Using private money for down payment ?

Question

At this time I’m looking to acquire a large 72 unit deal with OPM for most of the down payment.

Example:

Purchase price $5,000,000

Down pmt:    $1,250,000

Amt:   30 year

Interest: 4.5%

Interest only period: 3 years

If the property will bring in an 8% return and I’m going to have $750,000 and the debt partners would finance the remaining $500,000 for the down payment I think this would work.

The debt partner would receive 6% interest for 4 years and then their initial investment would be paid back at year 4.

What are your thoughts ?

Would this strategy work and would it be risky ?

Christian Podedworny · Answer

I believe I would need a guarantor for the loan but I'm not sure if I can go around this if the loan will be recourse.

Any thoughts ?

Brian Burke · Answer

@Christian Podedworny this could work, but there are obstacles. First, you’ll need more than $1.25. That’ll satisfy the 25% down payment but you’ll have closing costs, escrow account deposits, first year’s insurance premium, utility deposits, $ for needed upfront capX plus reserves. Plan for 30-40% of the deal size.

Next, the primary lender is likely to disallow subordinate debt.  And finally, the added debt service could be a real problem if the income is stressed in a period of economic weakness. Many people learned the hard way during the real estate meltdown of 2005 that too much leverage is a recipe for disaster.

The best solution is to either use your capital for a smaller deal, or bring someone on as an equity partner.  As an equity partner they get a split of the cash flow and the exit.  If there is no cash flow, they get nothing (until there is once again cash flow, of course). Tell a debt partner that there’s no cash flow and you’ll hear the squealing tires of the process server as they rush over to serve you a foreclosure notice.

Bringing in an equity partner requires legal counsel. It’s not a DIY project.  But it’s how all of the successful professional buyers do it.

Tom Keating · Answer

@Christian Podedworny @Christian Podedworny, I work at CBRE as a direct seller/servicer of the Freddie Mac SBL Program.  I think your assumption of 4.5-4.90 is a fair assumption.  I would note that each equity investor holding 20% or more equity will be required to sign the carve outs as a guarantor.  The loan will be fully non-recourse.  Feel free to PM me with any questions.

Chris Purcell · Answer

I think if you get a private loan for the down payment they need to co-sign.  At least for residential

Christian Podedworny · Answer

If iattain 10 year debt at 30 amt. through a Freddie Mac’s small business loan the rates would be 4.5-4.75%

Christian Podedworny · Answer

12 deals

Martin Morales · Answer

how many deals have you done thus far?

Using private money for down payment ?

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