Private Investors Deal Structure

[Leila Moussavi]

Hi there!

I'm a new real estate investor looking to invest OOS in MF for cash flow in KC, Indianapolis, and Columbus and Cleveland. My parents are willing to fund my deals and are able to pay all cash for properties. This opportunity is obviously a huge blessing, and but I'm at a loss on how to structure the deal so I can provide returns for them.

I personally don't need to the cash flow from the properties in the next few years, so was thinking of giving them 100% of the cash flow for the near future. However, this would mean taking a long time for them to receive returns on their money.

Any suggestions about how to structure deals with them to ensure a quick(er) return on their money?

Thanks for your insight!

[Joe Fritton]

@Leila Moussavi

Your parents are providing a great boost for you! That's awesome. 

I recommend you do some research on investment lending. It's great that your folks are willing to provide 100% financing, but it could be more powerful to borrow a 20% down payment plus closing costs. Most institutional investment lenders don't season such funds and they are ok with family contributions so long as the family funds don't come with a secondary lien. If you get the properties with a DSCR rental loan, then you get a bit of a safety net in that these loans are based on the cash flow of the property over and above the PITIA loan payment. Such lenders won't close the loan if the property isn't going to make positive cash flow for you.

From a financial perspective, the borrowed leverage would allow you to acquire many more properties and your parents can keep their cash in an interest bearing account. Say you find a quad to buy for $500K. If you have a credit score in the 700+ range you can likely get a 30 year fixed rate purchase loan at around 5.5% with a 20% down payment. That has the cost to close at appx. $120K, including impounds, rather than the full cost of purchase and closing costs. 

Taking that example further, we've got a 4 unit apartment building for $500K purchase. Using $4,000/mo total rents, guessing "blue sky" numbers at $5K annual taxes and $2,500 annual HOI, and an 80% purchase loan at 5.5% the PITI loan payment is $2,896.16. That's a monthly cash flow of $1,103.84 before management, etc. Paying your parents half of that each month would be about a 5% return on their cash contribution recurring every single month.

Those are totally guess values, but imagine the broader buying power if using borrowed leverage. This type of business purpose loan doesn't require verification of your own income or DTI, etc. The lender will not ask for your pay stubs or tax returns. It's purely based on your credit score and the cash flow of the asset.

Best,