Borrowing money from parents to get started?

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Borrowing money from parents to get started?

Isaac Pyle
New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes

Hello BP community-

Does anyone have experience borrowing money from their parents to get their foot in the door with real estate? How did it go for you?

Let me explain my situation. I am going to be a sophomore in college this fall, and living in a very expensive market. However, I also am hoping to begin house-hacking sooner than later, and would like to do this in the next few years. At this point, waiting tables over the summer I just about break even with college tuition and expenses (I live relatively frugally) and likely would not have enough money for a 3.5% down payment. My parents, however, have offered to lend me money towards a down payment if I am able to find a place that meets my criteria for a good house-hacking investment. Has anyone else borrowed money from their parents to get started?

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Gina SternPro Member
Investor · Boca Raton, FL · Member since 2019 · 1k+ posts · 160 votes
7y

@Cory Carlson don't ever feel ashamed for using the resources that are available to you. The smartest people realize what they have and take advantage of a good situation. Good luck on your future endeavors! 

[email protected]561-430-2616
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  • Cory CarlsonBusiness Member
    Real Estate Broker · OR · Member since 2018 · 311 posts · 226 votes
    7y

    I did to buy my first house. I am very thankful to have the support I have and if your parents are looking to support you this way, show the initiative and quantify your ideas. If i would do it over again, i would house hack. I bought a single family home and it has been a great place to raise my kids. 

    The great thing about house hacking is the lender will recognize 75% of the adjoining unit(s) as income. This aids in buying power and hopefully effectively lowers your monthly out of pocket. I also live in an expensive market and these properties can be hard to find. 

    I drafted a report that quickly outlines the benefits of house hacking, perhaps it is something you can send over to your parents as you do your due diligence work. 

    Send me a PM.

    503-222-0282
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    7Reply
  • Doug Phillips
    Realtor · Cincinnati, OH · Member since 2018 · 140 posts · 53 votes
    7y

    I agree with @Cory Carlson I think he brings up great points.  Later this year I should be receiving a small profit on an investment that I will be using in addition to $ I am currently putting aside for a house hack situation.  I plan to bring that capital as well as the nice calculators BP use to generate a nice report/my idea to my dad for additional funding.

    1Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    Will you find a lender to give you a loan knowing your parents are "lending" you the money? Or will they give the money early and the funds will be seasoned by the time you want to buy? Or will they fill out a gift letter showing it isn't a loan? Just a few things to think about. 

    Here's something else to think about. Form an LLC with your parents, and partner with them on a multi family house hack. They supply the money to get in. You live there, manage the place, and do repairs. But do a legal doc so all parties are covered. Even with parents I would not advise going about it with a handshake .

    Just a thought...

    8Reply
  • Taylor Chiu
    Real Estate Agent · Salt Lake City, UT · Member since 2014 · 473 posts · 230 votes
    7y

    @Isaac Pyle

    I borrowed some money from my folks to go in on a couple investment properties a couple years ago. We partnered together on the deals, and now they are returning good cash flow for both of us. 

    That wasn't our first jump into real estate investing, but if your parents are willing to lend for your first one, that's great for you!

    Just make sure you have the terms of the loan written out, so no one gets hurt feelings if something goes unexpectedly.

    Are you planning to buy a place, live in one room, and rent out the others? That can be a great way to get started.

    0Reply
  • Josh Dane
    Rental Property Investor · Chicago, IL · Member since 2013 · 100 posts · 85 votes
    7y

    @Isaac Pyle for me, first ever loan was from family for an investment property down payment (25%), 6% interest, paid monthly over a 30 month term. Luckily the building largely cash flowed this back each month..

    1Reply
  • Gina SternPro Member
    Investor · Boca Raton, FL · Member since 2019 · 1k+ posts · 160 votes
    7y

    @Cory Carlson don't ever feel ashamed for using the resources that are available to you. The smartest people realize what they have and take advantage of a good situation. Good luck on your future endeavors! 

    [email protected]561-430-2616
    11Reply
  • Isaac Pyle
    OP
    New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
    7y

    @Cory Carlson Thanks for the reply! Currently I am planning on house-hacking, and my parents actually recommended I read a BP book that got me hooked, so they know about the benefits of house-hacking as well. I did not know about the 75% of adjoining unit(s) income however, that is good news to hear! So say I am renting out one unit for $1000 a month, and living in the other, they would recognize $750 of that as income when I am trying to get the initial loan on the house?

    0Reply
  • Isaac Pyle
    OP
    New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
    7y

    @Anthony Wick That is a great idea! I had not thought about partnering with them on a multifamily hack. I will have to see what they say when I present the idea, and I will need to come up with some figures... thanks for the idea!!

    1Reply
  • Isaac Pyle
    OP
    New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
    7y

    @Taylor Chiu I'm glad this worked for you as well! That is good news to hear. Yes, I am planning to buy a place (hopefully a duplex) and rent out the other unit, as well as possibly other rooms in my unit. Good call on setting up proper terms before agreeing on money, I would not have thought of that. Thanks!

    1Reply
  • Cory CarlsonBusiness Member
    Real Estate Broker · OR · Member since 2018 · 311 posts · 226 votes
    7y

    @Isaac Pyle that's correct. This helps in a number of ways. The lender can now qualify you for a higher loan amount and if you pick the right property, you would be less out of pocket when compared to a single family home. 

    Quick example with illustrative numbers: $250,000 house payment is $1600 (est) or a $325,000 house the monthly payment is $2300 but you are getting $1000 in rent from the adjoining unit so before expenses you are out of pocket $1300 for property that has a higher loan amount. Proportionally, your pay down on your loan is cheaper than a SFH.

    Thats the theory anyways, that does not always work in some expensive markets. To find that property in Bend, Oregon requires digging pretty deep. 

    503-222-0282
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    0Reply
  • Isaac Pyle
    OP
    New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
    7y

    @Cory Carlson that’s great news to hear! Seeing as I am 19 and have a limited income because I am in school, that would probably help out a lot. I am curious too, and this is a bit off topic, but I was considering co-signing with my parents and being able to use their income for the loan instead of mine, in order to be eligible for more money. This sounds lie it could have negative effects to me, but I am not sure what they would be. Thoughts?

    0Reply
  • Cory CarlsonBusiness Member
    Real Estate Broker · OR · Member since 2018 · 311 posts · 226 votes
    7y

    @Isaac Pyle You likely will not have a choice. I would cosign with them. Also talk to your lender about doing a low down payment using conventional financing. FHA is 3.5% down and the minimum for conventional is 5%. You will see a better cost structure and lower PMI with conventional finance. After you have achieved 20% equity, it is easier with conventional financing to remove your Private mortgage insurance (PMI).

    Using your parents credit and credentials will not hurt you. To get them off down the road you would have to refinance, but thats okay. The conventional loan uses credit to determine the PMI. While I have good credit, when using my parents credit the PMI was less than half when compared to an FHA loan.

    If you're serious about this I would start talking with lenders who are familiar with this strategy. After your loan application a good lender will outline the pros and cons of what i just mentioned 

    503-222-0282
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    0Reply
  • Peter TverdovBusiness Member
    Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
    7y

    I apologize but tThis bothers me every time I read about it. Sadly, it seems it's very common that people use Mom and Dad for their first house. What happened to doing things on your own to start?

    [email protected]732-289-3823
    1Reply
  • Isaac Pyle
    OP
    New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
    7y

    @Peter Tverdov at this point I am looking into my parents helping me because 1: they offered. They told me I could use them as a resource to get my foot in the door, so that I could potentially get started while in college, instead of waiting until I am done and 3+ years older. The value of my money being invested now instead of waiting 3 years is worth making the effort now. 2: If I am able to do this properly and use their resources instead of my own, I/we can actually be making money from my housing instead of paying hundreds if not thousands of dollars. I could not make that happen while being a student at a $30,000+ college. 

    I guess I am confused as to why it’s sad that they help me do something productive with my time and money...

    7Reply
  • Isaac Pyle
    OP
    New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
    7y

    @Cory Carlson That makes sense. I am curious though, does co-signing with them / using their credit score hurt them at all? And when the loan becomes refinanced after reaching 20% equity, does it get "re-signed"? Meaning that they could "unsign" from the property and I would be the only name on the loan? Is that what you meant when you said "getting them off down the road"? And I am curious about the credit as well, because my credit score is in the high 700s, but is less than a year old. My parents is only slightly higher than mine, but is over a decade old. Would that decrease the PMI by a significant amount? I guess I just thought that all credit scores were the same if the number was the same. Sounds like that may not be the case.

    0Reply
  • Peter TverdovBusiness Member
    Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
    7y
    Originally posted by @Isaac Pyle:

    @Peter Tverdov at this point I am looking into my parents helping me because 1: they offered. They told me I could use them as a resource to get my foot in the door, so that I could potentially get started while in college, instead of waiting until I am done and 3+ years older. The value of my money being invested now instead of waiting 3 years is worth making the effort now. 2: If I am able to do this properly and use their resources instead of my own, I/we can actually be making money from my housing instead of paying hundreds if not thousands of dollars. I could not make that happen while being a student at a $30,000+ college. 

    I guess I am confused as to why it’s sad that they help me do something productive with my time and money...

     Partly jealousy on my part

    But it's also called snowplow parenting or helicopter parenting and I despise it. You don't learn much when parents do that. You don't go through the stress of being a landlord when it's not your money. You don't understand how to sacrifice to save up money to start. Lots of life lessons that you don't get to learn that are important. 

    [email protected]732-289-3823
    3Reply
  • Isaac Pyle
    OP
    New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
    7y

    @Peter Tverdov I understand why you would think that. That would not be this, however. I have a good relationship with my parents, but they would make sure that I pay them back in full once I was able to. They are not just giving me money to play with. I have to show them what I am going to use the money for, how long it would take me to earn it back (to the best of my knowledge), and then I would likely need to give them a slight amount of interest (not anything like borrowing from a bank, but they are investing in this project of mine). Furthermore, I definitely know the sacrifice of saving money to start something. I took a gap year between highschool and college to wait tables and work a construction job in order to save money for college so that I could go to school and take on no student loan debt. My friends were not. My girlfriend hated (and still does not really like the fact) that I worked so much (50+ hours a week). I feel like you tried to judge my entire life thus far based on a post I made questioning whether using my parents' resources is a smart decision.

    2Reply
  • Isaac Pyle
    OP
    New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
    7y

    @George Despotopoulos That makes sense.. in order for you to see the source of the funds, does that mean having my parents co-sign? Or seeing previous tax-documents to show income? What does that mean?

    0Reply
  • George DespotopoulosBusiness Member
    Lender · New York, NY · Member since 2016 · 936 posts · 287 votes
    7y

    @Isaac Chun, yes, that means they should be members of an LLC alongside you. They would sign a personal guaranty and sign the loan documents. They would provide asset statements (checking/saving account statements) for the lender to verify liquid assets -- basically that they have the funds for the downpayment and in addition to that 6 months of loan payments. That's called a minimum liquid reserve requirement. Some lenders have a 6 month, and others a 12 month, reserve requirement.

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    0Reply
  • Isaac Pyle
    OP
    New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
    7y

    @George Despotopoulos Interesting. So if we decided to initially go 50/50 on the down payment, would we both sign the loan documents? Or would we need to put those funds into one account (theirs) and they are the only ones signing it? 

    Also just an FYI, you tagged a different Isaac in your last post.

    0Reply
  • Peter TverdovBusiness Member
    Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
    7y
    Originally posted by @Isaac Pyle:

    @Peter Tverdov I understand why you would think that. That would not be this, however. I have a good relationship with my parents, but they would make sure that I pay them back in full once I was able to. They are not just giving me money to play with. I have to show them what I am going to use the money for, how long it would take me to earn it back (to the best of my knowledge), and then I would likely need to give them a slight amount of interest (not anything like borrowing from a bank, but they are investing in this project of mine). Furthermore, I definitely know the sacrifice of saving money to start something. I took a gap year between highschool and college to wait tables and work a construction job in order to save money for college so that I could go to school and take on no student loan debt. My friends were not. My girlfriend hated (and still does not really like the fact) that I worked so much (50+ hours a week). I feel like you tried to judge my entire life thus far based on a post I made questioning whether using my parents' resources is a smart decision.

     You had me until the last sentence. Welcome to the real world, people will constantly judge you, get used to it. 

    [email protected]732-289-3823
    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Peter Tverdov  I find your line of questioning quite perplexing. The school of thought of "do everything on your own" is silly. I personally despise the old thinking way of "I suffered so everybody else must as well". What is the difference if he partners with his parents or partners with you, or I? There are thousands of people on this site alone that borrow from hard money lenders. Are they not doing it on their own? Are they being helicoptered by the hard money lenders, banks, anybody? Unless I missed an update, I see nothing from the OP wherein mom and dad are simply buying him a home to live in and he is just taking it all as a gift. And honestly, if that was the case it really isn't any of our business. 

    Opportunity doesn't come knocking on your door. You have to find out where opportunity is hiding and kick in that door. And yes, that could mean parents, friends, family, me, you, hard money lenders. Anybody. 

    Hey @Isaac Pyle, get out there and kick some butt. If you were my son I'd definitely partner with you. 

    4Reply
  • Taylor Roeling
    Fort Collins, CO · Member since 2019 · 185 posts · 61 votes
    7y

    @Isaac Pyle I know I'm a little late to the game, but if your parents have offered to help you, from a logical and financial point it seems like it would be a great option for you especially as a college student! I mean if you have a close and good relationship with your parents then it really is up to you. After college, you don't want to have debt you don't need - don't worry about other people's opinions because everyone's experience is going to be different especially with money! 

    1Reply
  • Isaac Pyle
    OP
    New to Real Estate · Louisville, KY · Member since 2019 · 127 posts · 86 votes
    7y

    Thank you @Anthony Wick, that means a lot. The fact that I have been presented with this opportunity is astounding. And @Taylor Roeling I agree, that was my thought process! Take on less debt, and begin investing sooner rather than later at the same time.

    2Reply
  • Scott Bossman
    Specialist · Onalaska, WI · Member since 2014 · 12 posts · 4 votes
    7y

    @Isaac Pyle your parents are awesome.  

    You could always look into land investing.  It's a powerful source of passive income, and the barrier for entry is quite low. 

    0Reply
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