Disclaimers: planning to live in Brooklyn for next 10 years, recognize that its an equity play, not a cash flow play. Currently paying $2700 a month for rent in Brooklyn.
Considering a deal in Bushwick, Ridgewood (I know that's technically Queens) Bedstuy, Crown Heights. The ideal place doesn't need a gut renovation, but does need new fixtures, paint, etc. I've seen several places that fit the bill. Would live in one unit, rent out the other 1 or 2 units. Continue to work on the unit we live in it. Eventually, would rent that unit as well if the numbers work.
Here is the catch. While we have a reflectively high income (near $200k year and good future projections) and a strong network of people with experience doing renovations, we don't gave the 20% downpayment. The solution is to pitch several extended family members who can help. Assuming their interest, what do people recommend for an investment proposal? One option is to pay back in monthly payments, ensuring interest comparable to stock market returns. The other is to offer equity, or some combination of both. Additionally, down the road a cash out refinance to pay off the family investors is a possibility, assuming our income increases.
The basic model for discussion purposes looks like this (subject to many factors, I know):
House cost = 1M. Downpayment = 200k (to avoid PMI). That leaves a monthly payment of approx. $5,000. We should be able to collect $3000 (conservatively) in rent. That means we could pay the remaining $2000 of the mortgage our of pocket, while still paying $1000 to the family investor. Result is we pay similar to our current rent while building equity.
Please feel free to direct message me with leads/ideas. THANK YOU ALL!
If you're ok with sharing equity then look into Unison. I did a write up on them here recently. There are no monthly payments, just a small up front fee and then equity. My client's used them to purchase a 2-family in Brooklyn. Like you, they had good income but not enough liquid for the down payment.
@Jason Lee funny you mention Unison. I just listened to a podcast by Brick Underground interviewing the CEO of a co-investing company (probably Unison). It seems like a solid backup plan, assuming the hidden costs are not prohibitive. I will read your piece.
However, if I feel strongly that my home equity will increase by more than any interest I would ultimately pay a family down-payment investor, should I try to avoid sharing equity? Or, is having a lower monthly payment just a better overall option to help ensure against vacancy, etc?
@Peter Golfman is there any particular reason you're against a lower dp mortgage? You can also get an interest only mortgage so your monthly payment is lower. I can intro you to a loan officer if you'd like to discuss the option.
Co-investing is not for everyone. My clients actually introduced me to Unison and the deal couldn't have worked without the co-investment. If you can get more favorable terms from relatives then go for it. I would first speak with lenders to see how they take into account private money from relatives. I don't know how they view source of funds if it isn't a gift.
@Jason Lee I agree, and talking to a lender(s) is a critical next step. My hope is that, assuming that I would qualify for an approx 800k mortgage without any DP, having the additional 200k private loan won’t be an issue. Do you have creative-minded lenders you can recommend?
@Scott Wolf thank you. I understand what an interest only loan is, but I'm not sure I fully grasp the consequences. Will this mean that eventually my monthly payments will balloon? Additionally, I imagine rates are higher, and a down payment is still required. Finally, having 20% down help avoid PMI, which is quite prohibitive a 1M mortgage.
@Peter Golfman there are many options. I have a client that just got a 10 year I/O loan with a balloon payment due in year 10. This is the 3rd one he has refinanced into. You can also do an I/O loan with interest only for the first few years and then the payment balloons. I know this particular bank offers 10% down with no PMI and you can always pay towards principal during the life of the loan.
@Peter Golfman also his rate was 2.5%
@Scott Wolf Thank you. I will do some reading/due diligence of this and get back to you if I think that's a viable route for me. Much appreciated!