Private Loan @ 4% via family lenders?! What do I do?

Question

Hi everyone,

So, I have been reading, listening, and asking questions on BP for a while now. I've started looking at various properties in my potential areas (although I am a long distance first time investor), and I finally had the conversation to iron out some of the finer points of the financing with my father.

He is an experienced, if not terribly savvy investor. He is in his late 60s, and looking for income rather than growth in his investments. He is partially surviving on T-Bills at around 3% and some reliably paying dividend stocks, so he was receptive when I first presented him with the idea of investing in the beginnings of my would-be real estate empire. Months ago, he asked me to find out what kind of rate I could get with my bank on a 30-year fixed mortgage, which was about 5.5%. As a response to that, during our recent conversation, he said that he would invest with me up to $50,000, at 4% simple interest, for up to 10 years, with interest only payments. I suggested points, an origination fee, and an early termination fee, all of which he turned down. He "wants to help me" he says.

What's the problem, you say? It sounds great, I know, but the problem is my conscious and my potential to receive his support again in the future, I fear. Given what I have read here on BP about how much this amount of money via a family-lender should be worth, I worry that later he may feel he could be making more, or simply not get what he needs out of the deal. Also, I want it to be a great deal for him, not just something acceptably better than a T-Bill, especially given that there will be markedly more risk than from a T-Bill.

As a side note, and completely unforeseeable development, my older brother was also in the room while discussing this with my father. All I know about his finances is that he has some savings in a savings account and is almost entirely risk-averse; despite that, at the end of discussing it with my father, my brother blurts out that he was willing to invest in my venture as well! Unbelievable!

Now I have even more incentive to do all this in the most equitable and mutually beneficial way possible, since I am dealing with two possible future investors.

Thanks in advance for your responses.

Frankie Woods · Answer

I say do it.  They would be making more money (albeit more risk) on their money with you.  Just make sure everything is documented with an attorney.  You could pay them more, but if your parents (and brother) are happy with the rate, why feel bad about it?  Just be open and honest with them, and always do the right thing, and you should sleep well at night.  If they're value of there money changes, you can figure it out on the next deal.

David Hald · Answer

Thank you all for the replies. I'd like to dig deeper into why the naysayers are opposed, and what details you supporters specifically refer to.

Thank you for your insight into the possibility of uninvited input on the part of the investor parent. I hadn't thought of that, and I wouldn't expect it, but it's a good point to note and perhaps worthy of adding a clause into the agreement/proposal regarding the investors' roles and abilities to influence decisions.

@Frankie Woods Thanks so much for the vote of confidence! I really appreciate the encouragement!

@Caleb Heimsoth I appreciate your caution. Could you please elaborate on your warning that "you better be 100 percent sure you know what you are doing"? I understand that they will get paid regardless of what is happening with the property. To give you some support for that, in the theoretical deal, down payment from me will be 20K, loan amount from dad/brother will be 70K, and my own cash reserves will be 15K. I understand that any holding or vacancy costs will be my own. I'm sure I am missing something-I would graciously accept any further and more specific advice on this deal. Thanks for your reply!

Account Closed Thanks for your helpful info! I will definitely put it all into writing before anything happens! Also thanks for the specific figures-it gives me perspective on what's happening with my own deal!

Thanks again to all for replying!

Steve Babiak · Answer

The post in this next link is good reading for those involved in private lending:

https://www.biggerpockets.com/forums/49/topics/555...

Caleb Heimsoth · Answer

@David Hald  I was just saying if you haven’t done a deal before and you don’t knkw what you’re doing and you lose money for them that could go bad quickly

Daniel Dietz · Answer

I have both partnered with my parents where they put up the funds and we (brother and I) do the work of the rentals. It works great, but everything is in writing and we have worked together in our 'day business' for years, so are used to business together.

We have also borrowed 'private funds' from a close friend (and are working on several other similar private lenders right now too) who is of retirement age and had funds to loan. He is a former landlord in his younger days, and very wise with money. In his view, our loans are part of his 'safe funds'. He is essentially putting funds with us that would otherwise be in ultra safe investments like CDs or Muni-bonds.

The first one in 2014 I offered to pay 6% and he said 'he could only take 6%' (4 times CDs at the time). The most recent in 2017 we did at 5%. Both were 5 year amortizations.  These were both first position loans on paid for properties and we were using those funds for down payments on additional places. Essentially almost ALL of the cash flow on the first paid for property had to go to pay off the notes that quick, but it allowed us to buy another 400K worth of good rentals for 'nothing down out of pocket' (just the equity we already had).

My advice is put it ALL in writing, including 'what ifs' and have multiple exit plans.

Dan Dietz

Private Loan @ 4% via family lenders?! What do I do?

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