Borrowing Private Funds for REHAB ONLY when house is on mortgage

[Brad Hornecker]

I would love to hear from someone who has structured a loan in this way or an experienced investor who can give some insight.

I am currently in a live-in flip in College Grove, TN. I already own the property on a 5% down 30yr mortgage.  My original estimates for rehab costs were $50-60K.

I went into the deal knowing that after the acquisition costs and setting aside holding costs I would only have $25-30K capital for the rehab, but I wanted to get it under contract because I knew that even if I had to raise the extra $20-30K I would still be looking at a near 6 figure flip profit.

I am getting close to tapped out and want to start securing the funds now.  A lesson I've learned is I should have started this when I had the house.  But here we are, and I need to raise the money so I'm going to make it happen!

My idea is to borrow a total of $30K from friends and family with no monthly payment but a 20% return on their investment when the house sells.  In case of an unforeseen issue where I have not sold the house after 6 months, I will have a backup payment plan in place that will pay them back over the next 2-3 years.

I'm curious to see what others think.  I'm also curious about how you would structure this, if a simple note would do or I should talk to an attorney.

Hopefully this can also help others who might be in a similar situation as well!