It is unknown whether it is a "good investment", more likely no than yes.
Some thoughts
- what is the true after tax return of these "4%"? what is your tax rate (fed+ state) ? will you be getting 1099 for this, how exactly would it work with taxes?
- how does it compare to say VWIUX or any other cheap national muni bond fund ? such mutual funds would beat the investment above is almost every level - after tax return for high income earners, liquidity (you can write checks against it any time and get dividends monthly) , much lower risk, no family member entanglement ,etc. tax specific muni bond fund could be even more interesting if you are in the high income tax state (California, etc)
if I were go into this or any other 'hard money lending' I would charge a lot more than 4% and structure it in a way to make sure risk is compensated appropriately. I would also never do it with the family unless I am ready to call it charity from get go - no need to f4ck up life long relationships should any of dozen things in business venture go different/wrong.
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I'd prefer not to get too hung up on the risk side of it. There are many reasons which I don't want to discuss here that this is very low risk. I am more interested in people's opinions on whether the numbers make sense. And if not, then how to negotiate the deal so that it does make sense. I feel like 4% is pretty low considering the illiquidity of the investment."
I think your gut is telling you something
- this is not a very low risk. this is a single issuer callable bond by a entity that has no taxing authority and with unknown rights to you as a bondholder. worse, there is no secondary market and all conditions favor the issuer , they can 'refi' at any time while you can not sell the investment at any time or at all.
-numbers make no sense for the amount of risk you are taking
if you are into single issue bonds - fidelity bond desk or any other major discount broker will give you a lot of options and potentially better deals for your money than this , plus you would get some liquidity options for security you purchased.