hypothetical situation-Would a lender ever agree to this?

Question

Hello everyone! Just thinking of a creative way to finance my first purchase! I was thinking of my ideal situation of how I can fund it and thought of this and was wondering if anyone can tell me if anyone would ever be willing to do this?

Currently I am looking at a 3 unit home that is in an up and coming area of PA. The home is 199K and the basic income stmt would look like this (below)

Now I currently have 22.5K for the purchase but need another 22.5K to close and have a bit in reserve for vacancy etc. (I can't do FHA or anything that requires me to live in it)

Would anyone ever be willing to provide(partner) with me the 22.5K that I need if I can repay them with whatever money is left after all the expenses every month. So basically the agreement would be that as long as that's months expenses are paid (everything included below) they would get the remaining until they were paid off. Once they are paid off (with a preagreed return also added on) that they would leave the partnership and I would become the sole owner and begin collecting myself. If the return takes longer than a predetermined time we would cash out refinance to repay the partner/lender and also keep the property.

What does everyone think? I am new so if something doesnt make sense or if this has glaring holes please excuse me. Thanks.

Rental Calc

Monthly

Yearly

Income

Rental Income

$  2,325.00

$  27,900.00

Laundry

$  -

Storage

$  -

Misc

$  -

Expenses

Mortgage (Includes insurance and taxes)

$  (956.00)

$ (11,472.00)

Utilities

$  (150.00)

$  (1,800.00)

HOA

$  -

Lawn-Shoveling

$  (50.00)

$  (600.00)

Vacancy

$  (116.25)

$  (1,395.00)

Capex

$  (186.00)

$  (2,232.00)

Property Management

$  (186.00)

$  (2,232.00)

Misc unexpected (Repairs)

$  -

$  680.75

$  8,169.00

Chris Mason · Answer

Finding a purchase money subject property HELOC is hard enough, finding a non-owner occupied one... I haven't found one yet or I'd be shouting about it from the rooftops.

For owner occupant 80/10/10, we almost all use the exact same bank for the HELOC, and that's TCF Bank. It's not a 'marketplace competition,' they are hands down the best (& one of the very few) deal in town.

TCF is prime + 1.99, everyone else doing purchase money owner occupant 10% HELOCs is at like LIBOR + 4 and crazyness like that.

Rigo V. · Answer

@Jonathan Towell the rate of return would be guaranteed. Only thing not guaranteed is the the monthly payment amount being the same every month and the repayment period which can be mitigated by a clause that would force me to refinance to give them the cash back after a certain period.

Mark A. · Answer

Have you thought about having the remaining $22.5k that you need held by seller financing? You could structure it to pay them back on a 20 or 25 year amortization schedule but as long as there was no penalty for early repayment you could pay any of your "extra" cash flow each month to pay them down faster.

Jay Hinrichs · Answer

you just need and equity partner... then you two strike whatever deal suits the both of you.

these things are fluid  not set in stone and each has their own deal structure.. its the fun part of real estate.

however the first lien holder may require your equity partner to go on the loan with you.

they may not accept a 80  10 and 10 deal.... in the old days it was perfectly fine.. but now not sure

@Chris Mason  is there 80  10 an 10 product out there are these being done in the investor arena

Jonathan Towell · Answer

Yes, that &"$8k allows them to get repaid in 3 years, but not make any money. And, the "rate" of return is not guaranteed in your description. It is only a guess as far as I can tell.

Yes, that lender gets collateral, but it is in 2nd lien position.

Anyways, you might pitch it and see what respsonse you get. It never hurts to ask.

Rigo V. · Answer

@Jonathan Towell Thanks for your response!

The lender would get a guaranteed rate of return in my deal. The schedule of repayment would be something they might have to budge on slightly. The collateral would be the home we purchase since they would technically be my partners until a certain threshold of cash back to them is paid.

I realize that this would not be possible with a traditional lender that's why I was asking if private lender would be willing to do a deal like this? 22.5K at the 8K i estimate to make a year from this home would allow them to get paid with a return in about 3 years.

Jonathan Towell · Answer

To summarize: A lender gives you $22.5k. She is repaid an unknown amount every month with no guarantee. As soon as an agreed upon return is paid, the lender is done with the deal.

That seems like the lender is taking the risk but limited in the upside. There is always someone who will go for any deal, but I would say that is generally not a good deal for the lender.

Lenders generally want a guaranteed return, a schedule for repayment, and collateral.

Equity partners are generally willing to forego the guaranteed and scheduled return in exchange for a piece of the upside.

Also, if you are borrowing the rest of the money from a traditional lender, they probably won't go for this either. If the down payment money is coming in as debt, that would likely make the loan-to-value ratio higher than what would normally be acceptable.

hypothetical situation-Would a lender ever agree to this?

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