How to convince my parents to partner with me?

Buying & Selling Real Estate
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How to convince my parents to partner with me?

Colin C leamy
CT · Member since 2017 · 30 posts · 4 votes

My income and savings don't allow me to get into real estate alone. I've been trying to find an "out" and I managed to get my parents to consider the prospect of lending me some help but they are the glass half empty kind of people that need heavy convincing.

My parents are pretty well off so if I can convince them to assist me in the right strategy I can use it to flip my life situation around.

Long story short, the mortgage I can afford is laughable. My credit is good but I just don't make enough money. I also have almost no W2 history (don't ask) so I'm not sure I can even get a mortgage to begin with.

I pitched to them that I would split the returns if they helped with the down payment and closing costs. This means In order for it to be worth it the deal would need to go into a property with some form of recyclable equity.

The BRRRR strategy is the first thing that comes to mind. They have done a few renovations in the past in the houses they lived in where the job lasted a lot longer and cost a lot more than they were told it would. They insist that the "rehab" part of the BRRRR is very risky because of this.

Do I have a counter argument for this? What kind of shape am I supposed to buy a BRRRR house in?

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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8y

You don't convince successful people to partner with you.  You build a track record of your own life successes and then they will want to participate.

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  • Shawn Ward
    Real Estate Investor & Consultant · Los Angeles, CA · Member since 2016 · 620 posts · 386 votes
    8y

    1. find deals that fit the profile you are looking for

    2. pitch the deals individually to them

    3. since they have experience, they should understand your numbers

    4. then if you all agree its worth it, take one of them out with you to see the property before going into contract

    5. if it falls through, keep pitching individual deals...put the work in and find properties. 

    All the best!

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Colin C leamy long story short your parents are mostly right. An extensive rehab is risky if you don’t know what you’re doing. At this point I think you need to educate yourself much much more before trying to convince your parents to give you money. If they did give you money what would the deal be really? They pay for the Dow payment and rehab costs? If that’s what you’re looking for that sounds like a bad deal for them. I would also look at increasing your income.
    2Reply
  • Account Closed
    Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
    8y

    When I needed to borrow money from my parents once, I got a loan through their bank in my name and had to pay it back. My parents pledged their property as collateral for the loan.

    0Reply
  • Colin C leamy
    OP
    CT · Member since 2017 · 30 posts · 4 votes
    8y

    I wouldn't go buying a house for another year or so, which gives me plenty of time to learn.

    The rehab costs are supposed to be factored into the initial loan is it not? I thought the only out of pocket costs are the down payment and the closing costs.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    8y

    Even if you can get a hard money lender to fund 100% of the purchase plus 100% of the rehab cost you will STILL need significant cash of your own. A HML will charge you points. Those are paid at closing. Four points (four percent of the loan amount) are typical, but can vary a lot. Most HMLs will withhold most of the rehab budget. You then do and pay for the work and they distribute the rehab money in "draws" as they inspect your progress. So you need cash to fund the labor and materials until you get reimbursed. You'll have holding costs like utilities.

    My rule of thumb is that if the HML will fund 100% of purchase and rehab you should have 15% of ARV in your own cash. If the HML has down payment requirements, add that to the cash needed. This is a capital intensive business.

    If you're doing BRRR you need to be able to qualify for that refi loan. And when you do the refi, you may or may not be able to get back all the cash that was invested up front. The point of the refi is to get out of a 15%, 12 month loan and into long term financing. If you can get some cash back, great. Current fannie mae guidelines limit refinances on single families to 75% of value. So, if you've hit all your numbers, and the HML gave you 70% of ARV but charged you four points, then you'll be doing good just to pay off the HML and get back your points on the refi.

    The only way I'd borrow from friends or family is if I was absolutely willing to do whatever it took to repay the money, regardless of the outcome of the deal.  If that's a second or third job, so be it.  Whatever it takes.

    2Reply
  • Colin C leamy
    OP
    CT · Member since 2017 · 30 posts · 4 votes
    8y

    Hmmmmm. How about if I used an FHA loan to live in the first house, this way I'm effectively paying the holding costs and the down payment. This gives me a year or so to rehab and minimizes the risk and involvement of my parents.

    The issue here is finding a suitable house that is FHA approvable. Foreclosures need cash right? Hmmmmmmmmmm, there must be a way.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    8y

    A regular FHA loan cannot be used for a rehab. Those loans require properties to be in VERY good shape. I've sold a house to a FHA buyer and it was a pain. An FHA 203k loan might work.

    Foreclosures do not require cash. In many states you do need cash to buy at the foreclosure auction. You also have to have a strong appetite for risk. You are not in a position to do this. But you can also buy before the auction, perhaps as a short sale, perhaps not. And, if the bank takes it back and it becomes a REO (real estate - owned) the bank will list it on the MLS. You can buy these with a mortgage.

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    8y

    You don't convince successful people to partner with you.  You build a track record of your own life successes and then they will want to participate.

    3Reply
  • Jeff Onofrio
    Specialist · Marlton, NJ · Member since 2014 · 92 posts · 55 votes
    8y

    @Colin C leamy- Hi Colin- I think the strategy works but here is how I would set it up to your parents.  

    1- have them act as a non-occupant co-signor on an FHA 203k loan. FHA allows for this and it allows for you and them to both be on the mortgage.

    2- get a HUD consultant involved regardless of the amount of renovation/rehab as this will provide a layer of protection (it should help to make your parents feel that you are adding this layer to protect you both). Normally you on need this person on a Full 203k but again the extra layer should help your parents to feel more comfortable.

    3- offer to split any profits- either when you turn around and sell or even on the monthly cash flow if you go multi family- which would be my recommendation to help you offset the payment 

    4- include everything you can into the project so that you are not relying on yourself to do the work on this first one.  take this one as a learning experience and let the professionals do what they do best.  prove to your parents that you can do this by managing the project.  

    5- live in it for a year and move on to the next one! 

    ** side note- there are programs both nationally and locally that will provide for DPA (down payment assistance)- FHA allows for this - look into it- Cheona Fund is one that is available nationally. Secondly you can also get up to 6% seller assist to help offset your closing costs. So theoretically you could come to closing with no money and would only need your parents for getting your loan approved from a debt to income perspective if you wanted to go above your own personal budget.

    Back to the strategy- I love this idea because you learn on the go but everything is not on you to do.  Use this opportunity to soak it all in and learn.  If you do this correctly you could be on your way to building a future using real estate and that is what we are all here for right? 

    Happy Investing and hope this helps!  

    0Reply
  • Colin C leamy
    OP
    CT · Member since 2017 · 30 posts · 4 votes
    8y

    Wow great info thanks! I like this idea a lot. 

    0Reply
  • John W.
    Rental Property Investor · Buffalo, NY · Member since 2017 · 257 posts · 130 votes
    8y

    My parents are wise with their money and they only lend to me because of my track record. They've seen that I've been good with money since I was young, never needed them to bail me out, and also successful with my rentals. They write checks with little concern. So a proven track record is probably what they want to see. 

    1Reply
  • Colin C leamy
    OP
    CT · Member since 2017 · 30 posts · 4 votes
    8y

    I have perfect credit. Personal track record is not a concern here. Their main concern is the rehab going sour.

    0Reply
  • Randy E.
    Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Colin C leamy:

    I have perfect credit. Personal track record is not a concern here. Their main concern is the rehab going sour.

     You said you qualified for a mortgage, but the amount was "laughable."  For a beginning investor, instead of designating the amount laughable, you should figure out how to make that amount work for you.  Lower your expectations of the house/neighborhood you want, then go search for one the approved amount will allow you to purchase.

    0Reply
  • Colin C leamy
    OP
    CT · Member since 2017 · 30 posts · 4 votes
    8y

    I've been over that scenario. The numbers don't work. 

    0Reply
  • Kevin Coggins
    Spring, TX · Member since 2016 · 243 posts · 203 votes
    8y

    I would never risk my family or friends' money, without having experience with what I'm doing. Unless I've done it before and KNOW there's a high probability of success, I'm not making any sort of recommendations or asking for an investment. 

    1Reply
  • Colin C leamy
    OP
    CT · Member since 2017 · 30 posts · 4 votes
    8y

    Indeed. It would be a year or more before I attempted anything. This gives me time to learn. Also as luck would have it my parents just informed me they are good friends with a real estate agent, we are going out to lunch next week to discuss options, so that helps too. My uncle is experienced in building and renovating houses which is also a help.

    0Reply
  • John W.
    Rental Property Investor · Buffalo, NY · Member since 2017 · 257 posts · 130 votes
    8y
    Originally posted by @Colin C leamy:

    I have perfect credit. Personal track record is not a concern here. Their main concern is the rehab going sour.

     You have no track record in rehabbing homes. Their main concern is your inexperience and it is a legitimate concern. And if your rehab does go south, it will be hard to pay them back with low w-2 income. 

    2Reply
  • Account Closed
    Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
    8y

    @Colin C leamy I can't convince my parents to do anything, let alone give me their money for something as "risky" as investing in property. LOL.

    To give you their funds someone has to be a believer. Best way to make anyone a believer is to gather enough knowledge and ability to be able to put together a compelling story. If you could do this, you could probably get money from a lot of people, not just your parents. In fact, getting money from others who are already believers in REI might be easier if you could establish credibility with them.

    Good luck!

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    8y
    Originally posted by @Colin C leamy:

    I have perfect credit. Personal track record is not a concern here. Their main concern is the rehab going sour.

    Most everyone on this thread is trying to help you understand that track record does matter.  Show them that the rehab is not going to go sour by doing it many times yourself without the rehab going sour.

    You can not convince them for the same reason that none of us can convince you...people believe what they see and experience...track record, not what you tell them.

    0Reply
  • Rich S.
    Central, MN · Member since 2015 · 148 posts · 184 votes
    8y

    There is no doubt many is this thread are right in that track record makes everything easier. The 203K loan is a good strategy because it does bring a 3rd party in to verify numbers and provide information to hopefully ease your parents worries. In my opinion, there are lots of ways to get things started, you just have to find the one that works for you. There are many folks who have gotten their start in REI by doing something most said couldn't be done OR taking a risk many others wouldn't take. It is all easier if you have high W-2 income, lots of savings, etc. as it opens up more doors, but you don't have that... my advice keep working to find the strategy that works for you, just because it doesn't work for others, doesn't mean it doesn't work.

    0Reply
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