Family loan advise

8 Replies

Hi everyone,

I am new to RE and I am looking at doing my first deal. I am looking at purchasing a SFR that has a one bedroom apartment in the basement that I can buy for 60k. It needs about 30k of rehab and the ARV comes out to be around 140k. My plan is to live in the house and rent out the basement which should cover about 90% of a 90k mortgage payment.

My parents have offered to loan me the 60k to purchase the house and after rehab I plan to get a conventional loan on it to pay them back. My parents insist on not being a part of this in anyway as far as they don’t want to have a lien on the property, be on the deed, co-owner, nothing. I know if they just wire me 60k that it will be subject to a hefty gift tax. They don’t want interest but I am thinking we need to write up a personal loan agreement with interest. If they want to gift me the interest back later that’s a lot less than 60k. I don’t want to do anything funny or get in trouble. I want it to all be legit. My dad is old and old school. He says it’s nobody’s business if he wires me the money. Of course we all know it will be reported so something needs to be in place. I would like to avoid an attorney and just write up or find a template to use. My dad is weird about attorneys also. I know in the end he will say to just keep the money but I am a responsible adult and will pay him back. It’s one thing to be in debt, another to be in debt to family.

My questions are:

  1. What is the best way to write up a loan to make it all legal? Where can I find a loan template?
  2. When can I get a mortgage on the house after rehab? Do I have to wait a year or does it matter because the house was paid in full at time of purchase?

Thanks!

@Chris Syrett  

I know you didn't ask this question but it came out in your write up.  Your parents can wire you the money without having to pay a "hefty gift tax" unless he has been sending you large gifts over your whole life (see lifetime gift tax exclusion).  I am not an accountant and don't want to explain it wrong but they have a lifetime gift exclusion amount that they can send you above and beyond what the yearly tax free gift limit is ($14k per person again for 2015).  It is reportable but they won't pay a hefty gift tax on the 60k.  Are you married?  Do you have children?  Your parents can gift you $14k each and to each of your family members with the annual exclusion.  So, for example, your mom could gift you and your wife $14k each and your dad could do the same.  That would total $56k only needing to report $4k to the IRS above the annual exclusion.  Again, I am not an accountant or estate planner so I recommend you do some research in this area for your exact situation.

If it was me and that is how your parents wanted to do it, I would have him wire the money, buy the house and pay them back after refinancing.  It sounds like you would be more comfortable having something on paper so you could write up a letter of intent from you to them saying that you will pay them back and add any interest in as you like.  Send it to them so they have it.  If you start going down the route of paying interest to them and making it a loan, you will also need to look into filling out an interest report and sending it to the IRS so they can tax your parents on the interest you paid them and you can write it off.  I suggest just paying them back over time and keeping it as a personal family loan if you can convince yourself that you are comfortable with it.  

If you want to go the loan route, have a search in the documents section and see if something is in there.  Maybe there is a seller financing loan document in there that you can adjust, I haven't looked personally.

If you are living in the house after rehab you should be able to get a mortgage on it right away since you paid cash.  That is assuming you qualify for a loan on a personal residence.  

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Originally posted by @Chris Syrett :

Hi everyone,

I am new to RE and I am looking at doing my first deal. I am looking at purchasing a SFR that has a one bedroom apartment in the basement that I can buy for 60k. It needs about 30k of rehab and the ARV comes out to be around 140k. My plan is to live in the house and rent out the basement which should cover about 90% of a 90k mortgage payment.

My parents have offered to loan me the 60k to purchase the house and after rehab I plan to get a conventional loan on it to pay them back. My parents insist on not being a part of this in anyway as far as they don’t want to have a lien on the property, be on the deed, co-owner, nothing. I know if they just wire me 60k that it will be subject to a hefty gift tax. They don’t want interest but I am thinking we need to write up a personal loan agreement with interest. If they want to gift me the interest back later that’s a lot less than 60k. I don’t want to do anything funny or get in trouble. I want it to all be legit. My dad is old and old school. He says it’s nobody’s business if he wires me the money. Of course we all know it will be reported so something needs to be in place. I would like to avoid an attorney and just write up or find a template to use. My dad is weird about attorneys also. I know in the end he will say to just keep the money but I am a responsible adult and will pay him back. It’s one thing to be in debt, another to be in debt to family.

My questions are:

  1. What is the best way to write up a loan to make it all legal? Where can I find a loan template?
  2. When can I get a mortgage on the house after rehab? Do I have to wait a year or does it matter because the house was paid in full at time of purchase?

Thanks!

 You can write up a simple loan on paper between the two of you. Google can be your friend in this case if you do not want to involve and attorney. 

@Chris Syrett  I have a basic promissory note that I use on a lot of deals that my attorney has written for me. He uses the exact same ones for notes that he writes on my deals as well.  I would give them a promise Siri note and a deed of trust they don't have to actually sign the deed of trust in North Carolina only you do agreeing that you were taking the mortgage on the property.  If you insist on not doing it it's not a big deal since it is your family.  If you do not get the deed of trust filed and it looks like you paid cash for the property. you can refinance it is soon as the property is considered a livable.  Some lenders and banks require you to at least have the property for three months before a refinance.  I'm not so sure that the gift tax would apply I would seek advice from accountant first but considering it is a loan and you are paying it back there should be a minimum state statue of what the lowest interest-rate can be.  

Good luck to you and if you would like a sample of the promissory note I would be happy to send it to you in word so you can adjusted as needed

@Joshua Houchins  Sure if you could send me a copy of the promissory note I would appreciate it.

Something my Dad suggested today was to open a checking account with both our names on it. Then he could put the money in it and I could write the check out of it. When I pay him back I could deposit the money back into the same account so he could access it. Anyone have any thoughts on that idea?

You could give each other access to each others accounts for deposit purposes only.  I do this for my military tenants who deposit the monthly rent into my account each month.  That way you can send him money and he can send you money as needed within your own accounts. 

Word of caution for what it's worth: lots of loose legal terms and methods related to loans, taxes, and other potential estate planning implications.  I really believe even an hour or two of a local qualified attorney's advice could save some major future pain.  Even family notes being collateralized by real estate and recorded on title can be a good practice and avoid complications in the future.  Also, I'd be careful about sharing bank accounts for the simple fact that if something were to happen to the other account holder, the account and all of its funds could effectively become the complete and sole property of the remaining account holder.