Down payment for a duplex/triplex/4 plex

[Annie Irizari]

I'm in business discussion to be a down payment private lender to a business colleague who is looking to start investing on a 4 plex. I can provide the down payment to an FHA loan. I'm thinking we need a business contract of some sort or owner financing ? What type of contract is applicable in this scenario . What should be in the contract/terms? Do I need an attorney to draw up the paperwork? What about an exit strategy? How does one typically structure something like this? Thoughts? Caveats? watch out for ? Thanks :-)

[Jaysen Medhurst]

@Annie Irizari, you're lending someone the 3.5% down payment for a FHA loan? So, this person is going to be 100% leveraged? I'd be very cautious.

1. Your colleague has little incentive to keep the property a float, should things go South. The bank is going to be in 1st position and with almost no money down, you're unlikely to ever get your money back in the event of a foreclosure.
2. Have you seen the underwriting of this rental property? Will it actually generate enough cash flow (after ALL expenses) to repay the mortgage and you? Share the specifics here and the community will double check the numbers.
3. With a FHA loan your colleague will have to live in the property for at least 1 year. During this time it is unlikely to cash flow, i.e. it will cost him something to live there. Can he cover this? I'm very skeptical about the financial strength and responsibility of someone who can't come up the the 3.5% need for a FHA down payment.

You asked about an exit strategy. If this is simply a loan, then the exit is for it to be paid off. If you are getting equity, that's different altogether. I don't think that would be allowed under a FHA mortgage (I don't know all the ins and outs of FHA), unless you are going to also live there.

Should you decide to go forward (and I hope you think long and hard before you do) you should absolutely have YOUR lawyer draw something up. Run it by your CPA as well so you understand any tax implications.