Using private money for down payment ?
8 Replies
Christian Podedworny
Investor from Maspeth, New York
posted over 3 years ago
At this time I’m looking to acquire a large 72 unit deal with OPM for most of the down payment.
Example:
Purchase price $5,000,000
Down pmt: $1,250,000
Amt: 30 year
Interest: 4.5%
Interest only period: 3 years
If the property will bring in an 8% return and I’m going to have $750,000 and the debt partners would finance the remaining $500,000 for the down payment I think this would work.
The debt partner would receive 6% interest for 4 years and then their initial investment would be paid back at year 4.
What are your thoughts ?
Would this strategy work and would it be risky ?
Martin Morales
Investor from Brooklyn, NY
replied over 3 years ago
how many deals have you done thus far?
Caleb Heimsoth
Rental Property Investor from Durham, NC
replied over 3 years ago
You may have a hard time finding a commercial loan at that interest rate
Christian Podedworny
Investor from Maspeth, New York
replied over 3 years ago
Originally posted by @Martin Morales :
how many deals have you done thus far?
12 deals
Christian Podedworny
Investor from Maspeth, New York
replied over 3 years ago
Originally posted by @Caleb Heimsoth :
You may have a hard time finding a commercial loan at that interest rate
If iattain 10 year debt at 30 amt. through a Freddie Mac’s small business loan the rates would be 4.5-4.75%
Chris Purcell
Investor from Philadelphia, PA
replied over 3 years ago
I think if you get a private loan for the down payment they need to co-sign. At least for residential
Christian Podedworny
from Maspeth, New York
replied over 3 years ago
I believe I would need a guarantor for the loan but I'm not sure if I can go around this if the loan will be recourse.
Any thoughts ?
Tom Keating
Lender from Chicago, Illinois
replied over 3 years ago
@Christian Podedworny ","user_avatar":{"medium":{"url":"https://assets1.biggerpockets.com/uploads/social_user/user_avatar/413861/medium_1445925898-avatar-christianp11.jpg"}}}" href="/users/ChristianP11">@Christian Podedworny @Christian Podedworny, I work at CBRE as a direct seller/servicer of the Freddie Mac SBL Program. I think your assumption of 4.5-4.90 is a fair assumption. I would note that each equity investor holding 20% or more equity will be required to sign the carve outs as a guarantor. The loan will be fully non-recourse. Feel free to PM me with any questions.
Brian Burke
Investor from Santa Rosa, CA
replied over 3 years ago
@Christian Podedworny this could work, but there are obstacles. First, you’ll need more than $1.25. That’ll satisfy the 25% down payment but you’ll have closing costs, escrow account deposits, first year’s insurance premium, utility deposits, $ for needed upfront capX plus reserves. Plan for 30-40% of the deal size.
Next, the primary lender is likely to disallow subordinate debt. And finally, the added debt service could be a real problem if the income is stressed in a period of economic weakness. Many people learned the hard way during the real estate meltdown of 2005 that too much leverage is a recipe for disaster.
The best solution is to either use your capital for a smaller deal, or bring someone on as an equity partner. As an equity partner they get a split of the cash flow and the exit. If there is no cash flow, they get nothing (until there is once again cash flow, of course). Tell a debt partner that there’s no cash flow and you’ll hear the squealing tires of the process server as they rush over to serve you a foreclosure notice.
Bringing in an equity partner requires legal counsel. It’s not a DIY project. But it’s how all of the successful professional buyers do it.