How to fund a down payment?

9 Replies

I am looking to purchase a few duplexes for rental properties and should be able to get the loans to do them but I don't have enough to cover the down payment. What is the best way to still be able to purchase the property. My thought was to offer other potential investors a note to cover the down payment and then pay both them and the bank on a monthly basis. Is this something other investors would do/be interested in? If so any ideas on interest rates?

That will be tricky because the bank is going to want to know the source of your funds. Telling them you've mortgaged your down payment with some kind of other collateral (you won't be able to encumber what you're buying) will put an end to your loan process.

SO, possibilities:

1. Personal/non-recourse loan. Might be hard money or just a regular personal loan from a bank.

2. Friends/family "gifting" you money. Even that gets tricky but might be doable.

3. One of the specialty loans that require no/low down payment. VA, FHA, ETC.

4. Get a second job and save some money.

5. Sell something you already own to get money. A car, Ebay items, etc.

@JD Martin I have already spoken with one mortgage lender and they told me I could have a second loan on the property as long as I can still show that there will be positive cash flow. But looking at some deals I found it would hard to have positive cashflow if the second loan was higher than 8-10% interest rate.  

Originally posted by @Adam Lang :

@JD Martin I have already spoken with one mortgage lender and they told me I could have a second loan on the property as long as I can still show that there will be positive cash flow. But looking at some deals I found it would hard to have positive cashflow if the second loan was higher than 8-10% interest rate.  

Most likely scenario is they were talking about a second mortgage, after the property was already purchased and mortgaged. But easy enough; just call up whoever you plan on getting your primary mortgage from and ask them if you are able to use borrowed funds for the down payment, and if those funds can be first or second position on the note. 

In reality, if you don't have any money, you are probably not ready to be an investor. Investing implies you have something to invest, and that something is generally money. Reverse engineer the problem - what is the incentive and the risk for 2+ parties to loan you 100% of the money needed to buy and rehab a property? For a couple of percentage points of interest? You might just need to press the "pause" button until you can accumulate more capital.

Like JD mentioned, the bank is going to want to know where the money is coming from. If you cant show any assets or capital then they wont give you the loan.

How good is your W2 job? Youd be surprised at how quickly you can save money by living frugal. That is how I funded my last down payment. I saved for 6 months and took my tax refund, used it all for the down payment. 

We have solved this problem by taking on a Private Investor Partner, not a Private Lender. They bring 100% of the down payment (20-25% depending on the deal and lender) in exchange for 50%. We do ALL the work from finding , purchasing, manage rehab, place tenants and ongoing PM for our 50%.

Cash flow is split 50-50 and equity growth will be split 50-50 when we refinance or sell out down the road. They will get their original capital they put in back before the equity split. We do this all in an LLC to keep things documented and easy to understand.

In our case it was a family friend with a lot of liquid funds. I know in my local REI some of the people have done similar things. I think it all just comes down to networking.

@JD Martin agree with you completely. Investing is a privilege reserved for those with the means and self discipline to save money. There I said it. Even if the OP could make it work he’ll be over leveraged and skating on thin ice. Not a good foundation to build wealth.

@Adam Lang , I've got a different take on it than some of the above responders. In basic real estate investing (SFR, duplexes, etc.) there are three components - cash, credit and knowledge. While having all 3 is great, having two of the three can still result in a successful experience. If you're credit is good enough to qualify for a loan, and you have some knowledge and hopefully some experience in real estate, you should be able to find a passive investor at a real estate meet up, REIA meeting, etc. Even if you have to work for a small profit, the experience and (hopefully) profitable track record that you'll take away from the deal with result in a boost to your reputation making future deals easier, and on better terms for you.

As for saving to accumulate capital, this should be taken seriously as the difference in return on your time using your own money for a down payment vs partnering with someone else is significant.  It essentially cuts your time to obtain any financial goal by at least half, and possibly much more if you have to give the money partner a preferred return before you share in a any positive cash flow or profit.