We spent the past week in Miami so I made no progress on finding a new video editor.
However, Dia made this video recap of our trip. Might have to recruit her for my YouTube videos.
Livin La Vida Luna
J chillin' on Española Way.
I'm Lending My Buddy $100K
I’m lending $100K to my buddy on his new construction project. I know, I know... “Don’t do business with friends or family.”
The truth is... I only want to do business with friends and family. If one of us succeeds, we should all succeed. If one of us goes down... well, misery loves company.
The trick to doing business with friends and family is having tough conversations up-front so you don’t have to suffer through impossible conversations down the road.
In this instance, the tough conversation happens to be hundreds of pages of legal documents that protect my investment and our relationship in a worst-case scenario.
The last time I checked, there were ~7 different loan documents my lawyer includes in my loan package. For the sake of brevity, I’ll go over the most important three.
1. 🤙🏽 Promissory Note
The first document is called a Promissory Note, which is basically a formalized “I owe you.”
This is where we outline the terms and conditions of the loan. These are the 4 most important sections of the Promissory Note:
🦉 Who is Involved
The first section identifies who is involved in the transaction. One party is the borrower, the other is the lender. This section includes the name and contact information of each.
🔢 Terms of the Deal
The second section outlines the loan amount, interest rate, and payment structure. This loan is for $100,000 at 15% interest paid monthly.
⏰ Late Payments / Default
The third section details what will happen in the case of a late payment or if the borrower is in default. Of course, you don’t want to anticipate late payments, but if they occur, the borrower owes the lender an additional 15% of the payment amount. If the borrower cannot cure their default, I can call the loan due immediately or foreclose and collect the security.
The fourth section identifies what the note is being secured by. In this case, the note will be secured by real property as well as shares in the LLC that owns the property. This is where things can get a bit tricky.
This loan has two lenders: a hard money lender as well as me, a private money lender. The hard money lender will require a first position lien against the property. There’s no way around that.
I’ll be a second position lien holder, but I’ll have something the hard money lender won’t: LLC shares in escrow. If my buddy defaults on my loan, I can take full ownership and control over the LLC. Once I have that, I can sell the property or execute the business plan to my liking.
I'll be able to do either well before the hard money lender is able to successfully foreclose on their first position lien.
2. ☠️ Mortgage
The second document in my loan package is a mortgage.
I do almost all of my personal real estate investing in NJ, which is a mortgage state. Some states don’t use mortgages, they use Deeds of Trust instead.
Some states use both or either.
I’ve never seen a deed of trust so I can’t speak to it, but a mortgage is basically a more formal promissory note. The only difference is that a mortgage gets recorded with the county you’re purchasing property in. This is an important distinction because if your lender lets you buy a property without recording a mortgage, you can technically sell or refinance that property without being forced to pay them back.
The mortgage is also insured by the title company with a lender’s policy. This policy protects the lender from someone else making a claim against the home.
3. 🤝 Personal Guaranty
The third most important document is a Personal Guaranty.
A personal guarantee is a promise made by an individual to accept responsibility for some other party's debt if the debtor fails to pay it. In this case, my buddy is personally guaranteeing the debt I’m providing to his LLC.
Now let’s say we find ourselves in a worst-case scenario and my friend can’t afford to make payments on the loan or abandons the project altogether. A signed personal guaranty gives me a little extra recourse.
If / when shit hits the fan, my first step would be to collect the security outlined in the promissory note. I’d take control of the LLC and either finish the project myself or sell it off immediately. If I can’t recover my funds (including interest and legal fees), I can then go after my friend’s personal assets to make myself whole.
It sounds predatory, but it’s just doing good business.
Also, I’m pretty sure I can ask for my friend to sign his unborn children over because at the end of the day, neither of us plans on screwing the other one over.
But that doesn’t mean we don’t take the necessary precautions.
Shoot me an email If you're interested in learning more about how the private money lending world works.
This is actually how I cut my teeth in real estate investing. I haven't originated a new private money loan in about two(?) years, but this was an opportunity I couldn't pass up. There was just too much synergy.