Beginner's Question for Investing with Private Money

[Doug Karkow]

Hello BP community! This is my first post, so set your expectations low! Here goes ...

Rather than save my way to down payments using my W-2 income, it is easy to imagine how using private loans could accelerate my REI goals. Perhaps this is a bit naive, but are there any legal or financing concerns with using a private loan from friends/family for the down payment of an investment property (SEC regulations, underwriting difficulties, etc.)?

- Hypothetically, if I were to borrow $100,000 from my folks and try to buy a $100,000 house entirely with cash, will I run into any issues?

- How about if I borrowed $20,000 at 5% interest over 30 years - can I use that private loan to fund the down payment for this $100,000 house?

The thought process here is that I may be able to make a 15% (for example) return on my own cash while accepting the risks associated with real estate investing, whereas a private party may not want the risks or fluctuations in income and be perfectly happy with a 5% return on their loan. They could give me a loan with a guaranteed return (i.e. 5%), and I could use the loan to go after higher returns (i.e. 15%). They get their guaranteed income, and I get cash flow with no/low money down. Win-Win!

Can I do this?! If so, is it as simple as, "Hey Dad, can I borrow $20,000?"  

[Steve Vaughan]

Oh- you're dad's private money adds a lot of complexities.  I for one wouldn't borrow from family.   Awkward t-giving dinner coming up!  Once you borrow his money, he will flinch at that vacation you're taking or that car payment you have in your drive or that selfie at starbucks.  'Why doesn't he just brew his own coffee like the rest of us?" he'll ask himself.

But a private lender, being someone you know, shouldn't skirt any SEC rules.  You just can't put an ad out or something soliciting money.

My private lenders like 6% fixed rate terms for 10 yrs at about 60% or less LTV. I bring them in to pay off commercial loans that keep bothering me or refinance higher rate stuff I've had a while.

For flips I could get other lenders but don't like people in my business, making me check in and get approval.  I'll stick with the old guys that want steady 6% monthly checks @Doug Karkow

"The only ship not meant to sail is a partnership"  -  experienced investor