Private money investor for down payment?

Question

Hey awesome people of BP!

I have a question for you guys regarding private money...here's my situation. I and my partner are looking to get into buying rental properties in the sacramento area. The type of property we want is a multifamily (preferably a four-plex) where we use an FHA loan and I live in one of the units for a year. Problem is, we still need about $10,000 for a down payment on a property valued around 250k...which we don't have.

What if I found a private money lender who would lend us the 10k and in return we offered a certain percentage of the monthly cash flow for 2-3 years and then pay back the principle 10k by refinancing the property and pulling out some of the equity it has built. Do you guys think something like that would work? If so, what kind of terms would a private lender want?

Thanks for your time and advice!

Pratik

Jay Hinrichs · Answer

@Pratik P.  save up the money.. is the best thing to do.. most private lenders other than mom and dad are not going to do this and as stated above you can't get a FHA loan this way so its moot on its face.

But the bottom line is that real estate requires capital.. and those wanting to get into it should have the wherewithal and discipline to raise these small amounts of money and in the context of real estate on the west coast 10k is SMALL money..

So if you don't have 10k your a very large risk from an investor standpoint.. what if someone does 5k worth of damage to a unit.. how are you going to fix it where is the money coming from..

going into rental real estate with no money and no rainy day fund or reserve funds is not wise at all.

Raeshelle C. · Answer

Completely don't agree with any of this at all.

You can borrow money from anyone to get the down payment and reserves. You would just need to let the money season in your account for 60 days so that they don't see that it was borrowed. Simple.

$10K is TOO a lot of money for a lot of people. Just because you're rich and have money, doesn't mean $10K isn't a lot of money to others. It is. And an investor shouldn't NOT invest just cause they dont have it. There are many ways to get money without saving it. I know of plenty of investors who got money and real estate creatively without having had any savings. If what you said was true, those investors would still be poor and asset-less today, saving for 2, 3 years to buy a house; but thank God they thought "How can I?" instead of "I can't".

Ned Carey · Answer

You have some issues to consider.

FHA lenders expect YOU to put in money. They want to know you have something to lose so that you don't walk if there is a problem.  If you borrow the money for the down payment, they are going to want to know where if came from? If they know it is borrowed money most lenders will not allow that.

Your private lender will be in second place if you can even record the mortgage at all. You could structure it as a company and make the private lenders owners of the company, but there go your favorable owner occupied terms on the primary loan.

Many people confuse private lenders, friends family and associates, with professional Hard Money Lenders. A hard money lender will absolutely not do this.

As to the terms a private lender may want t depends on how good a negotiator you are. private lenders can range for 4% to 15% or more. It in part depends on how sophisticated they are as an investor. Your sweet old aunt may think it is a scam if you offer her 7%. Someone who knows what hard money is and is familiar with what investors will sometimes pay may want 12%+

Pratik P. · Answer

@Raeshelle C. I made this post about 2 years ago. A lot has changed! I believe I had maybe 4k in the bank at that time. I was talking to another investor today about buying a 300k duplex with cash :DI agree with Jay regarding having enough reserves in case something goes wrong. You need to be able to absorb some loss. But I also agree with you that we can't just sit around and save until we have the ability to buy. We have to get creative to build up capital faster.

Stephanie Medellin · Answer

The issue you're going to have with this plan is that your FHA lender's guidelines aren't going to permit you to borrow your down payment from a private lender.  They will want a minimum contribution of 3.5%.

The good news is that you do have some options.

You could ask for a gift from family for the down payment.  That is permitted.  For closing costs you can pay a slightly higher rate and get a lender credit.

The other option would be to look into down payment assistance programs.  You may need to agree to live in the home longer than 1 year with one of these programs, but a government or non profit down payment loan or grant is the only kind of second loan permitted with FHA.

Alexander Price · Answer

What if the market goes down? That's my first thought. Otherwise it seems reasonable.

Debra A. · Answer

Don't forget that you will most likely be required to have reserves in the bank. Personally, I'd strive to have at a minimum 6 months of reserves in the bank after all is said and done, god forbid something were to happen - tenants don't want to pay rent anymore, they lost their job, etc.

Private money investor for down payment?

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