Rookie Reply: How to Borrow Money for Down Payments (and Pay it Back!)

Ashley Kehr:
This is Real Estate Rookie episode 160. My name is Ashley Kehr. And I am here with Tony Robinson.

Tony Robinson:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the information, the inspiration, the motivation and sometimes we answer your questions directly so you can get started or keep going on your real estate journey. Ashley, what is going on today?

Ashley Kehr:
Not much, Tony. This is actually our third rookie reply. If you guys are watching this on YouTube, you probably realize that we’re the- well, Tony’s in the same shirt every day. We record a black T-shirt. For me, say you love it, three weeks in a row or care to reply. I’m not really sure what other small talk we could fake since we recorded it too`.

Tony Robinson:
I actually have one, I actually have one. My house in Louisiana, all of you know about it, it is under contract for a third time right now, and feels like we’re inching closer to actually being able to close this one. We just got the buyer’s request for repairs, so we’re giving them a credit for that. I think the appraisal has come back already above what we’re selling it for, so fingers crossed that this one actually ends up closing this time. It’s almost bittersweet because it’s if we actually do end up selling this property I won’t have anything to complain about on a regular basis. This is the only part of my life that I allow myself to openly complain about, but on the flip side I’ll get to save the money that I lost last year on it, so.

Ashley Kehr:
Well, if you need something to complain about Tony, you can complain about me. [crosstalk 00:01:39]

Tony Robinson:
There you go.

Ashley Kehr:
That Ashley, her laugh. It’s always overpowering the podcast.

Tony Robinson:
Fair enough.

Ashley Kehr:
Okay. Well, it’s very exciting for you to hopefully have that property to the end and I think this is actually a very valuable lesson to anyone listening as to, okay, they might have bad investments, but also as people trying to buy properties, those person that’s buying this property from you, they know you want to get rid of it, but probably don’t know the extent of what you’d be willing to do to get rid of this property, so [crosstalk 00:02:17]like how they give you your repair list.

Tony Robinson:
If they said, Tony, we need your left leg, I would give them my left leg.

Ashley Kehr:
Yeah, like the repair list, you’re just giving them a credit. Did you even try to dispute it or anything?

Tony Robinson:
For what reason?

Ashley Kehr:
Right. They probably could have asked for a lot more and you would’ve just said, okay, yeah. Let’s go ahead, yeah.

Tony Robinson:
Fair. At this point, I’m willing to pay them to take it off of my hands, so.

Ashley Kehr:
So if it comes onto the market for a fourth time, you guys know.

Tony Robinson:
You can pretty much ask me anything and I’ll say, okay.

Ashley Kehr:
Yeah. Okay. So, we have another question from my DMS. You can send me a DM @wealthfromrentals, you can send one to Tony at @tonyjrobinson on Instagram, or you can leave a message on our voicemail box at 1-888-5-ROOKIE. And those voicemails actually get emailed directly to Tony and I, so we do listen to them and we do get to play some of them here on the show for you. So today’s question is from AJ Seaton. “Hi Ashley. I enjoy the podcast. Here’s the question and scenario I have. Let’s say I borrow from the bank to purchase a rental property. Then I borrow money from family or friend for the down payment. What’s the best way to pay back the family friend, the down payment. For easy math, the home is $100,000 purchase price. The bank will be putting 80,000, holding the mortgage for that. A family friend would be paying me or giving me $20,000 to borrow. Let’s say I pay a thousand dollars as a fee, so I owe them a total of $21,000. What’s the best way to be able to still cash flow the property and pay them back?
So the first thing I think of is if you are borrowing from a bank for a rental property, make sure that for the down payment, you are allowed to borrow money and that you don’t have to use your own money. If you’re doing an FHA loan, they do require you to use your own money, some conventional loans. You could go to the commercial side, where they usually don’t care at all where the money is coming from, but just make sure that it’s clear with the bank that you are allowed to borrow for the down payment. If you are not allowed to borrow for the down payment, you can receive money from family and friends, but you’ll have to have a gift letter written. So the letter is stating that, say, your mom gave you $20,000 for the purchase of this property, and it is a gift and does not need to be repaid back. So that’s something that can be done if you do need to get that down payment gifted.
So for saying a $1,000 fee, so what you work out with the family members is, or your friend, is doing a payment plan and making sure that just works into your number. So say your mortgage on this property is $500 per month, and you are going to pay back your family the balance plus, maybe 3% interest or something like that. And that ends up being another $300 I month per se. So can your property afford an $800 mortgage payment per month? Or you set this up outside of the property where maybe when you’re running your numbers, you’re putting that down as $20,000 invested as cash put into the deal. And then that way you can see what your cash on cash return is, and then the money you’re actually paying back your family is coming out of maybe your W-2, coming some out of the cash flow of that property.
So, there’s different ways to analyze it and look at it, but check out biggerpockets.com and go to the tools in the rental property analysis. And you can run, especially if you’re a pro member, you can run reports as many times as you want. So run it different ways, in different scenarios and see how it actually ends up.

Tony Robinson:
Yeah. So much good information there, Ashley and I think AJ’s question is essentially on how to structure this partnership. And we’ve talked about this a lot, is that there’s no right or wrong way to structure a partnership, as long as you’re not breaking any laws and both partners are happy. Ashley, you talk about this all the time, that you partnered with someone to where you put the money up for the deal, and you’re not getting any cashflow from it, right, but you’re playing that situation with the equity. So, that totally works, AJ. If you find someone that says, I like this area, I like this house and I just want the equity play, then you don’t even have to worry about paying them back, right. Or maybe you say, hey, we’re going to buy this house and we’re going to hold it for five years, and then when we sell, maybe that partner gets all of their capital back at that point, plus whatever interest has accrued.
Or, hey, we’re going to say, hey, AJ’s managing the property on a daily basis, he gets a hundred dollars a month in management fees, then all of the additional cashflow goes to the partner and so the partner’s paid back. So you can get as creative as you want, AJ, with how you structure this partnership. At the of the day, all that matters is that you and the partner are both happy and that the property itself can produce a positive return.

Ashley Kehr:
Awesome, Tony. Yeah, that’s great advice. That’s the hard thing though, is that there’s so many different ways to do a real estate investing. So many different ways to get money, so many different ways to structure a partnership and really, it’s just making sure it’s legal and that it works for you and your partner. And also feel free to post in the Real Estate Rookie Facebook group. Maybe some options that you’re thinking of doing for this partnership and put it in there and just get people’s opinion and advice on it there of ways you’re thinking of structuring it. Tony, anything else to add?

Tony Robinson:
No, I think we hit it all, ash. I’m excited to see where this one turns out, AJ. So if you do get that deal in the contract, just shoot us a note. If, actually AJ do me a favor, go into the Real Estate Rookie Facebook group that Ashley just mentioned, and when you do finally buy this property, just drop a little comment or drop a post there, let us know how you actually end up structuring it.

Ashley Kehr:
Well, thank you guys so much for listening. I’m Ashley, @wealthfromrentals and he’s Tony, @tonyjrobinson on Insta and we’ll be back on Wednesday with a guest, and let’s hear something from Bigger Pockets that will provide you guys, the rookie is so much value.