It seems like it’s family week on my blog. Another question about doing business with family members. This one is from Helena:

Q: If my parents want to invest their money with me (instead of buying a CD at a bank) and I agree to pay them 7.5% interest, how do we structure the agreement, how & when do I pay them interest, and how do I keep track of it legally from a tax perspective? They also want to know if they can simply "write me a check" in order to purchase (if you will) the CD from me. In this example let's use $40,000... can you help me to do this the right way?

A: You are asking good questions, Helena. You need to treat this just like you would a loan from someone totally unrelated to you. You need to draft a simple note that includes all of the terms, including the interest rate, the length of the note, whether it is payable upon demand or at a specific date, when the interest will be paid (needs to be at least annually) and what happens if it is paid late.

This is a great opportunity for you and your parents to help each other. Every seasoned real estate investor knows that the more capital they have, the more money they can make due to the effects of leverage. People without the knowledge or desire to invest in real estate or a business would do well to put this money with someone who can do more with it than if they just put it into the bank.

Warmest regards,

Tom