Asking parents for loans:/ Best strategy for paying them back

11 Replies

Hello,

I am messaging you today in hopes that I may get some advice on how to approach a private lender (my parents) in regards to investing in my first turn key real estate investment...I only need a down payment from them as I should be able to finance the rest my self from a mortgage lender.

Question: Though I can pay my parents back in interest I would like to know the best strategy for paying them back. For example...Option 1, should I pay them the monthly cashflow for an estimated 5-6 years until they are paid, which will leave me with the refinance money to invest in another property? or option 2, pocket the cashflow myself and pay them back in whole with the cash out refi? or option 3...?

My priority is to start accumulating rental property, so losing the cashflow on the first property to get started is not a big deal if it means that I can use the cash-out refi to buy my next property. I dont know if my debt to income ratio will be adequate though...?

Thanks for your time. I will try to make this message a little shorter next time. I am very new to rental real estate and am certain this is where I want to spend my time. All your feedback is appreciated.

Dan

Hey @Daniel Peterson , welcome to BP!

There are a couple things to consider when taking a loan from relatives to use for investing...the first is how the banks will view it.  Depending on the dollar amount, and timing they may require your parents sign a document stating that the funds are a gift and not ever expected to be repaid.  Without this document, you could effectively be buying the property with no skin in the game which just about any bank will catch and not allow.  To get around this, you may have to deposit the money from your parents 3+ months before you get started.

As far as repayment terms go...I'd suggest talking to your parents and see what they'd be willing to accept.  If I were in your shoes I'd want a lump sum payment several years down the road with no prepayment penalty.  They might not agree to this though so you have to take what you can get.  It would most likely be in their best interest to get paid monthly but that could change drastically depending on their financial/tax situation so the best way to find out is to discuss.  If they tell you to set the terms then I'd opt for being fair and probably do a monthly payment with a balloon at the end of 5 years so everybody wins.

Welcome to BP Daniel-

I think you will have to talk to them about how they would like to be paid back, but paying them monthly forces you to consider the loan as a part of your deal rather than hope that the property will appreciate so that you can get cash out later.  If I was the lender in that scenario that is what I would be more comfortable with, and make sure you put the deal in writing and both parties sign it.

And FYI- as far as I know, banks won't accept money that has been gifted or loaned to you as a down payment source on an investment loan. I am not sure how they would treat it if you are going the FHA route and owner occupying a mutli family property, so you might want to check into that. Most banks will want 2 months worth of bank statements, so they will question any sums deposited on those statements or payments going out, say for a loan from your parents.

Kelly

Step 1:  Make sure you have already moved out.  In order to have a good sales pitch about being an asset to them, you need to quit being an expense.

Step 2:  Do your own laundry and quit raiding the fridge.

Step 3: Think about what your parents want. Are you going to them because you know they would have an interest in loaning a novice money to invest in real estate and are interested in the associated ROI? Or are you going to them because you have a dream and they have always supported you and how could they possibly turn their sweet, innocent child down?

Investor types have no problems negotiating terms.  If you are going to them as their child with a hope and dream, I think the details of the loan repayment is the least of your worries. 

@Daniel Peterson

Welcome to BP. 

As a parent and investor, my modus operandi is that I don't lend to friends and family, money which I can't afford to lose. This came about as a result of multiple lessons learned early in life.

Now, with that said I am in agreement with the other early contributors to this thread, regarding your deposit of the funds in a short timeframe prior to the loan processing.

Additionally, you need to sweeten the tentative payment plan and not have it drag on for eternity to repay your parents.

Don't assume that they have nothing better to do than lend you their hard earned money for an extended period.

Put this transaction in writing, so that your feet are held to the fire and there is no misunderstanding later if it's done verbally.

Lastly, on the other hand, what if they say no? You should create a plan B to mitigate this possibility.

Originally posted by @Daniel Peterson :

Hello,

I am messaging you today in hopes that I may get some advice on how to approach a private lender (my parents) in regards to investing in my first turn key real estate investment...I only need a down payment from them as I should be able to finance the rest my self from a mortgage lender.

Question: Though I can pay my parents back in interest I would like to know the best strategy for paying them back. For example...Option 1, should I pay them the monthly cashflow for an estimated 5-6 years until they are paid, which will leave me with the refinance money to invest in another property? or option 2, pocket the cashflow myself and pay them back in whole with the cash out refi? or option 3...?

My priority is to start accumulating rental property, so losing the cashflow on the first property to get started is not a big deal if it means that I can use the cash-out refi to buy my next property. I dont know if my debt to income ratio will be adequate though...?

Thanks for your time. I will try to make this message a little shorter next time. I am very new to rental real estate and am certain this is where I want to spend my time. All your feedback is appreciated.

Dan

 Before you start forming great aspirations, I'd start with your strategy.  You state, that you are looking for a turn-key investment that you assume is going to be appreciating.  Most turn-key programs take a good chunk of the meat on the bone of the investments they sell and a lot operate in places where appreciation is very low. Think the breadbasket.  Turn-key investment is predicated on cash-flow mostly and not appreciation.  That may be the biggest flaw that could get you in trouble, and is something that you should really look into first.

You could just tell them to take it out of your inheritance. The other thing you should keep in mind is the reason you're asking them for money in the first place. If everyone involved wants it to be treated like an investment for everyone involved, approach them the same way you would approach any other person you'd be requesting hard money for. Give them the numbers, tell them how it's a win for them, assuming that's the truth. Lay it out easy for them and make sure they understand what's going on.

Thank you everyone for your feedback. This an idea I have been juggling around in my head for sometime now. I want them to feel like they are getting a good ROI. This is not meant to be a favor but a business proposition. I will be able to do this myself in 8-12 months but am anxious to get things started so I figured I could ask them and make it worth their while. @Michael Seeker , you are explaining exactly what I want to accomplish with this deal. A well thought out strategy that ends up in a win win for both parties, especially my parents. 

Thank you everyone. You guys are awesome!!

@Daniel Peterson Before you ask your parents for a loan, be sure what is in their best interest.  For example, if your parents mentioned to you that they want to retire soon, you may want to consider not asking them.  If they are looking for consistent cash flow, perhaps it would be an alright idea.  Be sure you have their interests in mind before yours! 

If you do plan on getting a loan from your parents, You can use a balloon loan with a 5 year expiry.  Sign up for Rocket lawyer and create yourself a legal document.  Using an official document keeps everyone happy, particularly when you file your taxes for the year.  Furthermore, you always have the option of refinancing the loan to go conventional.  Good luck!

Loans to family or friends are more than a business transaction. They won't be able to help evaluating what you spend your  money on from then out.  Thanksgiving dinner will have a weird taste, know what I mean?

 Personally, I would wait the 8 months and do it on my own.   Save and earn it. It will be your deal and give you a great sense of pride. 

Don't tell us your still living in their house, too?  Got to give us the full scoop so we can offer unbiased opinions.  It took guts to ask us @Daniel Peterson .  Welcome to BP!

As someone who's done this (borrowed from parents), here's my take on it. When I was starting my buy and hold journey, I shared everything I was learning with my parents, so they knew what I was up to, the risks involved, as well as the benefits. We have a very tight-knit family, I'm very close with my parents, we all trust each other - this is important. So the first thing they said when I told them it will take some money to get started was "let us help you".

This is when I decided that if I was gonna borrow from them, I wanted to structure this new business venture in a way that would benefit them. So I made them equity partners by creating an LLC with four members - myself, my wife and my parents. Everything we've been buying is held by the LLC, with roughly 90% of it financed by my parents. We had a verbal agreement that the first 5 years we would use all the profits to grow the portfolio. Now, here's where some people will look at me funny - we've yet to decide how we'll split the money when the time comes to start spending it. My goal is to grow the business to the point where everyone's living expenses would be covered, with my parents taking priority. They will be the first to get paid when we start taking money out and they will always be entitled to a large part of the LLC's holdings.

I don't know if this helps, because there is some ambiguity in our arrangement. Again, with our family being the way it is, nobody is worried about being short-changed. However, at some point we will have to sit down and spell out who gets what. Right now, there's an implicit agreement that everything we are doing is for the greater good of the family.