Down Payment question... (i hate being this guy).

2 Replies

I am in the position where it looks like a few projects could all be coming to fruition in the near future. The downside, I think I will only have enough capital for 1-1.5 of the projects when there is potentially 3 coming (likely 2). 

I am curious your guys' thoughts no this. 

I am partnered with family on an existing project, and want to potentially use the parents for a type of loan for me. 

They are on the thought of 'eh, we will happily take interest from you, since you pay more than the bank'. I used this when we bought our last complex as I had some capital tied up until a couple months after we closed. So they allowed me to do a bridge loan with them at 5% until I got them paid back. 

So here is where the issues occurred. We stretched our capital pretty tight during that period and the thought of having a bridge loan to the parents made me paranoid as heck... We repaid the whole thing in 4 months (i told them 'lets plan for a year') so there was never any stress on them, although the stress on myself in that position was more than enough to teach me I didn't like lending that way much in the future.

Well, 16 months later and here I am wanting to be an Alzheimer's patient. Only I have a slightly different idea for them and I want you guys to tell me if you think its a good idea... If i am screwing them, if i am taking too much risk, etc...

Potential new project value 1.5-2mm. I would be splitting hopefully 50/50 with some friends of mine who are top notch developers. (they would give me how ever much I wanted due to me bringing the project forward) My income is very volatile... If i have a great year, i could potentially raise the whole 150-200k in the next 9 months... If i have a bad year/issues with another company... who knows if I can raise half of it in 5 years. That volatility is the source of my stress if you can't tell. :) 

My idea to them****

They have at any given time a good chunk in cash equivalent assets and would happily take interest. I might propose to them that they buy 50% of the project. With the following stipulations. They get paid back a 6% yield... guaranteed by me. But I hold any guarantee's on the note/etc... So their risk is the invested equity only. On top of that for me to 'buy them out' they need to get bought out at a 10% yield pace... 

So if the project does bad and i am subsidizing their yield early on and they only get 6% the first 2 years.. I would need to pay the compounded catch up to 10% as well as the initial equity to take over the ownership. 

I am just curious if this is a screw job on them. Part of me thinks its fair, and part of me is uncertain so that is where I ask you guys for input on this... 

Thanks in advance for your responses.

The proposal seems overly complicated. It also front-end loads the terms against you.  That is, if times are tough the first few years then you'd be paying the minimum.  Then, if things are rolling better you'd be unable to catch-up due to compounding interest.

In your 6% : 10% proposal, your benefit of not offering a fixed 10% is that it gives you an outlet if things are bad. However, the difference between 6% and 10% isn't all that much. If you've got a great deal, then go with 8% fixed. I wouldn't offer more than that just because it is such a struggle as an individual investor to make much more than 8%.

I'd probably start-off proposing a fully amortized loan at 6% for whatever term.  By fully amortizing the loan, they'll receive more interest during the first part of the loan.  If you choose to pay it off early then their yield will be greater than 6%.

The loan is simple if the only variables are interest rate and term.  If you need an outlest for generosity (or guilt), once or twice a year, send the lender a thank you package of fruit, candy, flowers, gift card to restaurant, iPad, etc.

Good luck in Iowa, I'm from Ames.

@Luke S.  

K.I.S.S. Keep It Short and Simple

1. They lent at 5% before, try this tactic again.

2. 6% seems like a good number as well.

3. Do a straight up buyout plan.  Borrow 200k, pay back 220/225/250k.  They do better if you pay faster.

4. If you have it at 5% and are still wracked by guilt, give them 14k after the project kicks butt.  You can do that without affecting their taxable income.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here