Deal in danger/financing issue

7 Replies

My brother and I are currently have a contract to purchase a triplex in our area for $134k. We are planning on doing conventional financing at 75% LTV which makes our down payment and closing amount around $40k. Originally we were planning on putting down $25k and having family/friends invest for the other $15k. With all expenses, debt and management considered the property is conservatively projected to make 12% COC return. We were going to structure it to pay out 8% simple interest to our family and friends that invested. All the banks I talked to seemed fine with this idea until time came to finalize the loan.

Is there any way to structure the investment like this to get around the bank financing issue?  They want to see that we have all the funds personally but the only way we will be able to do that is if I am able to pull out my retirement funds to close and then pay those funds back with investor money after the fact.

What am I missing?  Is this something a portfolio lender should be comfortable with.  I want to be able to continue to grow our portfolio but using a mix of our funds and family/friends investments.

Any help would be greatly appreciated!  Thanks in advance.

John Cassel

@John Cassel   Can you do something simple with your retirement funds like a 401k loan?  My employer only charges $75 and funds in 2-3 business days.  I've used that a few times to cover a shortfall, then paid back the loan with the investor funds afterwards.

 - Tom

Originally posted by @John Cassel :

My brother and I are currently have a contract to purchase a triplex in our area for $134k. We are planning on doing conventional financing at 75% LTV which makes our down payment and closing amount around $40k. Originally we were planning on putting down $25k and having family/friends invest for the other $15k. With all expenses, debt and management considered the property is conservatively projected to make 12% COC return. We were going to structure it to pay out 8% simple interest to our family and friends that invested. All the banks I talked to seemed fine with this idea until time came to finalize the loan.

Is there any way to structure the investment like this to get around the bank financing issue?  They want to see that we have all the funds personally but the only way we will be able to do that is if I am able to pull out my retirement funds to close and then pay those funds back with investor money after the fact.

What am I missing?  Is this something a portfolio lender should be comfortable with.  I want to be able to continue to grow our portfolio but using a mix of our funds and family/friends investments.

Any help would be greatly appreciated!  Thanks in advance.

John Cassel

 I am not a tax professional, but my general understanding is that if you put the funds back in the account within 60 days they don't penalize you.

No, you cannot use "gift funds" for the down payment on an investment property if using Fannie/Freddie financing. That should have been pointed out way back at the preapproval stage. Any REI friendly lender should know this... :\

The lender that didn't know you couldn't use gift funds for investment props probably also has that retirement account tagged to satisfy the "PITI reserve" requirements. Get really clear on that.

do you have any other funds besides the 401k? can you get another family member to go on the loan? do you have anything of value that you could sell? If so get a purchase contract for the item and you could use that as funds with Freddie mac also. if all else fails get a hard money lender to do your financing upfront then refinance it with a heloc.

@John Cassel I agree with @Chris Mason that this should have been caught very early in the process.  Many Loan officers want to just book in the deal and move on with out asking a lot of questions up from to prevent issues like this during the process.  Fannie and Freddie do not allow gift funds for investment properties.  I think you might want to look at the 401K loan but as Chris mentioned make sure if you do that the loan does not cut into your cash reserves required by the lender.

Tom, Chris, Marc & Melvin,


Thank you so much for the responses.  Unfortunately I will not know if my retirement account allows me to pull it out until Friday because the job I had the account with is in the middle of switching carriers and transferring funds. 

I specifically made it a point to all the lenders that that was my plan from the get go because I didn't want to run into this issue.  I guess I didn't stress the point enough. 

I am going to double check about it being considered the reserve funds but my guess is know since it was the lender that actually suggested it.  If worst case scenario I need to get a family member on the loan that shouldn't be a problem because I have a lot of family/friends that are looking to invest. 

Two questions...If I choose to do hard money and then refinance, do banks normally want me to hold it for a time period, say a year before they are willing to do that?  And secondly, are portfolio lenders comfortable with family/friends investing if I go that route for future deals.  If not I may need to rework my plan a little to continue to grow.

Once again, thank you for all the responses and help!

John

Originally posted by @John Cassel :

Tom, Chris, Marc & Melvin,

I specifically made it a point to all the lenders that that was my plan from the get go because I didn't want to run into this issue.  I guess I didn't stress the point enough. 

FYI: When most lenders run your credit and see a bunch of other lenders have run your credit (or get the pings afterward), most will default to being less informative and spending less time on you and spending less time actually thinking about your questions before answering.

@John Cassel If all other options are not possible, and if the deal and a great one, you can considers private money, then refinance with banks. Some Banks needs seasoning (6 months to a year) before they will do the refinance. But there are some banks, especially credit union don’t need that. We are local private lenders close to York PA. If you need, you can reach out to us. Good luck.

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