or chattels, sold to more than one purchaser as part of a single plan of financing; [/i]

2

If the LLC loans you money and you go purchase a house for cash, I guess you can go back and give the LLC a deed of trust (mortgage) on the property. Of course, this leaves you with most of the tax bite. Principal payments are not deductible to you, only interest.

why doesn’t the LLC purchase the property directly? You take a cut for “management fees” and pass the rest thru to the investors. You are only taxed on what you keep, and the investors are taxed on LLC net rent income.

Or the investors could loan money to the LLC, which then becomes deductible to the LLC leaving the investors to pay tax on remaining net LLC income plus individual interest income.

Generally I prefer debt to equity, however, how you choose to tax the LLC matters because in some scenarios debt affects basis.

There are lots of other options that would avoid the “LLC loans money to you” problem. You need to run this by a good CPA to help you see the pros and cons of each method so you can present it to the investors.

I don’t think you run afoul of SEC unless you make a “public offering” (advertising for investors, etc).