Is borrowing money from Private Individuals a good idea?

[Alejandro Valbuena]

Hey everyone!

I am looking to invest in my first real estate property but it appears that saving for a down payment of 20% or more could take me at least a couple of years. Because of this, I have been seeking alternatives for funding the down payment. Is borrowing money from private individuals who offer a higher interest a good idea? I am considering borrowing from a private lender for the down payment and borrowing the other 80% or so from the bank. This is just an idea of an investment that would take place hopefully at the end of 2023 or start of 2024. Please let me know any recommendations or comments on this scenario and/or what else should I consider or be aware of.

Thanks!

[Alex Martens]

It can certainly be done, but you want to be very thorough with your numbers. A private lender will be asking for a generous interest rate and at a relatively short term. You'll end up being 100% leveraged which means the property is bought completely with debt. So you'll have to have a plan to pay off the private lender at their maturity date...So you'll have to either buy a property at a nice discount so you can do a cash-out refinance soon after, or do some sort of significant value-add in order to achieve a cash-out refinance. Or simply pick up extra shifts and save like crazy to ensure you have the cash to pay them off. Another thing to consider is what the bank will allow. Make sure you talk to your lenders to ensure they would even allow a loan to be used as part of the down payment. It could end up putting your debt-to-income ratio too high. If the numbers work, they work. Just be diligent. Hope this helps!

-Alex