Utilizing other people's money (OPM)

3 Replies

I'm in the process of getting my finances together to purchase my second deal (Kansas City market). My girlfriend and I have enough saved up for a down payment on about a $200K property if we use a conventional mortgage. I've also spoken with some friends, family, and coworkers about my business venture and have had several folks express interest to invest $10K-$30K. I understand that these would be considered "gift funds" and maxed out at $10K if I wanted to use go for a personal mortgage. 

What is the best option to tap into this potential investor pool? LLC? Other strategies? Want to make sure I set myself and my potential investors up for success from the get-go.

Originally posted by @Dar Fornelli :

I'm in the process of getting my finances together to purchase my second deal (Kansas City market). My girlfriend and I have enough saved up for a down payment on about a $200K property if we use a conventional mortgage. I've also spoken with some friends, family, and coworkers about my business venture and have had several folks express interest to invest $10K-$30K. I understand that these would be considered "gift funds" and maxed out at $10K if I wanted to use go for a personal mortgage. 

What is the best option to tap into this potential investor pool? LLC? Other strategies? Want to make sure I set myself and my potential investors up for success from the get-go.

Actually, gifted down payment funds can't be used at all to purchase an investment property, if you want anything close to the rates you see advertised everywhere on a 30YF.

- But they can lend you the rehab budget, post-closing. 

- And they can lend you the money, provided the borrowed money is secured by other real estate. Just like a HELOC or conventional cash out refinance - borrow against Property A to get the down payment for Property B - but with private non-institutional lenders in this case. Their ROI approximately equals the interest rate you negotiate with them.

For the latter, an investor friendly local lender will be absolutely necessary. The random guy at a 1-800 number will not be able to help facilitate that. 

(Edit: left out a critical word)

@Dar Fornelli - depending on the number of "gifters" / lenders you may want to just consider giving them a lien on the title. Write a contract stating they get paid X, as a return, plus their money and until X is met they get second lien or third lien, etc... on the title. 

While you could create an LLC I would recommend against it. Contact a real estate attorney. Pay the $250 and get some solid advice so you know all your options when it comes to structuring.

You could offer these other lenders a 2nd lien position or a 3rd lien position - I do a few loans for a few investors who flip and need the down payment, I am in 2nd position on a house that even 1st and 2nd are still under 80%.

You could create an LLC and form a partnership with them, several of the multi family investors do that as well.

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