Borrowing money from relatives

[Evan Hauler]

Hello everyone!

I am looking to buy my second property, I purchased the first using a bank loan. Now my parents are wanting to buy the next one in cash, due to high interest rates. How best do I go about doing this? Are both my wife, mom and i all on the deed or should it just be my mom and I. 

Another caveat is that the money is going to be a gift my grandpa, who wants to see the families money being put to use, but does not have the will or health to be involved. So we are planning on making the money a gift to my mom and then a loan to me. 

Essentially, I am in need of a walk through. Thank you all in advance for your responses I truly appreciate it. 

[Ryan Muska]

First off, make sure that this property is going to be worth it. The worst thing to happen would be to get this loan from your family and the property ends up being a bust.

That being said, make sure you have it all written down, checked by an attorney, and then notarized. You can make all these verbal agreements, but money is a powerful thing that tears relationships apart. So, having it written down is a safe bet. 

There only needs to be one name on the deed, yours. Unless the other individuals want to be on the deed, there is no reason to have multiple names on it. Even if they want to put a lien against the property (which your mom technically will be doing) she does NOT have to have her name on the deed. It actually might muck things up if her name IS on the deed (that is a question for a RE attorney). 

As far as getting money from your grandpa and who it passes through, I can't imagine it being much of an issue if you are "planning on making the money a gift to [your] mom and then a loan to [you]." 

My biggest recommendation is getting a lawyer to assist you on this. It may be expensive but it is definitely going to be worth it. 

[Evan Hauler]

Quote from @Ryan Muska:

First off, make sure that this property is going to be worth it. The worst thing to happen would be to get this loan from your family and the property ends up being a bust.

That being said, make sure you have it all written down, checked by an attorney, and then notarized. You can make all these verbal agreements, but money is a powerful thing that tears relationships apart. So, having it written down is a safe bet. 

There only needs to be one name on the deed, yours. Unless the other individuals want to be on the deed, there is no reason to have multiple names on it. Even if they want to put a lien against the property (which your mom technically will be doing) she does NOT have to have her name on the deed. It actually might muck things up if her name IS on the deed (that is a question for a RE attorney). 

As far as getting money from your grandpa and who it passes through, I can't imagine it being much of an issue if you are "planning on making the money a gift to [your] mom and then a loan to [you]." 

My biggest recommendation is getting a lawyer to assist you on this. It may be expensive but it is definitely going to be worth it. 

 Thank you, the plan is for me to house hack, for an extended time in this next property, so I will make sure in works with me living in it. But it doesn't necessarily need to work after. I will contact an attorney thanks again 

[Andrew Postell]

@Evan Hauler thanks for posting.  If you are taking a loan from your mom then I'm guessing there's a need to pay her back?  If so, it would be beneficial for your to file that lien when you purchase the property in cash. That way, if anything ever happens to you (which nothing will happen...but I still want to cover it) then there's a filed, documented loan that protects your mom's interest.  So, you own the property but your mom is the lender and she has a lien on the property.  That will also help if you ever need financing in the future.  Refinancing an existing loan will often come with benefits over doing a "cash out" refinance loan.  I would still recommend to get prequalified so you know what to expect when the time comes to refinance.  And yes, an attorney/title company can help you with documenting the loan properly.   It's not a requirement, but I would recommend it.

Hope all of that makes sense.  Thanks!

[David M.]

@Evan Hauler

Honestly, this seems a bit complicated --- there are a bunch of things to consider..  For one, how you hold Title is important.  Have you considered Titled with your mother for future step up in basis, for example?  Who of you has the best position of refinancing, for example?

[William Bratrud]

I started investing 7 years ago in a similar scenario. I was flat broke and about $60K buried in bad debt, we were living paycheck to paycheck and barely scraping by. After listening to BP podcast for about a year I had enough and knew that if I didn't take action nothing would change. Long story short, I took massive action. Without having a dime to my name I offered on and purchased a rehab property using private money from my Uncle, I searched online for a website to assist me in drawing up a simple "Note Secured against the Deed of Trust" This protected my Uncle and made sure he got the property in Lieu of foreclosure in case something unexpected happened. This also guaranteed that he would receive his money back plus 10% straight interest once I sold the home. This was a 6 month term at 10% straight interest and we supplied the note to the Title Co. when we sent over the purchase contract, they took care of helping us get it notarized and recorded against the deed of trust. When I sold that property I was able to completely pay off my uncle with his 10% interest, pay off our $63K in debt and still ended up with $42K in the bank. After this deal multiple family members and even some friends came to me and wanted to make a similar return on their money as well. To this day I have done virtually every deal using private money and I work with many family members, and friends to build my real estate portfolio. Using this method I reached financial freedom within 5 years and by 2021 I hit my first $1M capital in the bank. Previously an electrician I am now a full time investor and licensed Realtor who specializes in Helping other investors in East Tennessee. The dream is real but you have to put in the work! I think Grant Cardone said it best, " Everyone thinks their gonna leave there 9 to 5 and make lots of passive income as a real estate investor, but the reality is, your gonna trade your 9 to 5 for a five to nine, And if you ain't gonna do that you ain't cut out for this business......" Im paraphrasing but you get the point.

Bottom line, When dealing in SFR and Small Multifamily Private money is super simple to structure and with some basic steps anyone can make it happen.

1. Call your "rich uncle"( Friend, parent, boss, co-worker) and offer a 10%-12% ROI on whatever terms work for them.( 6mo, 12mo. 24mo. etc....)

2. Find a property to flip and put it under contract 

3. Draw up a simple Note: secured against the deed of trust and submit it to title for recording (Have the title co. help you with this step if needed or use an online document maker such as legalzoom.com, Rocketlawyer.com , etc...) 

4. Close on the property with the funds that your "rich uncle" wires into escrow/title

5. Get that thing rehabbed ( Use CC, or rich uncles funds, or any other method you can dream up to pay for the rehab)

6. Pay your rich uncle back and wait for him to say that was great let's do it again!

7. Grow your network of private money partners and repeat the process

*Other than you, No one needs to go on the deed unless they really want to. The note secures their interest in the property and removes their liability. 

[Alecia Loveless]

@Evan Hauler I would definitely use an attorney. I borrowed money from my parents years ago for a purchase and they made it a 0% interest loan but it had to be paid back. It was a $335,000 loan and after 9 years we had paid back $220,000 and we sold the property. At the closing we had a bank check sent to them in the final amount owed to them, the remaining $115,000 and to this day my mother for some reason still swears that we did not pay them back in full.

She’s moved on and my parents are worth millions of dollars so it’s not like it’s a big sticking point anyway it just is a matter of my personal pride that she doesn’t think I paid her back. Where if she had had a loan service keeping track of the loan she would absolutely have proof that it was paid in full.

[Mike Hern]

Quote from @Alecia Loveless:

@Evan Hauler I would definitely use an attorney. I borrowed money from my parents years ago for a purchase and they made it a 0% interest loan but it had to be paid back. It was a $335,000 loan and after 9 years we had paid back $220,000 and we sold the property. At the closing we had a bank check sent to them in the final amount owed to them, the remaining $115,000 and to this day my mother for some reason still swears that we did not pay them back in full.

She’s moved on and my parents are worth millions of dollars so it’s not like it’s a big sticking point anyway it just is a matter of my personal pride that she doesn’t think I paid her back. Where if she had had a loan service keeping track of the loan she would absolutely have proof that it was paid in full.

That's a great point. People remember things differently and there is no controlling that. Having at least a written agreement that includes the amount, the interest rate and the payoff date allows for clarity and makes thanksgiiving dinner more enjoyable.