How to use money from friends and family?

Question

So i have been watching a lot of the biggerpockets podcast and something keeps coming up. There are a lot of people who are using money from friends and family. How does this work? How do they get paid? How to I make money if I'm paying back a loan to friends and family. For example say I find a rental that I want to purchase. I raise the down payment money from family and buy the property. How do I pay them back but still make money every month? I feel like I'm missing something.

Alexander Zurn · Answer

@Will Eagles you'd have to find a good deal that cash flows enough for you to pay back your family with part of the cash flow (i.e. after ALL expenses are paid each month) and then the rest would be profit.

Consider it a loan, with an interest rate and term that you have to pay back. Borrowing from friends/family is good to start out because it can give you a track record to bring to private lenders in the future.

So say you find your property for 100k and you want to put down 5% but you don't have 5k laying around. You will obtain a mortgage for $95,000 at 30 years and 4%. Then you'll borrower the down payment from a family/friend to a similar agreement. The benefit is that you get to set/agree to the terms. They will probably want their $5,000 (5% of 100k) back in 1, 2, 3.. let's say 5 years and they want to make 7% interest on their loan to you. So you'll make 60 payments (12 months x 5 years) towards the principal and then calculate 7% interest on the payment. Below is what your payment schedule would look like.

So in order for YOU to profit while paying off the down payment loan, you'll need at least $99.02 in cash flow on the deal because the total payment to your family/friend will be $99.01. BUT once that is paid off in 5 years, you'll be making that extra $99.01!

That dragged on there but just trying to make it clear. All in all, just think of it as another expense on your monthly payments then see if you still cash flow after ALL expenses are consider.

Good luck

Jordan Grimstad · Answer

@Will Eagles Alternatively, friends/family could theoretically provide funding for a deal such that their money does not constitute a loan - it just constitutes an equity share. That way, they just get a cut of the profits each month (and share in the risk directly) rather than having some kind of preferred claim to cashflows from the house.

Goes without saying, but going into a business venture with friends/family under such an arrangement would require a lot of introspection/discussion/preparation to mitigate potential issues down the road.

Brent Coombs · Answer

Most Lenders won't allow money borrowed from other sources to be your required deposit. Or if they do, you'd better believe that the interest they charge on their ~75% loan balance will be much higher than if the 25% deposit was actually YOURS to begin with. I haven't seen the podcasts you're referring to, but I'm guessing that the "friends and family" thing is where they're lending you the BULK of the purchase cost, and you still come up with some too? ie. They would BE your Bank? In which case, the answer is: you pay them back (just like any loan), but at an interest rate that you've hopefully negotiated at a lower rate than if you did have to rely on Hard Money Lenders?

But yes, a BP mantra suggests: it's only a "deal" if it would still get you positive cash flow, even when 100% financed!...

Account Closed · Answer

Very Very Very Carefully

Brent Coombs · Answer

So, when your dad asked you to start repaying him - you whipped out your "proof" that you legally owed him nothing?...

(Because if you DID pay him back, that was "proof" of YOUR fraud). Cheers...

Alexander Zurn · Answer

@Eric Mauricio in the loan process, you likely wouldn't be asked to provide statements for 4-6 months prior but possibly up to 3. Say, however, they do ask for that 6 months and find the large deposit. You would have to sign something say you won't pay him back like you did before so... it'll come down to how comfortable you feel "avoiding the truth" on a mortgage app. I don't think I would do that but I bet many people have before - maybe/maybe not. Judgement call!

Eric Mauricio · Answer

@Brent Coombs @Alexander Zurn or anyone else who wants to chime in...what if you borrow the money from friends/family 3-6 months ahead of applying for the loan? Would the lenders think it's your own money and/or ask how you were able to get $5-$20K in your account suddenly? I remember for my personal home mortgage 10+ years ago my dad gave me some money and the lender requested that he sign a memo stating I wouldn't have to pay him back the money he gave me.

How to use money from friends and family?

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