Hard times trying to wrap my head around payment schedule options

5 Replies

Hi All,

Thanks again to all the great contributors here on BP.  I am still sucking in info but really need to jump in with action.  To that end I am looking at a potential duplex purchase using private money to fund the downpayment while using a 75% purchase and rehab loan from my local credit union.

I would like to ask a friend to fund $25k for the downpayment combined with a $75k, 25 year purchase & rehab loan at 5.5%. (Total purchase $100k Including $55 purchase and $35 rehab on a potential ARV of $160k)

The options I was thinking of that could benefit both my friend and me in the deal are:

  1. Loan the $25k based solely on an 8% balloon payoff in 12-14 months after refinancing. This of course depends solely on the bank or credit union agreeing to refinance once the property has been rehabbed and lived in for 6 months.
  2. Loan $27k interest only payments for 14 months at 8% interest. Again - same success or failure based on banks refinance.
  3. Loan $25k at 6% for 10 year term, monthly P&I plus 25% of the cash flow for same term.

I have four questions

The first question I have is:  Does anyone think these are outrageous in one direction or another? e.g. Am I stiffing my friend or stiffing myself? Or does one or the other seem reasonable.

The second question I have is: How in the world do I calculate the balloon payment on number 1?  I have looked around for an online calculator but could not find what I was looking for.

The third question is:  What do you base amortization on an interest only or balloon payment short term loan? I keep hearing people on BP refer to taking an interest only loan for 14 months or a balloon payment loan for 12 or 14 months at n%.  What is the n% based on?  Is it on 12 months? 30 years? etc. If you are basing it on 12 months but the lender is amicable to going an extra six months because you need to, how did that extra six months get calculated into the initial 12 month amortization? Maybe this one should be a post in and of itself ;)

The forth question is: What would be the best way to calculate the third option? To date I have created two rental reports on the BP Rental Property Calculator, one for $25k and one for $75k, then I simply took all the expenses from one report, and manually added the P&I from the other report in order to come up with the true monthly expenses.  Is there a BP calc that I am missing that will allow me to put in two mortgages?

Thanks all!

God Bless,

Chris

I wouldn't do #4- you're giving up too much. What you pay your friend depends partly on his expectations and where he's getting the money. If it's coming from some place where he's getting 10-12% returns or he's a seasoned investor, you'll pay more to borrow the money. If it's coming from a simple savings where he's getting 0.3% interest, he'll jump at 5-6%. I'm generous with with I pay my private lenders but the property still has to make sense for my profit as well. 

The simplest way to do it is to have an interest only loan with a balloon payment in 15-18 months. There is no amortization to worry about with interest only as the principle balance is fixed throughout the duration of the loan (question 3). I would write it out longer like i did above just in case something comes up and you can't refi out as soon as you expect. $25K at 8% is $166/month. You pay that interest each month and the principle is the same. 

I wouldn't do the 4th option because in that situation, the loan is amortized and the lender is getting a boat load of interest on the front end. You can google an amortization calculator and put in your own numbers to get a payment. Add the payments for both loans plus the insurance plus the taxes and that's your total PITI. I'd take off top 25% of your gross rent to factor in vacancies, property management, repairs, CapEx, etc. With the remaining amount- subtract the combination of PITI. That's your net rent. Feel free to give him a quarter of that if you work for free. The payoff amounts are actually very similar between interest only at 8% and amortized at 6%. I'd keep it simple and go with interest only.

Is your friend okay being in 2nd position? Should you default, the bank gets paid off before your friend. Are you sharp enough or experienced enough to play with $25K that is not your money? If crap hits that fan- are you able to repay them quickly as to maintain the relationship and not screw them over? It's easy to calculate numbers and such but you can't calculate the emotions involved when borrowing from friends and family. 

Thank you @Adrien S.  That was all great info. The amortization tables I can get online pretty readily, but I am constantly trying to figure out that 12 month vs. 14 month vs. n months and what that percentage was based on and I THOUGHT you nailed it for me.    

This is what I thought from reading your post.. Basically, to do an interest only payment loan - you decide on the longest hold time - say 18 mos - then run an amortization calculation on the amount, interest, and time frame, then the first month's interest is what you are paying each month for 17 months, then the balloon is full amount plus one more monthly interest payment.  

However - when I just run an interest only payment calculator, It does not matter how many months I put the payments at, it comes up with $166.  WHERE OH WHERE do they get that number?  Eight percent of $25000 is $2000, not $166.  How is that calculated?  (I will do some googling while tonight as well to try and figure it out.

As for the friendship / partnership - I am not afraid of asking as we have had this relationship prior, in smaller amounts and always interest free for shorter terms.  He knows the risk of investing in this property and I think I can convince him of the benefit of 2nd lien position. He knows he can foreclose if he wants :)  

In the end I have calculated approx. 66% for vacancies, capex, insurance, taxes, repairs, etc. then subtracted mortgage. I am hoping to fill rent the units by the bed, to graduate students as it is very close to a local university.  If I cannot, and I have to rent to two family units, then I have to buy this property and/or fix it for considerably less :)  I will try that anyway, but my marketing will be to the university students first.

Thank you again for the great response.

Blessings,

Chris

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like the previous person said the best option really is interest only payments for 12-16 months and then a balloon payment of the 25k. This keeps everyone honest, you remember it's not your money, and he gets steady payments that tell him you haven't forgotten about him. To answer your questions....

1. Option 2 is reasonable, 1 is fine too, 3 is bad. You don't know if he wants to be tied to the situation for up to 10 years, most wouldn't want in that long. Also for option 1 or 2 you are in the right Wheel house. You'd want to offer 7-12%. Shoot ask them what they are getting now else where. Your goal would be to beat their stock portfolio  (4-6% normally)

2. You be looking at just 8%/12 (.6667%) x the balance each month, the interest would compound so at the end of 12 months you'd owe about 27100~.

3. Interest only loans are like #2 except your making that payment each month. So it's still 8%/12 x 25000 = $167/money. Technically when you do this through a bank it will be based on average daily Balance so it can fluctuate a few dollars but that's irrelevant in this case. None of this changes if you take it out 14 or 24 etc months. It's still $167/mo and it's still the interest rate divided by 12.

4. Should you decide to go this route you'd just run a 10 year mortgage calculator on 6% and 25k. Then add 25% of the actual cash flow and be done with that. So it would be like $278 plus 25% of the final cash flow/mo.

Hope this all helps and good luck!

Thank you @Adrien S. and @Matt Turbitt !!!!  These are great responses.  I am going to approach my friend for interest only for for 18 months or early payoff.  

The help you gave me was invaluable :)

Blessings,

Chris

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