Using private money for down payment ?

8 Replies

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 ?

 how many deals have you done thus far? 

You may have a hard time finding a commercial loan at that interest rate

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%

I think if you get a private loan for the down payment they need to co-sign.  At least for residential 

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 ?

@Christian Podedworny ","user_avatar":{"medium":{"url":"https://assets2.biggerpockets.com/uploads/social_user/user_avatar/147390/medium_1494597380-avatar-christiannyc.jpg"}}}" href="/users/ChristianNYC">@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.

@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. 

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