If you needed to finance $100,000 for an investment, which would you choose:
a) A conventional loan at 4.25-4.50% for 30 years
b) A loan from a family member for 0% interest, but have to pay $10,000-$15,000 back per year.
Now, it seems great to have a 0% interest loan, but do the numbers make sense? if rental income is $1500 or so per month, after expenses, it make actually be a negative cash flow. In the conventional loan, it would cash flow positive ~$400.
It depends on whether that loan from the family member was tied to the property (lien) and had to be paid back when you sold it or refinanced it. If it was just a straight loan of 100k that had to be paid back (????) with a cost of 10-15k/year, I'd choose that one hands down.
I would think that would depend on your business model. Sometimes I don't mind negative cash-flow if the property is in a high appreciating area... in that instance I'm after equity pure and simple and not paying out interest would be extremely attractive.
If you need the cash-flow or negative cash-flow puts you into a tough position, nothing wrong with that conventional loan. At first glance, looks like that would cash-flow very well.
It might also depend on how well you like this family member :)
It wouldn't be a lien. Just a loan from my dad, knowing a cash offer would be stronger and I dont want to tie that much of my assests in a single investment.
How do you mean depending on how well I like the family member? I would still pay back the same family member or Joe Schmo down the street ;)
Then I would definitely go with the Family loan. You can recycle that money more than once over the course of the year there by spreading that 10% yearly cost over more than one property/use.
Keep in mind even if the cash flow nets to slightly negative, the tax attributes may bring the transaction positive. As @Joe Villeneuve said, take the family loan hands down.
@Brian Cronin It's more than the tax issue. Since the debt isn't a lien, if you sell the house, you don't have to pay it back right away. There's associated debt, but not lienable debt. This means you can use it as many times as you are able during the year, but only get charged one time.
If the cost is 10% = $10,000.
Use it on one house, and the cost is $10,000/house
Use it on 2 and the cost is only $5k/house
Use it on 4 and the cost is only $2.5k/house.
Non-lienable debt, as long as you have the means to make the monthly payments (and if you do it right, those payments can come from the debt itself), NLD is the cheapest form of funding there is...in spite of the potentially higher interest rate.
Stand on your own two feet, use the conventional loan and take the cash flow.
Then, your dad can loan you smaller amounts as you move along in your investing having that cash flow repay him.
Don't borrow money you don't need, even from family, in fact, especially from family. He could make 4 loans of 25K in 4 different properties, you'd have five properties instead of this one.
You must be an only child, LOL :)
And no, just because a loan is not secured it doesn't make it the cheapest financing available to you, the lien has nothing to do with the interest you will owe.
And, your dad needs to check on imputed taxes for under market rates of interest charged, he may have taxes on interest he doesn't receive.
Now, if he gifts it to you, that would be different too. :)
I would rather pick pennies up in a parking lot then take money from a family member. Families bring drama all by themselves without adding money to the mix....
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