Family loan advise

[Chris Syrett]

Hi everyone,

I am new to RE and I am looking at doing my first deal. I am looking at purchasing a SFR that has a one bedroom apartment in the basement that I can buy for 60k. It needs about 30k of rehab and the ARV comes out to be around 140k. My plan is to live in the house and rent out the basement which should cover about 90% of a 90k mortgage payment.

My parents have offered to loan me the 60k to purchase the house and after rehab I plan to get a conventional loan on it to pay them back. My parents insist on not being a part of this in anyway as far as they don’t want to have a lien on the property, be on the deed, co-owner, nothing. I know if they just wire me 60k that it will be subject to a hefty gift tax. They don’t want interest but I am thinking we need to write up a personal loan agreement with interest. If they want to gift me the interest back later that’s a lot less than 60k. I don’t want to do anything funny or get in trouble. I want it to all be legit. My dad is old and old school. He says it’s nobody’s business if he wires me the money. Of course we all know it will be reported so something needs to be in place. I would like to avoid an attorney and just write up or find a template to use. My dad is weird about attorneys also. I know in the end he will say to just keep the money but I am a responsible adult and will pay him back. It’s one thing to be in debt, another to be in debt to family.

My questions are:

1. What is the best way to write up a loan to make it all legal? Where can I find a loan template?
2. When can I get a mortgage on the house after rehab? Do I have to wait a year or does it matter because the house was paid in full at time of purchase?

Thanks!

[William Allen]

@Chris Syrett 

I know you didn't ask this question but it came out in your write up.  Your parents can wire you the money without having to pay a "hefty gift tax" unless he has been sending you large gifts over your whole life (see lifetime gift tax exclusion).  I am not an accountant and don't want to explain it wrong but they have a lifetime gift exclusion amount that they can send you above and beyond what the yearly tax free gift limit is ($14k per person again for 2015).  It is reportable but they won't pay a hefty gift tax on the 60k.  Are you married?  Do you have children?  Your parents can gift you $14k each and to each of your family members with the annual exclusion.  So, for example, your mom could gift you and your wife $14k each and your dad could do the same.  That would total $56k only needing to report $4k to the IRS above the annual exclusion.  Again, I am not an accountant or estate planner so I recommend you do some research in this area for your exact situation.

If it was me and that is how your parents wanted to do it, I would have him wire the money, buy the house and pay them back after refinancing.  It sounds like you would be more comfortable having something on paper so you could write up a letter of intent from you to them saying that you will pay them back and add any interest in as you like.  Send it to them so they have it.  If you start going down the route of paying interest to them and making it a loan, you will also need to look into filling out an interest report and sending it to the IRS so they can tax your parents on the interest you paid them and you can write it off.  I suggest just paying them back over time and keeping it as a personal family loan if you can convince yourself that you are comfortable with it.  

If you want to go the loan route, have a search in the documents section and see if something is in there.  Maybe there is a seller financing loan document in there that you can adjust, I haven't looked personally.

If you are living in the house after rehab you should be able to get a mortgage on it right away since you paid cash.  That is assuming you qualify for a loan on a personal residence.