How to structure investor financing terms
Hey everyone. I'm getting to a new point in my investing and want to reach out to the BP community for some guidance. Until now I've been able to finance my properties on my own. I have one SFR and two duplexes. I'm now working on purchasing a four plex for buy and hold but don't have enough of my own capital to cover the down payment and some additional costs. What are some simple terms that I could present to potential investors (friends and family) that would work for both parties? I understand that ultimately it will come down to what works best between the investors and myself but I'm also struggling to fully understand when and how to pay them their portion and ultimately pay off their investment. There are so many avenues to do this that I can't keep them straight. Like my first investment property I went with something simple, I could understand and then grow from there and that's kind of what I'm hoping to start with here, something simple and then on future deals get more fancy if necessary. Thanks everyone!
Some strategies:
1. Friends an family loan you the money as a 2nd note secured against the property - this may reduce your chances of getting a first mortgage though so check with your mortgage broker - Offer them a fixed interest rate and a payback of the balance of the note at a specified date in the future.
2. Split the down payment and expenses, put them on the mortgage and split the proceeds according to the percentage that they paid in.
3. Give them an equity position in the property that is equal to the percentage of value that they contribute. I.E. property is valued at $500,000 they contribute $50,000 they get 10% of rent and profit when the property is sold or refinanced.
@Tamara Deering, Thanks for the great information! Very simple and just what I was looking for. I'm going to start writing up a plan using each strategy and see which one plays out best. When you have more than one investor does one of these strategies get messier than another or even not work at all? Thanks again.
I would say the easiest way to do this with multiple lenders is option #3. Give everyone proportional interest in the project based on their contribution. You may want to consider setting up an LLC or partnership for this purchase if you are going to do it that way.