Using Investor Funds for Down Payment

[Zach Vaughn]

Hello everyone. I am currently house hacking a duplex that I purchased in April and am now trying to work on a second deal. I have my eyes on a couple of small multifamily properties in my area but am running into the issue of lacking personal funds for the 20% down payment needed to qualify for a mortgage on an investment property. 

I have a few investors that are interested in helping me fund the deal, but my issue is qualifying for the mortgage without having enough of my own money for the down payment. My DTI would allow me to take on the debt, but my lender said that to use someone else's money toward the down payment, the other individual would have to be on the loan as well.

Because of my relatively low income, saving the 20% down on my own is possible but would take much longer. 

Any advice on how I could potentially make this work would be greatly appreciated!

[Jon C.]

If you're buying a property with co-investors then they should be on the deed in order to be equity participants. If you were buying a commercial property under an LLC then the LLC would be the borrower and fee title owner, and the co-investors would be members of the LLC, although you, as the Managing Member (and perhaps your deepest pocketed investor(s)) would be the Guarantors.

In the residential setting, where you have to buy under your own name to get preferred rates and lower down payment requirements, the people on the deed typically have to be on the mortgage as well, unless one person has the vast majority of the funds and the bank is willing to move forward with only that person on the loan. 

If your investors are not equity participants then they are either giving you a (typically unsecured) personal loan at an expected rate of return, or they are providing you a private lender portfolio mortgage on the property (based on your municipal restrictions for such loans). 

You have to figure out how you want to structure the deal and it may require that you wait a bit in order to save up more. That said, equity investors in the deal usually are willing to share the risk and the reward, not just the reward. How you split the disbursements is something you may need to negotiate in your Tenancy-In-Common Agreement, assuming your acquire the property as Tenants-In-Common.

Speak to your local legal counsel about your options before moving forward.