New Investor - Personal / Private Lending Questions

[Brian Duplechain]

BigPockets forum.. I am looking for some suggestions from the BiggerPockets network on the situation I am in and any advice would be appreciated. I truly enjoy this forum and it has definitely provide a ton on insight and education and hopefully someone with experience can provide some suggestions. Here is my situation.... 

My wife and I have been looking around for a single family home in the suburbs of Houston as a rental property for an investment opportunity with some extra cash we have sitting in the bank. We are looking in the 50k - 150k market with some minor renovations and a buy / hold strategy. With that being said my in laws have approached us about their interest with being a private lender for our rental properties and no involvement except for investment purposes.  

So my questions are what is the best strategy going forward?

1.) Stick with my wife and I putting up cash for a 20% down payment and just go through a traditional mortgage for the rentals and tell the in laws thanks but no thanks? 

2.) Use in laws cash on hand to purchase a property with all cash and they would essentially be a private mortgage that we would establish an interest rate and pay them off with a 15 year loan? - (they suggested this and are completely OK with this long of an investment)

3.) Use in laws cash on hand just for the down payment and thus have more cash for another property in lieu of using all the cash for the entire house purchase? 

4.) Maybe a 50/50 option? 

Some other notes I have a full time job and this would all be on the side from my day to day job. I do commercial construction so the construction side of a rental property does not concern me. The ultimate goal is some passive income and an investment that can potentially help for college tuition for our 3 young kids in 15 years in lieu of sitting in the bank.

[Michael Le]

@Brian Duplechain

Here are some of my thoughts on the matter.

1. This is a personal choice and would depend on your relationship with them. There's always a chance this could go south, so you need to think about the ramifications of that.

2. Most private lending does not go this long. If they're willing to go 15 years, that is great. But amortizing over 15 years instead of 30 will squeeze your cash flow. Perhaps you can get them to do a 15-year term but with 30-year amortization. So after 15-years you will do a balloon to pay them off.

3. Banks won't allow you to borrow the down payment, so they would have to be partners on your deal.