Financing an investment with an investor

7 Replies

I am about to start my Real Estate Investing company.

An uncle of mine wants to invest $10,000 with me.

My question is, if I buy a $100,000 property, does that mean he owns 10% of the property, or some percent of my company?

I don’t want to give him any percent of my company, but a percent on the property his money is being used in is something I consider.

Is there a general rule when people are investing money in your real estate company? Out of that %100,000 property I buy, how much percent should I give him?

@Felipe Gonzalez  it really just depends on your agreement with him. Most people who have private investors will work out a deal that they pay them 10 - 12% + points when either the property sells(if its a flip) or at the end of 6 to 12 month term.

@Felipe Gonzalez  

Welcome to BP! You need to decide if you want debt or equity financing. $10,000 on a $100,000 property results in a small (minority) position in either case. Is there a senior lien (like... mortgage?)  Debt financing, to me, in a deal like this makes the most sense... but if you are borrowing a substantial amount (like $75,000) then the lender of that larger amount may restrict your taking a $10,000 second position lien.

Originally posted by @Nicole Pettis :

@Felipe Gonzalez it really just depends on your agreement with him. Most people who have private investors will work out a deal that they pay them 10 - 12% + points when either the property sells(if its a flip) or at the end of 6 to 12 month term.

 Does this mean that I should pay him back the whole amount he invested with me with 10% interests or does it mean that after 6-12 months I start paying him the monthly Net Operating income of what he invested in me? For example, if he invested $10,000 in a $100,000 property, he owns 10% of the property. If I make let's say $1,000 a month in net operating income, should I pay him $100 a month? 

Originally posted by @Chris Martin :

@Felipe Gonzalez 

Welcome to BP! You need to decide if you want debt or equity financing. $10,000 on a $100,000 property results in a small (minority) position in either case. Is there a senior lien (like... mortgage?)  Debt financing, to me, in a deal like this makes the most sense... but if you are borrowing a substantial amount (like $75,000) then the lender of that larger amount may restrict your taking a $10,000 second position lien.

Thank you for the response. 

There  will be a mortgage involved and that's why I was thinking of giving him certain percent of the property. If he gives me $10,000 on a $100,000 should he own 10% of the property or less? I ask because I am taking on the mortgage and greater risk.

Also, if I will be renting the property, should I give him 10% of the monthly net operating income? Or less because I will be doing administrative tasks?

Thanks

@Felipe Gonzalez  It really depends on you and him at the end of the day. What do you two want in this agreement. Does your uncle want to have 10% interest in a property or does he just want a return on his investment? If he wants a return and not an interest, then I would work out a payment structure with him. If he wants an interest, then I would figure out what that means to you two.

If your uncle wants 12% back on his money and not a part of the business, then I would set up terms. Meaning if he is lending you $10k, then 12% on $10k is $1200. So you would owe him $11,200. How you want to set it up and pay him back is up to you. You can do payments or eventually refinance and give him his lump sum. If he is okay with you paying him $100 a month for the length of the mortgage, then that is up to you as well.

Again at the end of the day, you two need to discuss how you want to set up this deal and have some exit strategies in mind. 

@Felipe Gonzalez  

I would check with your mortgage broker to see if what you are thinking of doing is feasible. A GSE mortgage has underwriting requirements that conflict with your desire to deed 10% interest to someone. Unless you are an owner-occupant, the underwriting will not allow a co-borrower. Page 866, "Occupying and Non-Occupying Co-Borrowers" of

https://www.fanniemae.com/content/guide/sel041514.pdf If your deeded interest is done outside of closing, you may violate RESPA rules. Check with a licensed mortgage broker... 

When you have an investor, unless they WANT to be on the title, then they are simply an investor and you will pay them back.  The return can be a straight percentage (if you're flipping) or maybe an amortized payment, or interest only. There are many ways to do this.

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