Borrowing Money For Down Payment...Can This Work for Investor?

Question

My partner and I have access to friends and family money to use for down payments for buy and hold properties. How can we structure a deal for an attractive return? They won't just give it to us, but we can't do deals without it.

We can get $500k, at least, and we want to use this money for as many 25% down payments as possible (looking in the 5 - 700k range for multi families).

Assume we used $125k down on a $500k three family--any creative ideas that won't eat our returns? Don't want to borrow the down payment @ 7%.

Bill Tyler · Answer

I read a post recently from someone on BP that created a real estate trust . He pays investors a 15% annual return, in turn he uses the money to find, fix, and flip about 3 properties each year.  Example: A $100,000 trust pays out $15,000/year. If he profits $100,000 from flips, he pays out $15,000 and has $85,000 remaining in addition to the original $100,000 from investors. If the investors want their money back, he still has the $85,000 from profits to fund more purchases.  I hope I explained that in a way that makes sense.

Royce Talbo · Answer

Bob D.

Ok bob I going to be honest with you.  I think what you are doing is very dangerous!  You are a newbie and have no experience yet you want to use $500k of family and friends money to invest.  As a newbie we all think just about the numbers and dream.  You said that you want to buy as much as possible with that $500k.  We are in a good market right now and haven't gone through a cycle yet, what happens when it becomes a down cycle? What is your exit strategy? How are you going to keep your family and friends money safe?  Read around there are a lot of guys who have over leveraged and lost everything, don't be like them just because the numbers work now and you have a dream.  You will end up in a bad situation and have ruined your relationship with family and friends.  They will be mad that you lost their money, but you will feel worst for disappointing them.  REI is a patience game and takes a lot of learning not just several months, it takes years.

My advice to you is if you feel you are ready from reading enough books watching the market for a while and talking with real investors, then start small with a SFH learn what its is to be a landlord.  Then try flipping or wholesaling to get your capital up to have for reserves.  Look at investors that use Hard Money some have capital to purchase the property on their own, but choose to use lending because they need capital in reserves for when things happen and they always do.  So if you are ready you can borrow some of your family or friends money to start investing small, but DONT use all the $500k and over extend yourself when you dont know what you are doing.

Aaron Montague · Answer

Bob D.

Why don't you put their money in an LLC and make that LLC partner to your deals?  They get nice returns of 10%+ and you don't have to fork over too much money on your side.

I'd also write in something that allows you to buy out portions of the LLC at a 4% return or something like that.  You can buy back investment dollars at $1.04 year 1, $1.08 year 2, and max it out at $1.20 year 5+.  This assures that they'll gradually get their money back AND make solid returns at the same time.

Bob D. · Answer

Tom,

We haven't done anything. I've been on my own journey of self-employment for a few months. Need to get myself up and running and revisit these REI dreams.

Bill P. · Answer

Many ways to do it. The way we do it is on our website:

http://www.tetrahomes.com/Investors/SCORE/Rates/rates.html

Has worked for us for years. Hopes this helps to clarify your thinking.

Aaron Montague · Answer

Vacancies need to be accounted for in the initial assessment of the property.

Tom S. · Answer

@Bob D.

Bob - what was the outcome of this?  Did you end up proceeding?

Thanks,

Tom

Brandon Z. · Answer

I am new and still trying to wrap my head around this as well. Does the following concept make any sense...?

You "borrow" the 25% down payment. Let's also assume you got a good deal as well and have some immediate equity, which we will call 5% (You got it at 95% of market value). Now there is 30% equity. If the house were $100K, there is now $30K in equity, a 20% gain on the initial $25K down.

Can one simply refinance to pull that equity out and pay back the lender, including the interest? I realize refinancing can also have significant costs...

Another take on that scenario would be to pay down $5K in equity over a year or two and then refinance, pull out the equity and return it to the lender to fulfill your agreement.

Could a contract be structured around this type of idea?

Tom S. · Answer

Bob D.

I think the biggest question is: will the bank allow your down payment to be borrowed? What are you going to answer on the loan application for that question?

- Tom

Borrowing Money For Down Payment...Can This Work for Investor?

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