No Interest because of faith

[Jarrad Weirich]

Hello everyone!

Me and my fellow business partner have just finished our first flip and sold it in under 24hrs with 4 offers!

The day we sold it, we were contacted by a previous coworker of mine who is wanting to get into the real estate wold. He wants to invest in our next deal and help with some of the work. It would only be a small amount (5k) and he will be helping with the renovation some.

The issue we are running into is that he cannot take Interest because of faith reasons. Has anyone run into this issue? What would you do in this situation?

We will have another private investor that is going to cover renovation costs, so he will get his regular Interest fee. I’m just not sure what to do about the return my previous coworker should get for his 5k and input he does in the rehab.

And help/advice would be appreciated!!

[Chris Mason]

Originally posted by @Jarrad Weirich:

Hello everyone!

The issue we are running into is that he cannot take Interest because of faith reasons. Has anyone run into this issue? What would you do in this situation?

So... disclaimer. I'm not a religious scholar, anything I say can and should be taken up with your/his preferred scholar of their faith, as well as with God directly, to validate that it will not send them directly to hell. I take no responsibility for anyone's place in the afterlife. 

That being said. Islamic/Halal solutions to make things OK when borrowing or lending for a vanilla home purchase, it turns out from what I've seen Muslims have put more thought into this than other groups, some taking the concern more seriously than others (the more profit-motivated institutions taking the theology less seriously, as is normal in the world). You can adapt as needed.

Solution 1: Rename it from "interest" to something else, assume God is an idiot and will not figure it out. There are plethora of mortgage companies that have done this. I'm not religious, but it is rather absurd to me to think that if you rename it from "bacon" to "happy fun non-pig meat," or rename it from "cheating on your spouse" to "sharing affection," that you will actually "trick" God, and this is effectively what this approach amounts to. Solutions 2 through 9 are variations of the "pretend God is an idiot" theme and I'll just skip. (You see this with every religion, or subset thereof, that prohibits interest, like clockwork.)

The best solution I've seen, a solution that does NOT assume God to be an idiot whom you can trick by simply renaming things, happens to come from Muslims:

Financial institution and you form a business entity, call it 123 Main St LLC or something. If you have 10% down and they have the other 90%, you are 10% owner and they are 90% owner. 123 Main St LLC purchases the home outright and is 100% owner, no mortgage.

Each year, an appraisal is done to document fair market rent and value.

You the person pay 123 Main St LLC rent each month, according to current fair market rent.

To start with, 90% of that rent goes to the financial institution. That is their profit.

That other 10% is used to gradually buy an increased ownership share, you use that appraisal to figure out how much this chunk of change buys.

Over time you are the 11% owner, then 12%, and so on, until you own 100% of the business entity. As your ownership share increases, obviously the amount of your rent that goes towards buying additional ownership interest goes up over time.

If you sell before that, profits are obviously divvied up according to ownership share.

Boom, there are you are. No interest rate was calculated or computed, no interest was collected, no interest was charged. This is truly no interest, at least according to my understanding of it as a mortgage broker.

Bad news? 5 year waiting list to get one of these non-mortgages. Like I said, these guys are theology motivated rather than super profit motivated, or they would find a way to do more volume. Since literally no interest is collected (only rent) and there is no secondary market to sell these financial instruments in, they have to sit and collect rent for years and years from multiple homeowners before they have the funds to do the next one.

OP you will need to modify for your specific use-case, but that should give you and your investor something to start with.