Structuring Down Payment Investment Deals

[Steve Sorensen]

Hi,

I'm new to investing and looking to make my first purchase within the next two months. I work 100% on the road right now, jumping from site to site around the country every few months, and I'd like to invest in a property in the greater Minneapolis area (where I'm originally from). House hacking isn't a realistic option for me because I don't need/want an extra property in Minneapolis that I don't ever stay in. Because of my situation, I can't/don't want to get a standard owner-occupied mortgage with a 5% down payment, so I need to get an investment mortgage with 20% down. For a small, single family home, I'm looking roughly in the range of $125k-$250k, meaning a $25k-$50k down payment. I can't foot this down payment by myself right now, so I'll need an investor or investors. My questions:

- How are deals like this typically structured? Investor pays part of or the entire down payment and in return gets xx% back? Over what time period?

- How do I go about finding investors for this down payment? I've heard talk on BiggerPockets about going to local real estate groups and meetups, but with my job situation, going to these is not a realistic option.

- Other suggestions/strategies for financing this down payment? I've looked briefly into seller financing deals but have heard they can be tough to find.

Thanks in advance for the feedback!

[Tim Swierczek]

@Steve Sorensen

Congratulations on taking this step.  There are many ways to do what you are asking here are my thougths on your questions in bold.

- How are deals like this typically structured? The investor pays part of or the entire down payment and in return gets xx% back? 

This is a very typical structure and the % will fluctuate on how much of the down payment your investor will bring and how much value you are adding.  For example, you will live out of state, so I sounds like you will not be participating in the management of the property.  That will be a factor for your investor to consider.  

Another structure is to borrow the funds as debt (a second mortgage)  with this structure you would pay them a mortgage payment secured against the property.  I find this structure is harder to achieve unless you are working with a close friend,  family, or you have a lot of experience as most investors require equity to participate.   Over what time period? If I'm understanding your question properly I think its most typical that the partner would remain in the deal for the life of ownership, but that is negotiable.  If they require you to buy them out you would need a plan to do so.  If you use the debt model I structure mine as 5-year loans with interest-only payments.

- How do I go about finding investors for this down payment? Friends & family first, if you have no expirence you will have a tough time finding someone who will partner with you as the lead.  I don't want to discourage you from trying but to be blunt if a newbie investor asked me to partner I would only consider it if I took the lead to protect myself and I would demand a large percentage of the deal if I'm bringing any money to the table.  That's not necessarily a bad thing for you as you would get paid for getting a mentor.  I just want to be real with what you should expect if you are not brining experience, working the management, or bringing all the capital you are essientally a wholesaler with a little capital and that does not have much value to an experienced investor.  The big thing is you will need to find ways to add value if you want a partner, especially if its not a close friend or family member.  Look for ways you can add value based on your situation.  In the meantime, keep saving.  I've heard talk on BiggerPockets about going to local real estate groups and meetups, but with my job situation, going to these is not a realistic option. 

- Other suggestions/strategies for financing this down payment? Partnering is the best way, just see above for being realistic as to what you are bringing to the table.  I also mentioned a strategy to use debt financing above.  I've looked briefly into seller financing deals but have heard they can be tough to find.  They are hard to find but you can keep an eye open for them.  Typically they will want a down payment but it's negotiable and often less than 20%.

Lastly, if you take on a partner and you are considering a conventional loan your partner must be on the loan.  This is also true of most portfolio lenders if the other person owns more than 20% of the partnership.  If you are planning to do all of this in an LLC then you will need a portfolio lender because Fannie & Freddie prohibit lending to an LLC.  If you use the debit structure you will also need to use a portfolio lender because the also prohibit gifted and borrowed funds on investment property loans.  You would be wise to approach a lender before you approach potential investors to determine if you qualify for a loan and at what amount.  This will likely be a question from your investor and you will want to have as much knowledge about available financing as possible.  For example, you referenced 20% down in your post which will get you a condo, townhouse, or single-family (you can do as little as 15%).  If you are looking at a 2-4 plex you will need 25% down for a conventional loan.  Portfolio loan down payments will vary by lender.