Buy a property with someone else's money and return profit

4 Replies

A family member is about to sell a paid off property overseas. He knows that I invest in rental properties and he would like me to invest his money for him. The plan will be to allocate his money towards the down payments of multiple rental properties that I would buy and add to my portfolio. He doesn't want to own the properties or borrow any money, he just wants his money invested. I don't know exactly what I might be getting myself into, so here are my questions:

1. Money transfer - What is the best way for him to give me the money in the first place without alarming the lender too much? Do I have to report the money he's giving me on my taxes?

2. ROI - I think it's not legal to guarantee return. Say a property returns $400 to $600 per month, I plan on returning 80% of the NOI to him. Is it legal and how can it be put down in writing? Investment contact?

3. Any gotchas? Taxes? Investing someone else's money? 

Thank you for pointing me in the right direction. I appreciate any advice beyond my listed questions.

Nick

If you are doing a commercial loan the lender likely will not care or investigate were the down payment money comes from.

If you are doing a residential loan the lender absolutely is going to want to know where the money came from. They will ask for letters from both parties explaining why the money was transferred and what reason of the money transfer was. Was it a gift or loan etc? They will then likely want bank statements from you and him showing the transfer.

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

1 he can just write a check. No tax issue.

2 make a promissory note.  Pay 8%. Monthly interest payments

3 ballon payment in 2-5 years.

Strictly a loan.

You can also set up an LLC and define contributions and payments. Ex 8% preferred return, or 8% preferred return and an equity split. If you are only using his money for the down payment and financing the balance a bank is going to want 1st lien position.

One warning, it is harder to find lenders that will loan to an LLC so the alternative would be to buy the property in your name and then have him agree to subordinate to a 1st lien position.

Thank you for your answers!!!

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