How to use money from friends and family?

[Will Eagles]

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]

@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