HELOC loan from family member - CPA Welcome

[Andrew Goduco]

Hi BP,

I've been looking into creative ways of raising private capital and through my research one possible option I landed on was to have a family member (my Mom) take out a HELOC on her primary residence (she has ~ 95% equity) and loan me the money.

My goal is to do a true BRRRR strategy of a SFR or MFR (1-4 units) where I'm paying for the property and rehab with cash. I would be using a combination of my own personal capital along with the HELOC loan from my Mom.

I have found a lender that will give my Mom a 1.49% interest rate (locked in) for the first 12 months then prime rate after that. No hidden fees/no closing costs/ just $50 annual fee/no restrictions on what the money can be used for.

For example, If I spent $400k on the purchase and rehab of a property using $200k of my own personal money and $200k from my mom's HELOC…. (Questions to come)

I understand that $200k is a lot of money and can’t be treated like a gift because of the annual gift threshold. Doing some simple research, I found that I would have to pay the Applicable Federal Rates in interest to my mom or it would trigger a taxable event (which I want to avoid). For a fair loan interest rate, I figured 1.49% because that seems right on par with the current April 2020 Applicable Federal Rates and is the rate of interest my mom would be paying on her loan. Also, neither of us would be deducting any of the interest

Questions for BP:

1. What are other tax implications and challenges I should be aware of if I were to do this?

2. Am I correct to assume if I pay back a “fair” interest rate like mentioned above neither of us will have to report this on our tax returns? (Again, trying to make it as streamlined as possible)

3. Are there reg flags when transferring that much money into my checking account? (The transfer would happen only when I’ve found a property to show funds to the seller and then purchase the property, so they wouldn’t be in there long).

4. Would a promissory note for documentation in case IRS ever came knocking suffice?

5. Assuming this is a sound strategy would there be any issue of doing this over and over with her HELOC?

6. Am I crazy to think this is not a good opportunity to get a large amount of capital at a very very low-interest rate?!

Furthermore, I get the risks involved in how my loved one is putting up her house, etc… I'm just looking for anyone who has experience doing this or a CPA's advice on the tax implications mentioned above. I also have a lot of skin in the game (and other collateral) and would make sure the capital extracted out during the cash-out refi would pay back the principal balance or her HELOC first and foremost… and of course, compensating her with a big hug and a thousand dollar bill.

Just trying to think outside the box.

Thanks,

Andrew