Loan terms with family and friends for buy and hold down payment?

4 Replies

Team,

I'm interested in hearing how people have/might structure deals with family and friends for buy and hold. To add some detail, say I'm seeking 50k to go towards down payments on 2-4 unit midwest properties that bring in about 3-500 p/m cashflow. What terms/rates would you propose for a loan of 50k from a retired family member who wants steady income through retirement? What terms might you offer a friend in in their 30s for 50k who is just looking to diversify in a hot stock market? Assume both are actually looking for real returns and aren't lending simply as a favor. Also assume that there is proof of concept for the returns and this isn't a newbie scenario. Thanks for the help. 

@Linda Lovely

Let's say it's a dollar for dollar match. I'm also of the persuasion to pay them back no matter what happens on the investment side.

I guess I'm thinking for a retiree, in return for the 50k of offering something like $500 p/m repayment at 10%. Repay 55k over 9-10 years. Not entirely sure about how to set up something for a faster return that's compatible with buy and hold.

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Lender security will be a consideration. A dollar-for-dollar match would imply you borrow $50k and add your own $50k and put $100k into a property. Is the lender a co-owner with you or have a lien on the property? That will lower your rate, versus it being unsecured. The as-is and ARV ratios are also important to assess lender risk and will drive your rate. Are you offering a personal guarantee such that the lender can sue for your personal assets if foreclosing on the property does not cover the debt? That will lower the rate. "No" to these questions raises your rate.

I am sure your intent is to pay back your lender family member or friend.  Unfortunately, things happen.  Make sure you don't jeopardize a relationship if "things happen."  Go into this with your retiree lender or friend knowing there is risk involved, as compared to "Hey, it's me - you know I'm good for it."  Be sure to give your lender awareness and legal security in case you are run over by @Account Closed's vegetable truck.  ;-)

You could offer a 20Y or 30Y regular amortization at 10%, but with a 10Y term.  It would balloon at 10Y.  The lender advantage is some principle is paid back each month which lowers risk.  That might be preferable to a 10Y interest only loan in which all principle is at risk for 10 years.  You would have a payment of $438.79/month.  Just a thought.

@James Mc Ree

Thanks for the response. With a first loan I'm trying to avoid getting anyone tied up in either co-ownership or liens on the property as I suspect that would be more of a deterrent than a sense of security. My preference would be to secure the loan with a personal guaranty on the initial loan or two from family. But solid reminder on not compromising the relationships because the unexpected definitely happens. The people I have are just interested in a monthly check without having to get sucked into something more complicated.