I have been looking for the past 6 - 8 months at properties, reading books and listening to podcasts. I believe I am ready to buy my first investment property(Multifamily HouseHack). I am already pre-approved for a renovation loan. One problem, I am having trouble coming up with the down payment/closing costs. I've been focusing the money that I would be using for investing to pay off credit cards from school as I graduated 8 - 9 months ago and have been working as a Software Developer ever since. I can afford a mortgage no problem as I get paid well for my career. I cant afford the down payment/closing costs currently because I want to get out of credit card debt. But the way I see is I'm paying rent regardless, but wouldn't it be nice to have the chance to live for free?
My question is how can I convince my parents to pay for the downpayment and closing costs and i pay the monthly mortgage and manage the tenants? My dad is a businessman so he would need numbers to make sure it's a good investment. What kind of deal do you think I could come up with so its a win win? My loan, their downpayment and closing costs and then I would manage the property. In what way could I swing the deal to make it worth my parents time and money to help me out? And how could I swing the deal in the way to make my parents monthly payments to pay them back for the down payment/closing costs?
Here's how I'd do it. Draw up a promissory note with your folks, and include an interest rate of something notably higher than prime (say 8%), along with a 3-year balloon repayment. Regardless of how the numbers shake out for your investment, they'll at least know they'll be guaranteed to receive their money back, as well as make a profit at the end of 3 yrs. If they have money sitting in the bank it won't be earning anywhere near close to that, and betting on you as opposed to throwing that money in the stock market would likely prove to be less risky. Just my two cents though, best of luck finding and closing your first deal!
While @Michael Garofalo has a creative idea, you'll have to tell the bank that the down payment comes from another loan, once you tell them that, they won't make the loan.
If you don't tell them, then its mortgage fraud, specifically a Silent Second.
The best way is to have partner with your parents on the deal. They front the down payment for a portion of the equity, while you run the property.
Interesting point @Bill F. In that case, if @James DuBois wanted to go the route I suggested, do you think the bank would still say no if his parents were also listed as co-signers on the primary mortgage? (not debating here, just genuinely curious what your thoughts are). My suggestion to draw up the note was just to help his parents out for tax purposes, as I believe "gifting" the cash would be capped at $10,000 per parent.
@Michael Garofalo I'm not a mortgage broker, so take my advice with a grain of salt, but I don't believe the bank would have an issue with it, since at that point his parents are equity partners in the deal and the bank has visibility on all parties involved.
At the end of the day @James DuBois find a deal that makes sense and bring it to your parents. The BP calculators can help with the presentation, but if you do solid underwriting and split the profits 60/40 it can be a win win.
Secondly you really need to pay off the CC debt on your own first and then save up for the downpayment and costs on your own.
If your dad is successful he probably won’t want a second position mortgage. My dad is the same way and I can guarantee you there’s no way he’d do that for me.
You live in one of the most affordable areas in the country. I bought my Cleveland rental all in for 12k. Where else can you do that? Hence pay off the debt on your own and then save up for the downpayment and closing costs. It make take you a couple years, that’s fine that’s how it goes. First one took me 10 months, second one took me literally one day (closed on the first one and put the second under contract the same day as I closed). It starts slow and goes faster over time
I may be out of line here, but I think it's a HUGE mistake to get your folks involved in any deal, especially your FIRST. To me, this is a business, and family and business don't mix well. What happens if the transaction goes sideways? Properties and money come and go; parents and families are (should be) forever.
Secondly, in my view, you are focusing on the wrong part of the program. It's the DEAL you need to zone in on. What about finding a killer deal, with TERMS from the seller?
Your mostly conventional approach is limiting you. Think about it--there is private lender financing (no friends or relatives) always available. There are sellers who will hold financing. If the deal is good enough, the money will find you. That's what you should be concentrating on. Get the GREAT deal, and the rest will fall right into place.
Thanks all for the responses, so then@Caleb Heimsoth suggested to pay off credit card debt first. Do you guys agree that I should do that before I even think about purchasing a property?
James : Mom/Dad? If you don't invest with me, me and my dog may end up having to move back in with the two of you and I may end up living here at home with you two forever. Would you like that?
Mom/Dad: Son,......here's the money.....just give us a promissary note and we are good.
@James DuBois yeah pay that off first
If you’re living in the property-
5% FHA loan, write into the contract a seller assist for the closing costs. Find a property that you can come up with 5% of the purchase price for. If you can’t come up with it, then you shouldn’t be buying- at least my two cents. Buying a bigger unit than you have the means for (5%) means you also don’t have the cash reserves for the capital expenditures. What happens when you move in and the tenants fridge breaks? Vacancy and rent takes longer? Hot water heater / AC goes? Reserves + 5% should be your goal for the first investment. Closing costs can be worked out.
I started in the game right around your age. Wholesale a few properties and you won't have to worry about convincing mom and dad.
Pay off cc debt. Save up for FHA 3.5% down payment since you have a good job. I think you're one year ahead of yourself. If this was 2009-2011 I might say differently, but with this point in the market cycle coupled with your financial position, I'd say hold off.
Banks won't let your parents cosign on an FHA multifamily, because it's an owner occupant only loan by the way. I've looked into "being your parents" in that equation (the money partner). It's a no-go.
CC debt + no money down for you + loan from parents = high likelihood of significant friction between you and your parents. I'm not a naysayer against high leverage at the beginning, but this seems a little premature in timing.
You should do nothing until you have cleared all your own personal debt. Your parents would be irresponsible to loan you any money until you are debt free.
At that point in time I would offer them a 50/50 partnership. Since you have no proven track record and 95% of new investors fail that would be the only arrangement I would agree to as a cash investor.
Your dad is a businessman treat him accordingly with the respect he deserves.
@Jason Powell I was scrolling through to see if someone would finally mention FHA. @James DuBois you are a perfect candidate for an FHA loan that would be a lot cheaper than borrowing from someone else like a HML or private bank. If you want to bring your parents in as equity partners then you need to have your ducks in a row and treat it like a business meeting. Have graphs and charts with your numbers, keep it professional, and document everything. Have an LLC drafted that protects everyone's interest.
Cool thanks all! I felt terrible and awesome, what I had for a down payment for a house ($2k) I completely wiped out my balance off one of my credit cards. The total credit card debt I have left, i've calculated that it will take me 6 months to pay the rest off if I budget correctly minus my student loans which the interest rate i have it super low its like $100 a month. Thanks for the support. Im trying to convince my dad that assuming I am debt free in 6 months if we can do a deal then so i can still keep looking at deals. So 6 months from now id be bad debt free as my student loan is a mortgage for 30 years at like $100 a month. I'd be able to pay that fine while saving up for a downpayment and still being able to afford a mortgage payment even with the student loan.
OR since you have a good job, pay off your own bills and pay for your real estate investments yourself. Dont rely on mom and dad. You are a big boy now. Its time to put the big boy pants on now and do it yourself, ALL yourself.
I dont mean to be harsh, but really?? Figure out how to do things on your own. If you rely on your parents for this, you will be asking them to help with everything in your life. Just because they may be the only people that you know who have money does not mean that they are the only ones who will lend you money. Get involved in your local REIA and meet some people.
Keep looking for deals. If you can not find owner financing on the deal, wholesale it to someone that you know from the REIA. You might make $500 or $1000. Pay your debts down even faster. After you wholesale a few deals and make some connections will you be ready to transition to buy and holds. You gotta crawl before you can walk and walk before you run.
Always ask your parents for advice, but not for money.
You CAN do it on your own (and you should).
@James DuBois just pay off your student loans after your credit card debt. Then go buy a house. You shouldn’t pay student loans for 30 years. Your lenders will thank you though if you do that. I had a friend pay off 37k in student debt in a year. Unless you have 100k plus in loans knock those suckers out
Take a look at the NACA program (www.naca.com). It's a zero down, zero closing cost loan that will allows for the purchase and rehab of a 1-4 family owner-occupied property. Downsides: going through their qualification process takes a while and can be a bit of a pain and the property must remain owner-occupied for as long as you have the NACA loan.
There are also some lenders doing zero down FHA loans. Though most of the programs I've seen are only one or two family.