Borrowing Money For Down Payment...Can This Work for Investor?

20 Replies

My partner and I have access to friends and family money to use for down payments for buy and hold properties. How can we structure a deal for an attractive return? They won't just give it to us, but we can't do deals without it.

We can get $500k, at least, and we want to use this money for as many 25% down payments as possible (looking in the 5 - 700k range for multi families).

Assume we used $125k down on a $500k three family--any creative ideas that won't eat our returns? Don't want to borrow the down payment @ 7%. 

I read a post recently from someone on BP that created a real estate trust . He pays investors a 15% annual return, in turn he uses the money to find, fix, and flip about 3 properties each year.  Example: A $100,000 trust pays out $15,000/year. If he profits $100,000 from flips, he pays out $15,000 and has $85,000 remaining in addition to the original $100,000 from investors. If the investors want their money back, he still has the $85,000 from profits to fund more purchases.  I hope I explained that in a way that makes sense.

Interesting, I was trying to think of ways to borrow down payment monwy without eating my profits also. The trust seems like a creative way to make it work for both investors and lenders. 

I think the biggest issue is that we aren't looking to flip and the buy and hold strategies down't produce enough cash flow for an attractive return. 

Right now for buy and hold multi-family units the average return offered to investors is 10-15% yearly. If the properties you are looking out do not fit that budget then I would advise looking for new ones. You definitely need to have this 10-15% accounted for when you are doing your analysis. There is no guarantees for investors but they want to make sure it's something they can take over if things go south and still break even.

I don't have a lot of posts here but I have managed $75m worth of multi-family apartment homes in the last 5 years. This is what the company I work for offers investors.

I hope this helps!

Everyone,

Thank you for your input. I suppose that rate of return is what we need to offer and we'll just have to find better deals. 

It seems like the best way to do it is factor in this return and pay it quarterly. 

thanks!

@Bob D.

Ok bob I going to be honest with you. I think what you are doing is very dangerous! You are a newbie and have no experience yet you want to use $500k of family and friends money to invest. As a newbie we all think just about the numbers and dream. You said that you want to buy as much as possible with that $500k. We are in a good market right now and haven't gone through a cycle yet, what happens when it becomes a down cycle? What is your exit strategy? How are you going to keep your family and friends money safe? Read around there are a lot of guys who have over leveraged and lost everything, don't be like them just because the numbers work now and you have a dream. You will end up in a bad situation and have ruined your relationship with family and friends. They will be mad that you lost their money, but you will feel worst for disappointing them. REI is a patience game and takes a lot of learning not just several months, it takes years.

My advice to you is if you feel you are ready from reading enough books watching the market for a while and talking with real investors, then start small with a SFH learn what its is to be a landlord. Then try flipping or wholesaling to get your capital up to have for reserves. Look at investors that use Hard Money some have capital to purchase the property on their own, but choose to use lending because they need capital in reserves for when things happen and they always do. So if you are ready you can borrow some of your family or friends money to start investing small, but DONT use all the $500k and over extend yourself when you dont know what you are doing.

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@Bob D.

Why don't you put their money in an LLC and make that LLC partner to your deals? They get nice returns of 10%+ and you don't have to fork over too much money on your side.

I'd also write in something that allows you to buy out portions of the LLC at a 4% return or something like that. You can buy back investment dollars at $1.04 year 1, $1.08 year 2, and max it out at $1.20 year 5+. This assures that they'll gradually get their money back AND make solid returns at the same time.

Originally posted by @Account Closed :

My biggest question would be how do you service the debt if you end up with vacancies? 

 Vacancies need to be accounted for in the initial assessment of the property.

Originally posted by @Aaron Montague :
Originally posted by @Ken Vesely:

My biggest question would be how do you service the debt if you end up with vacancies? 

 Vacancies need to be accounted for in the initial assessment of the property.

As a portfolio if you ever need to go to the banks, they use 95% as the standard for vacancies. In other words, they will only loan up to what the property is worth if 95% of the units are filled. Some, if not most, investors do the same.

Hope this helps.

@Bob D.

I think the biggest question is: will the bank allow your down payment to be borrowed? What are you going to answer on the loan application for that question?

- Tom

Originally posted by @Tom S. :

@Bob D.

I think the biggest question is: will the bank allow your down payment to be borrowed? What are you going to answer on the loan application for that question?

- Tom

This is a great point. If you are going to borrow money as a down payment for an investment property, it can not be a "gift" from someone. However, if you open a business account, the initial amount you put in the account just has to sit for 60 days to be able to use for an investment property. I ran into a situation like this and this is what the bank told me I was able to do.

My biggest issue is understanding how a 100% financed deal on a buy and hold multi family investment where 25% of the capital is borrowed at 10% and 75% is borrowed through a traditional mortgage could grow into something bigger.

With low but positive cash flow properties we would neither generate enough to pay back the principal on the private money in the short term, nor would our investors want a 30 year loan term. 

It just seems like private money is better put to use on flips and it would be helpful to see an example of a deal where investors were happy. 

Royce, thanks for your input. I understand that I'm very green in REI. We don't expect to do any of these deals soon, I'm looking to see how this investment structure works in a perfect world, and scale it down from there for our purposes.

Aaron, I think the LLC partner and buy back structure is interesting. We are also in the same market (Boston)--has this worked for you?

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The down payment question was something I had considered but thought I would address down the road. It seems like there are ways to handle it. 

I am new and still trying to wrap my head around this as well. Does the following concept make any sense...?

You "borrow" the 25% down payment. Let's also assume you got a good deal as well and have some immediate equity, which we will call 5% (You got it at 95% of market value). Now there is 30% equity. If the house were $100K, there is now $30K in equity, a 20% gain on the initial $25K down.

Can one simply refinance to pull that equity out and pay back the lender, including the interest? I realize refinancing can also have significant costs...

Another take on that scenario would be to pay down $5K in equity over a year or two and then refinance, pull out the equity and return it to the lender to fulfill your agreement.

Could a contract be structured around this type of idea?

Updated over 2 years ago

It just occurred to me that refinancing probably doesn't work in a way that would allow you to quickly pull your cash out of a loan that required a 25% down payment, otherwise why would they require the 25% down? Would seem you could potentially pull out equity on top of that $25? Or maybe there is a threshold of a certain number of years before you can again access that equity?

If you are getting traditional financing, the bank will have first position. Where dose that leave your family and friends money if everything went bad? What secures them in a worst case scenario?

@Bob D.

Bob - what was the outcome of this?  Did you end up proceeding?

Thanks,

Tom

Tom,

We haven't done anything. I've been on my own journey of self-employment for a few months. Need to get myself up and running and revisit these REI dreams.

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