Firtst Deal - Using Private Money

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Firtst Deal - Using Private Money

Mario Calabretta
Royersford, PA · Member since 2017 · 5 posts · 3 votes

We are looking to avoid the conventional mortgage route and use private money to buy our first house. It's a large 2 story in a multi-family zoning district so we plan to place 2, or maybe 3 units here but the house needs a lot of work - issues that may not allow us to finance conventionally - 100 year old slate roof that is leaking (bank won't finance with deficiency like this unless it is fixed - something I do not want the seller to do), knob and tube electrical wiring (many insurance companies won't write a policy which all conventional mortgage holders require). I think this may be an opportunity to renegotiate with the seller at an extreme reduction in price if we offer to buy outright using cash. I have several willing investors (family members) and the plan would be to buy the house outright, renovate it, rent it out and then reappraise/refinance to pay off the private loans and keep the rental for cash flow. You know BRRR...

What are the implications are for private loans like this?  I can find contracts for this kind of thing online, but what regulations will we bump into?  My family members aren't drug dealers or anything like that but we are looking in the area of about $80K in private money and I know there are limits on deposits and transactions with banks that sometimes require an explanation.  I hate that kind of governmental oversight which assumes I basically am a criminal and have to explain myself to prove that I am not.

Also, how will this affect closing with the seller?

Your insight and advice would be most appreciated...

pax...

 
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Christian Wathne
Investor · San Jose, CA, Bellevue, WA · Member since 2016 · 327 posts · 257 votes
9y
Mario Calabretta , market rate for hard money is 10-12%, market rate for conventional mortgages is around 4%. For family private money loan of 1-3 yrs I would suggest settling somewhere between the two.
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  • Frank Y.
    Lender · Philadelphia, PA · Member since 2017 · 225 posts · 72 votes
    9y

    I lent much more than $80k to investors without any questions. The money from your family members will be used to pay the seller at the settlement, either in cashier check or wire transfer. As long as the $80k is in your family member's bank account.  Well, if your family members have $80k cash under the mattress, then they will need explanation.  Good luck.  

    0Reply
  • Mario Calabretta
    OP
    Royersford, PA · Member since 2017 · 5 posts · 3 votes
    9y

    Thanks Frank. 

    Any suggestions on fair terms for the loans? I expect it to be short term (1-3 Years) and the lenders are not in any rush - the funds are just sitting right now earning dismal bank-type returns.

    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    9y

    @Mario Calabretta , the deposit rules apply to cash deposits of more than $10,000. I'm assuming the private lenders will write you a check or wire the funds directly to the seller at closing.

    Even if they do give you a pile of $80k in cash, it's easily explanable by saying they are lending you money to buy a house. 

    [email protected]Podcast Guest on Show #261
    BiggerPockets
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  • Christian Wathne
    Investor · San Jose, CA, Bellevue, WA · Member since 2016 · 327 posts · 257 votes
    9y
    Mario Calabretta , market rate for hard money is 10-12%, market rate for conventional mortgages is around 4%. For family private money loan of 1-3 yrs I would suggest settling somewhere between the two.
    2Reply
  • Frank Y.
    Lender · Philadelphia, PA · Member since 2017 · 225 posts · 72 votes
    9y
    As Christian Wathne said, private money is between 10 to 12, some lenders also charge points. Family members are negotiable. But whatever term/rate you guys agreed upon, make sure to document everything and have all parties signed.
    1Reply
  • Greg Routen
    Real Estate Agent · Dallas , TX · Member since 2015 · 33 posts · 10 votes
    9y

    I'm in the same boat here and trying to figure out the best approach. My father/mom were planning on gifting me $35k to purchase my first rental property. I'm trying to figure out a better option here. I think it's best to have my father be the lender and I make monthly payments directly to him. I just don't know how to do this, or the forms that need to be filled out. I'm planning on trying the BRRRR strategy so I can pull the money back out and invest in another property, so trying to figure out if a short term or long term loan is best. I'm clearly a novice here and any guidance would be greatly appreciated!

    0Reply
  • Scott HawleyPro Member
    Investor · Bellevue, WA · Member since 2016 · 65 posts · 36 votes
    9y
    We were paying a hard money lender 2 points and 12%. Now that we are on property 7 and looking for number 8 we have a mix of hard money and loans from friends and family who got tired of making <1% in the bank. We just closed on property #7 with a Hard money lender and 3 private lenders. We paid our friends and family 7.5% and no points. We are doing flips so my target is 6 months. We write the loans for 1 year interest only. Preferably with payments at the end. We signed a promissory note and deed in trust and recorded the deed in trust to secure the note. I'm happy to share more details if you have any further questions. Scott
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  • Scott HawleyPro Member
    Investor · Bellevue, WA · Member since 2016 · 65 posts · 36 votes
    9y
    Greg Routen I wanted to add that if the $35k is truly a gift then that is wonderful. But if they expect it back, I would do a note and deed in trust. That will protect their interest better. Oh, and one of our private lenders is using their SDIRA. You need to factor in a few extra days if you are doing a fast closing. Otherwise it is pretty straightforward. Scott
    0Reply
  • Andrew Holmes
    Rental Property Investor · Chicago, IL · Member since 2015 · 275 posts · 271 votes
    9y

    @Mario Calabretta

    Mario if they are writing a check for it then there is no issue. Are you going to give them a mortgage and a note or just a note. 

    In Cook county (Chicago, IL) you have to attach a state of IL form called anti-predatory lending when you record a mortgage in Cook county. All you have to do here is get it from the state it's simple or a title company can just do that for you. Very few places have this requirement. 

    You are good to do it's a private loan. Done all the time and there is a paper trail. Just can do it with cash now a days. 

    0Reply
  • Greg Routen
    Real Estate Agent · Dallas , TX · Member since 2015 · 33 posts · 10 votes
    9y

    @Scott Hawley Thanks for the helpful information. I guess I might be overthinking it here, but I'm just trying to figure out the exact steps needed to get this all set up. My dad is giving me this money as a gift, but I do plan to pay him back overtime. Should the title company be able to provide me with this information and paperwork if I tell them the situation? 

    Also, as far as terms, I know there is a minimum interest rate that needs to be applied so the IRS doesn't look at it as a gift. I plan on refinancing in the near future if all possible, and pull out that money so I don't have much into the deal at the end. My concern on a short term loan with my dad is that I wont be able to refinance the property. Would it be easiest to just set it up on a 15 year term with a minimum interest rate? That way I can just keep this loan in place if I can't refinance? 

    Apologies for my ignorance here, just trying to do this the right way! 

    0Reply
  • Joe Kim
    Lender · Anaheim, CA · Member since 2017 · 64 posts · 32 votes
    9y

    My company is not bonded in PA, however, there are companies out there that have all sorts of great non-QM mortgage products, like 12-24 month bank statements, asset valuation.  No income check, no documentation loans (no-doc).  Fair rates much lower than 10% with 1-5% of origination fee.  You just got to find them.  Appraisal values are important, but condition of property is not so much as important as they will only lend on the lower of appraisal value or sales price and understand that you'll be fixing it up.  Just look for non-QM lenders online.  There should be some out there.

    0Reply
  • Scott HawleyPro Member
    Investor · Bellevue, WA · Member since 2016 · 65 posts · 36 votes
    9y

    Hey @Greg Routen, it sounds like you and your Dad are going on trust and not concerned about having an official note and deed in trust. Here is my friendly advice (not legal or tax advice).

    You can gift up to $14k to someone with no tax. Your Mom and Dad could each give you $14k which totals $28k. If you are married, they could also give your wife the same. If that is the case, then you have the $35k and are all set. If you are not married, write a note for $7k at 6% interest only with all payments and interest due in a year. Then your Dad/Mom can forgive the note in 2018 which would count as a ~$7k gift in 2018 and still have no taxes.

    Then you can gift them back later as you can based on the understanding that you and your parents have.

    I would also make sure that your parents understand that without a note and deed in trust to secure their interest, it could be lost if you were to have some devastating event like being sued (and losing), divorce, bankruptcy, death, etc.

    I googled for my promissory note paperwork for my state. I suspect your real estate agent in your state could give you one.

    Scott

    1Reply
  • Greg Routen
    Real Estate Agent · Dallas , TX · Member since 2015 · 33 posts · 10 votes
    9y

    @Scott Hawley Thanks Scott, I think this is going to be the best option. I really appreciate all of your help! 

    0Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    9y
    Originally posted by @Mario Calabretta:

    What are the implications are for private loans like this?  I can find contracts for this kind of thing online, but what regulations will we bump into?  Also, how will this affect closing with the seller?

    There are no implications if you structure the deal correctly & everyone involved does their job.  None of this should affect closing w/ the seller.

    • Create an borrowing agreement between yourself & family members w/ clearly stated terms & the % of the note or agreement each member has
    • If the family member wants the note secured by the property then have the note recorded by the title company as a lien against the property
    • You can have $ deposited in a bank or a portion of the $ deposited in a construction escrow account w/ a title company & avoid the bank
    • When $ is wired to your bank have the family member reference the loan & property address in the note for the wire; 

    At the end of the day a large % of money used for deals like yours is actually private money.  If a bank asks questions about a sudden influx of cash to your account you'll be able to reference all the paperwork put together for the transaction.

    312-681-7487
    1Reply
  • Kerry Boyle
    Lender · Bethesda MD · Member since 2017 · 283 posts · 123 votes
    9y

    In terms of rates, 10-12% seems fair. They can look to their retirement accounts and see the interest gained and try to match/slightly beat that. A SDIRA is a great way to do this and it gets a custodian involved to assist with overseeing the paperwork - a plus if you don't really know what you are doing.

    0Reply
  • Mario Calabretta
    OP
    Royersford, PA · Member since 2017 · 5 posts · 3 votes
    9y

    @Crystal Smith

    Thanks very much Chrystal!  Clear and concise...

    0Reply
  • Sheree H.
    Rental Property Investor · Atlanta, GA · Member since 2013 · 67 posts · 26 votes
    9y

    @Mario Calabretta

    Sorry to go off on a tangent, but we're in a similar situation, also looking at buying an old house in central PA about an hour west of you, fixing, then refinancing. Mario, what are your estimates for fixing the roof, and replacing the knob and tube?

    Edited to say: 

    -when determining a fair % for your family loans, also consider that the 4% conventional rate is for W-2 holding homeowners. I've done many BRRRs, and my rates as an investor are between 7-8% for 30yr amortized. 

    -I don't think anyone mentioned this, but another reason to do the paperwork to make it an official loan against the property, and not just "cash help", is that its easier to cash-out refinance. In my experience, banks have no problems refinancing and taking over existing loans but they balk at loans from cash you've put in.

    Thank you!

    0Reply
  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    9y

    @Mario Calabretta  Looks like you're original post was about 3 weeks ago. Just curious, how did this work out?

    Thanks,

    Tom

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