@Kevin Reik welcome to BP I see it is your first post. I pay 10% to my private lenders. I would much rather be at 8%. What you pay your dad depends entirely on what you two can agree to.
@Kevin Reik welcome to BP I see it is your first post. I pay 10% to my private lenders. I would much rather be at 8%. What you pay your dad depends entirely on what you two can agree to.
8%-10% is a good reference point, I'm curious what your opinion would be as to a fair rate?
Given this is not a cash loan, and I would be using a home equity line of credit from his paid off primary residence, correct me if I'm wrong, he should expect to pay ~4% interest once the line of credit is used.
So if I pay him 8% on his loan to me, he would basically net 4% himself
(Given these are not exact percentages)
Is that correct thinking?
I want to understand how he will profit for certain
4% might be the APR now, @Kevin Reik , but though there are fixed interest HELOCs with relatively high rates, most are variable, and interest rates are rising. Plus, interest income is taxed at ordinary income rates.
If your dad lives in a high tax state like New York, his combined federal and state marginal tax rate could easily be 40% or more. While I agree with your math, using your example of a 4% gross profit, he would actually keep something closer to 2 1/2 percent or so, net. This could easily go to zero if HELOC rates rise. Yuck, unless he just wants to help his son and doesn't care about his real return.
Your profile doesn't indicate any experience, Kevin, which makes this a relatively high-risk real estate loan. Risk-adjusted, for these kinds of returns, your dad would probably be better off buying treasuries, which have some tax advantages. Alternately, partnering on longer-term real estate investments offers distinct tax benefits and greater returns, that the two of you might consider.
If your dad has idle money in the bank, or perhaps in a tax-deferred or tax-free self-directed retirement plan, an 8% - 10% loan could make some sense, but not if he has to borrow the cash.
My husband and I just went through the process of opening up a HELOC to finance a project. We both have excellent credit, and our interest rate will be right at 6% VARIABLE on $100K to start. We can lock in the rate but need to actually call in to do so. I have shopped around with three different lenders and that seems to be common. Of course I am not in that industry, this is just what I have learned shopping around the last few months.
Yes rates are in the 4%'s currently, but remember this is a line of credit, not a mortgage. The rate will be higher. Best of luck
So if I pay him 8% on his loan to me, he would basically net 4% himself
Yes that is basically correct he would make a 4% spread. That is not a deal would take. I would want a greater spread. But each situation is different. I am not your dad.
@Kevin Reik Hey Kevin. We are actually on the same boat here! I am in the process of getting a heloc of a family members property to help me fund a BRRRR property. I am covering the interest only payments. (About $1150 a month on $250k at 5.5%) I also gave them an option, (since they're family) to either get a cut of the cash we take out when I refinance or a check at the end of each year from the net rent of the property for a 3 years. We did it through a credit union and their property is in New York. Planning on investing in philly. To make things easier I was added as a co applicant so we would get checks in birth our names so I can write them to close deals buy materials and pay contractors etc. Hopefully all works out and good luck !
Are you going to fix and flip? Buy and Hold? You could pay for the HELOC cost to borrow the money plus give a cut of profits if you're doing fix and flip. As others have said, whatever you two can work out that feels fair for both parties should work. I pay private lenders 10% like @Ned Carey but the funds I am borrowing are not coming from a HELOC. I am also only borrowing short term, under 1 year, while I do rehabs and then I put long term debt on the property. So your exit matters when thinking about how to structure.
Just responding to "if it doesn't go as planned" I can cover the payments with my job and plan to live in one unit, I'd be saving money considering my current rent, the numbers are not the issue
I am just seeing if something creative might be better then to use a bank mortgage
Responding to the high risk: I am definitely low risk focused, I will admit inexperience though, my father and I run a buisness together and my pay is guaranteed, I only plan to buy within my reach, and am considering properties that are currently under rent, where there is a unit for me to live in (rent hack)
Then I plan to brrrr it long term for reference to anyone else who might read this.
My big question is what is the best way for me to finance my first purchase.
I can use a bank but feel I have many other options available to me that I need to consider
It seems as though bank mortgage would be the best route after reading your response Jeff, do you agree? Currently mortgage rates are about ~5% near me as far as I know