Should you ever personally guarantee principal or returns to a private investor? This question vexes many real estate investors from the green newbies to the most experienced and savvy.

I’ll admit: I wrestled with this one a bit myself when I began bringing private money as my exclusive financing source.

When you work with private investors, you have to be flexible while also sticking to your business model and deal parameters. There is some wiggle room, but not much once you begin down a particular path. For instance, if you are flipping single family houses, there are a few deal structures that work better than others and you have a ceiling on what the private investor can make based on the profit margins.

Where Guarantees Come Into Play

Since there are two types of private money investment: private money loan or private equity investment, the subject of personal guarantees is relevant only as it applies to loans. By it’s very nature, an equity investment is an “at risk” investment and most people know that when you buy 1,000 shares of GE nobody is guaranteeing your principal or return.

Fear not, however! There are many ways that you can structure real estate investment deals with equity investors so the investors principal is protected (in many cases better than a loan!).

Personal Guarantees apply to private  loans – where a private investor loans you money at a specific interest rate for a set period of time. Usually, a private money loan is going to be secured by a mortgage or trust deed, so the private lender can foreclose and sell the property to recoup their investment if you don’t pay them back.

Most banks and mortgage companies require Read More→