Getting People that Know you to Lend you money as a NEWBIE

[Michael Ramos]

Hello Again Everyone,

I am still slowly saving money for my out of state (OOS) investment property. In the meantime my gears have been grinding on how I can speed up this process, short of, selling some (cough, cough) illegal substances or knocking over some banks.

I starting thinking about marketing myself to my family and friends and gathering funding for a down payment from them to create a Joint Venture (JV), where I would pay them interest (at a rate that is better that the savings account that they currently have that money in) over a relatively short period of time.

But I don't want everyone's name being added to the note on the property. I just want a legal document stating that they will receive from me no less than "X" interest over a period of time, or quicker, "Y" from me for their "Z" contribution towards a down payment for an investment property that I am purchasing for me. Etc Etc. Basically stating a deal between me and the investor only with them having zero ties to the property.

Has anyone every done anything like this? Please let me know! Help a NEWBIE out!

[Evan Polaski]

@Michael Ramos What you are really looking for is creating a partnership with your family members.  They are owners in the partnership, and the partnership will own the real estate.  You will be working with the commercial side of the bank, which typically entails higher interest, higher down payment, and often times short terms and amortization periods.  You can structure it so that no one in your family owns more than 19% of the partnership, even if they are putting in all the money.  Confirm with some lenders, but most commercial lenders require anyone with ownership of 20% or more to sign the loan, so limited to 19% keeps them below that threshold.  

Here your family has a clear legal document outlining their ownership and terms of the partnership.  The lender will not require them to sign on loan and you can outline the upside you receive from your ownership of the partnership, maybe as a general partner.  I am not sure what type of properties you are thinking about, or the money involved, but unfortunately, you are going to be paying an attorney for this structure, and it could see it costing a couple thousand dollars or more, depending on your attorney.

Alternatively, if you have family that will finance the whole deal, just make them a lender in the first lien position.  They put up the cash at closing and you run the deal.  

Alternatively, if they are willing to take the risk to invest in you, maybe they will add the risk of signing the mortgage too, and have their name on the title, while letting you run the project.  

At the end of the day, there are a lot of ways you could structure it, and it really depends on you and your family.  Of course there is risk with all of it, but you hear about millennial buyers offering cash on properties which is really mom and dad's money, with the expectation that the kid will get a mortgage after closing to pay off mom and dad.  I can guarantee most of those have no formal documentation, and mom and dad don't show up on the deed.  It is trust in the family.  You are looking to do a similar thing, but to do it formally requires attorneys and money to get it setup.