Borrowing money from parents to get started?

New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes

Hello BP community-

Does anyone have experience borrowing money from their parents to get their foot in the door with real estate? How did it go for you?

Let me explain my situation. I am going to be a sophomore in college this fall, and living in a very expensive market. However, I also am hoping to begin house-hacking sooner than later, and would like to do this in the next few years. At this point, waiting tables over the summer I just about break even with college tuition and expenses (I live relatively frugally) and likely would not have enough money for a 3.5% down payment. My parents, however, have offered to lend me money towards a down payment if I am able to find a place that meets my criteria for a good house-hacking investment. Has anyone else borrowed money from their parents to get started?

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Gina SternPro Member

Investor · Boca Raton, FL · Member since 2019 · 1k+ posts · 160 votes

@Cory Carlson don't ever feel ashamed for using the resources that are available to you. The smartest people realize what they have and take advantage of a good situation. Good luck on your future endeavors!

[email protected]561-430-2616

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Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
7y
@Isaac Pyle your parents can’t lend you the down payment. They can gift it to you though. They’ll have to sign a document stating it’s a gift and not a loan.
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Matthew Irish-JonesBusiness Member
Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
7y
@Isaac Pyle you will need to get a commercial loan if you form an LLC.
Or... transfer title into the LLC after, which technically can trigger a due on sale clause.
Something to be aware of before forming an LLC.
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Isaac Pyle
OP
New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
7y
@Scott Bossman Firstly, yes, my parents are the best. Secondly, while I would love to look into land investing, the whole appeal of house-hacking a duplex is that I have somewhere to live as well as pay less rent or maybe break even / make a slight bit of cash. If I invested in land, while it would be a good source of passive income, would not provide me with a place to stay.
@Caleb Heimsoth I did not know this, that's a good clarification. Obviously I will need to run that by them as well.
@Matthew Irish-Jones interesting.. that could be a potential setback. Do you happen to know what the minimum down payment on a commercial loan is? I was going to use a FHA because it was only 3.5%, and if I remember correctly, it is 5% for commercial, yes?
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Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
7y
Originally posted by @Isaac Pyle:

@Scott Bossman Firstly, yes, my parents are the best. Secondly, while I would love to look into land investing, the whole appeal of house-hacking a duplex is that I have somewhere to live as well as pay less rent or maybe break even / make a slight bit of cash. If I invested in land, while it would be a good source of passive income, would not provide me with a place to stay.
@Caleb Heimsoth I did not know this, that's a good clarification. Obviously I will need to run that by them as well.
@Matthew Irish-Jones interesting.. that could be a potential setback. Do you happen to know what the minimum down payment on a commercial loan is? I was going to use a FHA because it was only 3.5%, and if I remember correctly, it is 5% for commercial, yes?
They don’t allow your down payment to be a loan. There’s nothing to run by them, this won’t be allowed. If your parents gift you money, and put that in writing that’s fine.
All of this aside if you have to borrow the down payment for an fha loan, I recommend not buying anything as you’re not financially ready.
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Isaac Pyle
OP
New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
7y
I'm sorry @Caleb Heimsoth I should have worded that better. It wasn't an "I will run that by them to see what they want to do", it was an "I will have to run it by them that they can't loan me money, only gift it".
As for borrowing for the down payment, I won't be borrowing more than 1/2 of the down payment, as I would want to make sure I have a good portion of my own money invested as well. Not that it changes my "financial readiness", but I would have that going for me. I also likely will not be doing any of this for at least a good 6 months or year, I am just trying to be prepared for when an opportunity arises later on. Thanks for the input.
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Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
7y
Originally posted by @Isaac Pyle:

I'm sorry @Caleb Heimsoth I should have worded that better. It wasn't an "I will run that by them to see what they want to do", it was an "I will have to run it by them that they can't loan me money, only gift it".
As for borrowing for the down payment, I won't be borrowing more than 1/2 of the down payment, as I would want to make sure I have a good portion of my own money invested as well. Not that it changes my "financial readiness", but I would have that going for me. I also likely will not be doing any of this for at least a good 6 months or year, I am just trying to be prepared for when an opportunity arises later on. Thanks for the input.
Also remember you need 6 months reserves usually and money for closing costs. There’s a lot of costs associated with buying homes that most people don’t realize on the first one.
Hope this helps.
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Isaac Pyle
OP
New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
7y
@Caleb Heimsoth I was aware of both of those actually. It's a good reminder though. I'm not just jumping into a property like it probably seems I am. Thank you for the heads up. Definitely helps.
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Shiva Bhaskar
Investor · Los Angeles, CA · Member since 2017 · 523 posts · 476 votes
7y
If you are ready to get started, have planned things out, and are comfortable working with your family, do it! I partnered with family in the past, and will do so again in the future if the deal make sense. Just have clear communication and clarify expectations, as with any investment you might consider.
As others have noted, know what your advantages are and use them. I greatly admire people who pull themselves up by their own bootstraps with little help, but if you have a leg up like access to family capital, and know how to properly use it, why not? In the end, your parents will be very happy to see you succeed, esp . at such a young age - and you'll find a way to pay it forward to others hopefully. Best of luck.
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Isaac Pyle
OP
New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
7y
@Shiva Bhaskar Thanks for the encouragement! I feel the same way, if I have been offered help to make something happen, and I do enough research to make sure the numbers are as solid as they can be, then why not start now? And if I had a job that allowed me to "pull myself up by my own bootstraps" then that is definitely what I would do, but as a college student I don't have that kind of job. This seems like the next best thing. Thanks for the input!
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Mary Holtz
Member since 2018 · 3 posts · 2 votes
7y
I agree with everyone who says to partner with your parents. Set it up properly from the beginning. It creates a better lending leverage for you and they retain some control of the investment on paper.
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Gregory Ostolaza
New to Real Estate · San Francisco, CA · Member since 2019 · 21 posts · 4 votes
7y
@Isaac Pyle Sounds like a great idea. Just be sure about your criteria and fall in love with the numbers.
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Jonathan R.
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
7y
@Caleb Heimsoth is right again. My parents gifted me some of the downpayment on my first property (lending is not allowed), but I will say I don‘t think you should have them co-sign on the loan. I think you should qualify on your own for the loan, if you can‘t yet, land the job first and then jump in.
1 Reply
Brennan Hitchcock
Member since 2019 · 1 post · 0 votes
7y
@Cory Carlson I'd love to read that as well. Trying to convince my wife to house hack our first residence.
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Isaac Pyle
OP
New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
7y
@Jonathan R. interesting look on it. Even if it was going to be cash flow positive while I was living in it (hypothetically), instead of paying $1000 in rent (made up number, but it is expensive here), and the only thing I needed was to show enough income, you think that I should still wait until I could qualify for the loan myself? I'm not saying it's wrong, I just feel like there is a lot of potential investment that would be stopped by this one piece of the puzzle.
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Jonathan R.
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
7y
@Isaac Pyle yes, for a couple reasons. 1. It‘s your investment not your parents. If they are doing the downpayment and the mortgage, what do they need you for? Why not just buy their kid a home and sell it when you are out of college? You need to prove you can handle the payments. 2. There is a good chance in two or three years real estate will be cheaper as we may be in a recession. We saw an inverted yield curve this week. So, there is no immediate rush. 3. In Rich Dad Poor Dad, Kiyosaki teaches you to pay yourself first, let your creditors scream if you have to. For me to scale to a handful of properties, I‘ve had at times to listen to some screamin (including going 30 days late on my primary mortgage-never 60 of course). So, at times, I‘ve had to take a small credit hit to pay my contractor so he can keep working and continue rehabbing a property. It would be dumb to kill a rehab on a property that will basically cover half of my primary mortgage payment, it would have killed my business’ ability to get where it is today. Now, paying your own mortgage 30 days late is bad enough, not to mention Mom and Dad‘s.
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Isaac Pyle
OP
New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
7y
@Jonathan R. To reply to your first point: They are only doing at most 1/2 of the down payment. I would not let them do more than this to ensure that I am at least as invested as they are. They also would only use their income to show that the mortgage will be paid off, but as far as they are concerned it is on me to figure out the mortgage. They are not paying for it in any way. Second point: That is true, however, the very soonest that I could be doing this is over a year from now, so I would have plenty of time to watch the market and re-evaluate then if necessary. Third point: I am not really sure exactly what you are saying here, but it sounds like you are basing it off of the idea that my parents' are paying the mortgage, not me. That would not be the case, however, and I will have plenty of time to watch the market and make sure I am only investing in something that is cash flow positive so that I don't have to worry about paying the mortgage. I know there are always be risks. I understand that I should "pay myself first". Honestly, it sounds to me like you just want me to learn some hard lessons before getting into real estate that would come when I'm older. However, many other people already in real estate only wish they got in when they were younger, so where is the line?
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Isaac Pyle
OP
New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
7y
@Jonathan R. I am not trying to say that you are wrong, I am just genuinely curious as to why I should pass up such a big opportunity like this. It seems like most people looking at my position think I should go for it so I am trying to understand where you are coming from.
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Obed H. Bey
Philadelphia, PA · Member since 2016 · 54 posts · 6 votes
7y
@Cory Carlson... That's just the kind of information I needed. Awesome. Thank you!
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Jonathan R.
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
7y
Originally posted by @Isaac Pyle:

@Jonathan R. I am not trying to say that you are wrong, I am just genuinely curious as to why I should pass up such a big opportunity like this. It seems like most people looking at my position think I should go for it so I am trying to understand where you are coming from.
I‘m good with them gifting the downpayment or half of it as you suggest. But the moment they have to tie their credit score to your real estate deal is the moment I think they are doing too much. I‘ve had friends who had a parent co-sign and then they got their parents off the loan two years later (at a higher rate), but the difference is they had excellent income, they were just business owners with excellent credit and it was very difficult for them to get qualified. They rented for quite some time before the parent stepped in to co-sign because of the ridiculously hard precedence a bank sets on business owners. If you can‘t get approved for a mortgage on your own, finish college, get a good job and then buy real estate.
PS I think most the people telling you to do this are just thinking you are getting downpayment assistance, not a co-signer.
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Jonathan R.
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
7y
@Isaac Pyle We‘ve all been there. I feel for you. I wanted to be a homeowner so badly when I was your age. And I didn‘t eventually achieve that till I was 31. But I achieved it on my own credit, and it felt good. It only took two years after that to have several rental properties. Here is why you don‘t need that kind of help from them:
It feels better to not use their credit on your first untested purchase (especially for a big loan amount). My best friend growing up throughout middle school, high school and college had his parents buy him a house after college. Well, he decided he didn‘t need to work hard in life after that. With a combination of alchohol, xanax and methadone he suffered some sort of heart failure in his late twenties and died on the phone talking to his mother about how he was feeling in that moment. Another family member of mine has a multimillionaire father who bought him a house out of college and Dad still writes him checks. Meanwhile, here I am kicking butt, my parents helped me launch but did not go overboard.
This is all the perspective I have for you based on my own life experiences. I‘d like to see you earn your first property. If you can only get qualified for x dollars, then you only have x dollars to spend. If you can’t get qualified, keep pushing. You’ll get there. Good luck.
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Grant Rothenburger
Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
7y
@Isaac Pyle
I didn't borrow money from them but my dad co-signed on my first mortgage. I didn't read all the comments so I imagine someone else said this, but is your plan finding a house hack and living off of it? You said you're breaking even with your job and college. I hope you don't plan on the house hack providing you consistent income that you depend on. Also, you're gonna need help getting the mortgage without a good w2 job.
Just things to think about, good luck finding a place!
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
7y
Have your parents co-sign the mortgage, but you do all of the payments and slowly repay them back any of the money they lent you for the down payment. Make sure you don't stretch yourself too thin and you have money for repairs.
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Isaac Pyle
OP
New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
7y
@Jonathan R. Thanks for the input. I'm not saying I will or won't do anything yet, but I will definitely keep this in mind. I am sorry that is how it worked out for your friend / family member.. but both of those cases sound pretty extreme. This is definitely closer to having my parens "help me launch", not buying me a house or anything (they definitely aren't multimillionaires). But I will keep this in mind. At this point it's just frustrating because I make enough money from my summer job and other things to qualify for a pretty sizable mortgage, but prices are so high where I live that it doesn't matter.
@Grant Rothenburger of course not, I would have to be crazy to try to live off of any income from a house I am still living in. The idea is that my main other option is getting Student Housing from the college I am going to. Which is ~$1400 a month. This would be more money up front, but investing it into something that is mine rather than giving it to the school. Can you elaborate on Why your dad co-signed on your first mortgage with you? @Jonathan R. is making a pretty strong case as to why that is a bad idea.
@Theresa Harris That was my plan, although I have heard differing opinions from other people. Thanks for the input!
Again, just to clarify: I am not trying to start arguments saying who is right and wrong here, I am just trying to collect as much information as I can so I make the best investment when the time comes.
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Isaac Pyle
OP
New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
7y
Also @Jonathan R. just to add another perspective, @Cory Carlson mentioned co-signing in one of the first comments on this post and did not seem to feel like it was nearly as big of an issue.. thoughts on that?
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Jonathan R.
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
7y
@Isaac Pyle My thought is he‘s wrong. You‘ll get more reward building your own credit profile and working hard. You’ll learn more about yourself and you’ll be stronger later. I wanted my grandparents to help me into a house when I was your age, thankfully they said no. When you ask yourself, how can I? Your parents should be the last thing that comes to your mind. You have talents to get you there, use them. No hurry on this.
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