Hello everyone, I'm looking to get my first single family rental property soon and was hoping to get some advice.
I was planning on borrowing a 20% down payment along with rehab costs from my mom and giving her a 12% return on whatever she lends me. And getting a conventional loan. I'm hoping to be able to pay her back in full after a cash out refinance. If I can't pay her back in full then she would get the cash flow until it's all paid back plus 12%.
Does this sound like a good deal for both of us or am I overlooking something? Is she allowed to give me that much money or do we need to be in a formal partnership? I believe you can only gift someone in the range of $14k?
Thank you for your help in advance!
Sandwich, MA · Member since 2018 · 103 posts · 57 votes
8y
I have a couple of questions. Yes, 12% is a great return for your mother, but was this negotiated at all? or is that the family rate? I do believe the tax limit for gifts is 15k but I am not an expert in any aspect of real estate so double check.
Is she only interested in getting a return on her investment or would she consider staying in the deal with you. You could use her money as a down payment, granted you do all the leg work, and split the cash flow ( or future expenses) from day one. Then you can refi and pull her money out and return it without adding interest. Then continue to split the cash flow moving forward. She would get a monthly payment throughout the whole process and you would also get paid.
Unless you are planning on using this property as a source of income right away you could also consider paying her off with 100% of the cash-flow unit your debt to her is paid off, then you wouldn't necessarily need to refi, unless you wanted to pull money out to reinvest. Once she is paid off the cash flow is all yours and your P&I payment wont increase because of a higher loan after the refi.
It would be nice to no some of the figures . Rental income, property value, rehab cost (amount borrowed from your mother).
Private Money Lender · Tampa, FL · Member since 2018 · 54 posts · 16 votes
8y
@John Korinke
Hey John, Congratulations on your first SFR rental! Why put down 20% with a conventional loan when you can but down 10% with a hard money loan and still do the refi you plan to do afterwards? Also, with hard money you're able to get a gift with no limits.
Sandwich, MA · Member since 2018 · 103 posts · 57 votes
8y
I have a couple of questions. Yes, 12% is a great return for your mother, but was this negotiated at all? or is that the family rate? I do believe the tax limit for gifts is 15k but I am not an expert in any aspect of real estate so double check.
Is she only interested in getting a return on her investment or would she consider staying in the deal with you. You could use her money as a down payment, granted you do all the leg work, and split the cash flow ( or future expenses) from day one. Then you can refi and pull her money out and return it without adding interest. Then continue to split the cash flow moving forward. She would get a monthly payment throughout the whole process and you would also get paid.
Unless you are planning on using this property as a source of income right away you could also consider paying her off with 100% of the cash-flow unit your debt to her is paid off, then you wouldn't necessarily need to refi, unless you wanted to pull money out to reinvest. Once she is paid off the cash flow is all yours and your P&I payment wont increase because of a higher loan after the refi.
It would be nice to no some of the figures . Rental income, property value, rehab cost (amount borrowed from your mother).
Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes
8y
@Alexander Wardell provided some excellent advice. There is a limit on the gift amount, but I'm also not sure what that is (I think it's $15k as well). A 12% return is very generous, and I think your plan is a win-win for both you and your mom if you are able to cash flow with those terms. If you are going the conventional route, you can avoid the gifting requirement by seasoning your mother's funds for 2+ months. These means, the funds have to be shown on two banking statements with no "deposit" associated with it. Also keep in mind that the definition of a gift would entail not providing your mother a rate of return. Hence, to avoid any fraudulent-like activity, I would recommend either seasoning the funds or having her co-sign on the loan with you.
@Tara Daniels Thank you, I am not well versed in HML, won't the interest rates be quite a bit higher? I have very good credit so I don't think a conventional loan would be a problem.
@Alexander Wardell This is very helpful and gives me a couple other options to think about. 12% was not negotiated yet but that is about her average return her money is making her in the market, so I wanted to be competitive.
@Frankie Woods Thanks a lot! Didn't know abot seasoning funds.
Hi John, Since it is your first deal, yes the rate may be a little higher, but you'll be putting down a lot less money. Also, if you know that you'll be done with the project in 6 months for example, you'd be paying half of the cost in interest making the numbers relatively close to going conventional.