Rental Property Investor · Chicago, IL · Member since 2018 · 22 posts · 12 votes
I'd like to purchase a 2 unit building with a 203k loan that I'll eventually BRRR. I have some money in savings, but not enough to cover a down payment, closing costs, and reserves to hold me over for a few moths while I manage the construction and vacancy.
I'm considering asking my parents to withdraw $10k from their 401k. This will be used for a down payment and closing costs while my personal savings will sit in reserves. I've never asked my parents for money, so I'd like to approach them with a simple strategy. I'll show them the numbers, how the property cash flows and the plan to cashout refi to repay them the loan plus the 10% withdraw penalty.
I understand all investments involve risk, but how can I protect their investment from any loss? Lets say the whole deal tanks. How can they recover their $11k?
Developer · Chicago IL · Member since 2019 · 147 posts · 125 votes
7y
Kristina,
First off I’d like to shake your hand and give you a big hug for sincerely trying to protect your parents investment! You are a wonderful woman. Second I’d like to shake your hand for having all of the numbers to provide a positive cash flow.
Now that I’ve gotten all of the good vibes going, there really is no way to protect your parents investment should the whole project tank. I did have a similar situation and the bottom line is at the end of the day if the property is worth less than all of the loans there is no way to recoup the money invested. This becomes especially hard with Family.
I would advise when you present your calculations you also have a heart to heart about the reality of what an investment is. I received some very wise advice quite some time ago and I know it is very relevant here; do not invest money you cannot afford to lose. If losing the money you are investing is going to change the quality of your life, don’t do it.
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
7y
Sorry in advance: It shouldn't, but it really bothers me seeing people borrowing money from their parents for their own home down payment or even worse, to invest in rental property. What happened to working hard, saving up and paying for it yourself like a grown adult?
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
7y
@Peter T. Not to mention it always blows my mind how people can call it real estate “investing” investing when they have no money to invest. How is that investing?
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
7y
It’s your parents, it’s only 10k. You didn’t ask to be born, they wanted you, they have some responsibility to ensure you get launched. Don’t abuse them, but I see no reason they can’t help you get started. Spoil them when you get older, you might need to help them later in life anyway. I have a couple daughters, I want to give them everything; I want them to be resilient, but when they come to me with a solid business plan I’ll surely fund it. Most the pushback you are likely getting is that people aren’t confident the deal is good. Make sure you are way under retail. Think about your exit strategy. Close a deal south of 80% current market value and you are fine. But don’t screw it up. You may only get one shot with your parents help. After that you’re on your own.
My parents helped me with a few grand to buy my first house, they’ve given me old beater cars too, it’s what middle class people do.
Investor · Washington, DC · Member since 2017 · 198 posts · 323 votes
7y
I don't mean to trivialize this but it's only $10k... I get mailers all the time from my credit union with a blank check telling me I am pre-approved for a personal loan up to $25k (at 9% interest though)... assuming this wouldn't throw your DTI out of whack you could also take a cash advance on a 0% APR credit card (usually there's a 2 to 4% transaction fee).
If the above suggestions are not possible, Instead of asking your parents to cash out of their 401k and get hit with a 10% penalty or asking them to withdraw money from their 401k and take out a loan against it-- do your parents own their home? If so, do they have any equity in it? If so, then ask them to take out a HELOC on their home and you tap into the HELOC and make the payments for them. I would personally take out some money from their HELOC and put it in my bank account for two months to show the lender liquidity and then after the loan closes I would pay off the HELOC with the cash you have on hand for reserves and then use the HELOC as a reserve fund that you can tap into if you need it.
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
7y
@Kristina Lugo
Don't borrow the money at all. Form an LLC with parents as partners according to how much each of you out in. Perhaps they already have money to invest, or like everybody has stated, can borrow the money from 401k. Hardly ever a good idea to take an early withdrawal and pay the penalties.
Or, if they borrow the money, they can be your hard money lender at say, 5% with a balloon payment.
Have you talked to a lending institution? Preferably a local bank. Ask them if you really need that much money. You mentioned money for rehab, but also stated a 203k loan. The 203k will be paying for the rehab. Get the real numbers from a bank before you approach your parents.
I think the HELOC approach as Ron mentioned would be better as well (if that is possible) as opposed to messing with the retirement funds and associated penalties / fees etc.. I would also be leery about depending on the BRRRR method to work 100%. As has been discussed in several forums the numbers need to be really good in order for the BRRRR to work as planned and to get all the money back out of the deal. You certainly need to have a number of exit strategies regardless of how you get the financing...and as I'm sure you will, have a plan for each of those strategies that takes care of your parents money and gets them, their 401k, or HELOC paid back.
Do you have a contractor who is willing to work with you and a 203k product? There's a lot of moving pieces when borrowing money to rehab. There are also not many inexpensive contractors who are able to 'wait around' till the job is done to be paid. Keep in mind that in order to close with a 203k product you need a GC to give a bid, the bank needs to approve it, you close, you get rehab money out for materials, the rehab work goes on and gets completed, the bank re-appraises the property to ensure the work has been completed, then the rest of the rehab money is released from escrow to pay the contractor for their labor. Oh an all of that needs to happen in 6 months from the closing. GCs who are willing to take on this kind of work usually are paid top dollar vs your contractors you find on craiglist who want you to pay them every Friday.
I ask because I don't think the BRRR strategy always pans out as planned. As others have mentioned before, you really have to have costs finely tuned to pull it off then get it to appraise for a significant LTV in the cash out process.
Now if the answers to all of the above is yes, then you can probably move onto considering how to finance the deal. Why are you thinking you would ask your parents to borrow from their 401k right of the bat? Why not just ask them for 10k they have lying around? Also, your parents, I assume are close-ish to retirement age, this isn't a great time to be complicating your 401k with a liability IMO.
Instead of your parents borrowing money from their 401k, just borrow money from credit cards, AND only do that if you need it. Also, you can search online for credit cards running a 0% promo for 6-12 months.
By doing it this way:
Your parents don't have to lose the $10K if the deal don't turn out as good as you expected
It seems like this is your first deal - you need to prove you're capable of getting a deal done and once you have your first success story, now you can start borrowing from friends and family
You get cheap money - 0% beats HMLs, private lenders, and just about everybody
Do you have a contractor who is willing to work with you and a 203k product? There's a lot of moving pieces when borrowing money to rehab. There are also not many inexpensive contractors who are able to 'wait around' till the job is done to be paid. Keep in mind that in order to close with a 203k product you need a GC to give a bid, the bank needs to approve it, you close, you get rehab money out for materials, the rehab work goes on and gets completed, the bank re-appraises the property to ensure the work has been completed, then the rest of the rehab money is released from escrow to pay the contractor for their labor. Oh an all of that needs to happen in 6 months from the closing. GCs who are willing to take on this kind of work usually are paid top dollar vs your contractors you find on craiglist who want you to pay them every Friday.
I ask because I don't think the BRRR strategy always pans out as planned. As others have mentioned before, you really have to have costs finely tuned to pull it off then get it to appraise for a significant LTV in the cash out process.
Now if the answers to all of the above is yes, then you can probably move onto considering how to finance the deal. Why are you thinking you would ask your parents to borrow from their 401k right of the bat? Why not just ask them for 10k they have lying around? Also, your parents, I assume are close-ish to retirement age, this isn't a great time to be complicating your 401k with a liability IMO.
I don't mean to be rude or overly blunt, but if your parents do not have $10K in liquid cash available to lend you, I would urge you to reconsider borrowing money from them at all. It sounds like they aren't in a financial position to lend you money, let alone dip into their retirement account. Also, BRRR is one of the riskier types of RE investing for people just starting out. Unless you are experienced at this and have a good team of contractors with whom you have an established relationship, the chances of them recouping their 10K via income generated from the property aren't that good.
If it's a duplex, why not just trying house-hacking?
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
7y
10 k for some is a lot and for some is a little only they really know. If you have a 401 k I believe you can withdraw or get a loan for your first home. At 57 it makes no sense for them to withdraw. If they have a home with lots of untapped equity ask them to get a helco if they are willing and partner with them using it for reserves. If they dont have a home they are probably not in a position to help.
Rental Property Investor · Chicago, IL · Member since 2018 · 22 posts · 12 votes
7y
@Colleen F. Thanks for the feedback. They're homeowners and I never thought of the possibility of creating an LLC with them as partners (as a previous replier suggested). I'll look into the HELOC option!
Rental Property Investor · Chicago, IL · Member since 2018 · 22 posts · 12 votes
7y
@Kristina Lugo
Not sure if this will update everyone following along but, the property I was interested went under contract! I’ve got another property I hope to see this weekend. I will follow up on a new thread with those numbers. Thanks again everyone!
Flipper/Rehabber · Long Beach, CA · Member since 2017 · 155 posts · 118 votes
7y
@Kristina Lugo
It sounds like you are looking for deals on the mls. Since you don’t have the money, one way for you to bring true value is by finding a deal your parents (or any other passive partner) wouldn’t find on their own. Anyone can go to the App Store on their phone, scan their finger (or face on the newer iPhones), (or manually enter the password you created when you were 15 and made an Apple ID on your iPod Touch) and download Redfin or Zillow. Everyone has access to deals on the market. Here’s what I’d suggest. Drive around these neighborhoods and drive for dollars. Until you get 500 properties, shoot for like 20/day. You can use property radar or deal machine for this. Then send that list of addresses to batchskiptracing.com or reiskip.com or any other skip tracing service. Then just call everyone of those numbers. I gaurentee you will get a couple leads and maybe even a deal out of it. Once you have a deal the partnership will make a lot more sense for someone who is covering the down payment. They will actually be saving money splitting the deal with you than buying and flipping a property listed on the mls.
Not sure if this will update everyone following along but, the property I was interested went under contract! I’ve got another property I hope to see this weekend. I will follow up on a new thread with those numbers. Thanks again everyone!
What's your side hustle? Where's your passive streams of income? It's not hard to make 10k on the side. Are you maximizing your potential?
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
7y
I've never been a fan of this. There are tons of other ways to get money and the risk of something going sideways would take more than just the money away. It's the convenient solution but not the least risky.
I did the same thing to get started. I asked my parents for 15k and my investment worked out. Just explain to them what you're trying to do. (Easier said than done). You're trying to buy a property, fix it up, refinance into a bigger mortgage, use the extra money for the next project.
Las Vegas, NV · Member since 2018 · 100 posts · 140 votes
7y
Parents should be the lender of last resort..........parents bail you out for $10k when things go wrong, its what you do for your kids, they may shout at you, but they will usually resolve the problem
When you need $10k, when the whole world just went black, you need someone to turn to, keep that someone as your mum and dad.
Lender · Chicago, IL · Member since 2017 · 438 posts · 193 votes
7y
@Kristina Lugo, was this going to be a 2unit that you'd occupy? If so, there are down payment assistance programs I can tell you more about that could replace the need for borrowing from your parents and relieve them of that risk. Feel free to PM me for more info!