How to invest with family and friends money?

[Alexander Ball]

Hi, I bought my first house hack at the end of last year.  I will be acquiring at least one more (maybe two properties) this year.  After I have a couple of more deals under my belt, I would like to start working with family to purchase more properties.  At first, I would take small amounts to mitigate risk for everyone and ideally later scale up from there.  My family make good money and I would make it very clear 1. My entire financial position 2. Risks of investing and 3. Of course the returns.

I cannot seem to find a straight forward guide on how to do this anywhere, but maybe someone can help point me in the right direction.  What I want to do is the following:

1. Buy residential

2. Have a partner lend me money for the down payment and closing costs, I pay them a fixed rate of 8%+ for the amount they lend me.

3. They are only lending me money, they're not a part owner of the deal.  I pay them 8% whether the property does very well or terrible

Questions I have

1. Will banks still lend me money if a partner is supplying the down payment?

2. How can I structure the loan they give me? Can it be as simple as 8% until they call it due?

3. How much work does it take a Lawyer to set up the following agreement?

Thanks

[Michael Doherty]

@Alexander Ball I just recently went through a similar situation. I purchased a 2 family using a 20% down commercial loan and 10k of friends money towards the down payment. The reason I went with a commercial loan is because I wanted to purchase in an LLC and their lending requirements are less stringent (just look at debt service and income the property produces). This is important because they do not ask for bank statements ect.

Furthermore, my lawyer set up a formal promise to pay agreement between myself and my friend (easy for a lawyer to do). Because of the low amount borrowed their was no collateral being held or 2nd lien on the property. However, I suspect at higher amounts borrowed friends and family are going to want some sort of collateral perhaps as 2nd lien holders. 

I structured this private deal as a monthly principal and interest payments as there is not any value add to refi and this property is a buy and hold. So essentially I am using the cash flow from the property to repay my private debt. If you plan to buy and rehab and either refi or sell- you could structure your private note as a balloon payment with interest only payments. Hope this helps.