Is this sketchy?

Question

I am ready to purchase my first investment property and I talk to the mortgage broker at the office I am working with.  I tell him I have 12k for a down payment, but my parents want to get involved for 35k also.  He tells me that I cannot take a family loan for an investment property, but put the money in my account and wait 2 statements.  Then the banks won't ask questions and we proceed from there (he did not specifically state this, but when I bought my primary residence they only asked for the last two statements.  So I am making an assumption here).

Now, my parents and I are doing everything legit, following IRS laws regarding family loans, and I am paying them back the minimum interest rate of 2.7%.

Is there anything wrong with the way I am proceeding with my first investment?

Any other creative ways to get my parents involved, if this is not ok?  The 35k at 2.7% is huge for me as the balance of the money I am leveraging would be at a much higher rate I would assume.

PS I am trying to go conventional, 30 year fixed.

Robert Levaro · Answer

My rule of thumb is that if I think it MIGHT be sketchy, I treat is as if it IS sketchy.  
If your parents were gifting you the funds then you are on better moral grounds with the lender.  However if the bank is loaning to you based upon a down payment that they believe is your money and YOU HAVE GONE OUT OF YOUR WAY TO MAKE IT LOOK LIKE ITS YOUR MONEY even though it's not, I would consider it mortgage fraud. That is not a legal opinion.  I am frankly shocked that a lending officer would advise you to "season" the proceeds of the loan from your parents to make it look like your own funds.  I bet he can provide you some great tips on money laundering too!

Jon Holdman · Answer

At the moment, lenders usually want to see a 20% down payment of YOUR MONEY.  Unfortunately, you don't have that.

You might try a different route.

Form an LLC.  You put in your cash, your parents put in theirs.  That gives a roughly 25%/75% capital split.  Now, get a non-conventional loan in the name of the LLC.  You and your parents may have to give personal guarantees.  These loans will probably have shorter terms, 15, maybe 20 years.

I'm guessing your parents are willing to give you some credit for the work you contribute.  You should sit and discuss that, along with many other details (what if more money is needed?  what if one of you dies?  etc. etc. etc.)  Put all that in an operating agreement.  Establish the profit and loss splits.  Profit, loss, and capital splits all have to be understood and come into play when the LLC files taxes each year (form 1065) and gives the partners their K-1 forms.

Another alternative is that your parents buy a house using their money and their credit and you manage it for them, for a cut of the rent.  PM's typically charge 10% of collected rent and half a month to fill a vacancy, though that varies a lot.  Meanwhile, you continue saving toward having money to buy your own rental.

Joel Owens · Answer

The problem is in the loan docs the lender will usually have a clause that you sign that says there are no other undisclosed loans with any party with buying this property.

I do not like what your mortgage broker is saying. It sounds like they are saying do this and nobody will find out etc.

I do not like that kind of thing as it appears not to be above board.

Account Closed · Answer

The 35k gift would be okay if it were a gift, and you would have to provide documentation signed by all parties stating so. If you were expected to pay the money back it would then become a part of your monthly "expense", therefore affecting your DTI ratio that your lender is basing your mortgage on.

Are you sure you want to team up with family members? Money can definitely put a strain on relationships. Just make sure you're all on the same page. I almost did the same thing and was very surprised to find out that my family began sprouting alternative goals for the property than what I had intended, and they even began referring to the property as their house lol. Thankfully the deal fell through, but that incident made me realize that I'd prefer to just do this on my own ;)

I'm pretty sure banks are required to report any deposit over 10k to the IRS. Due to the debauchery that took place during the real estate bubble, many lenders will request statements beyond 2 months.

Roy N. · Answer

Mike Rodrigues:  Here if you receive your downpayment funds as a *gift*, inheritance, lottery winning, etc. - as long as there is no expectation of repayment - conventional lenders will have no issue.

I'm a long way from Florida and across the imaginary line, but conventional mortgagees work pretty similar regardless.

Mike Rodrigues · Answer

Again guys thank you very much, my parents were on vacation and with giving them the information that I learned here, they want to do some things differently.  They don't want to from and LLC with me, and they don't want to be part of the mortgage at all.  They would just rather not have any of the debt in their name.

What they want to do now is just gift the money.

@Robert Levaro above seems to think I would be on BETTER moral grounds with the lender, but based on responses from @John Holdman and others still say that the money needs to be mine.

I am blessed to have family willing to help so much with the start of my real estate career, but they seem to think if they gift the money to me with no loan at all, then I am free to use it on a down payment.  They will be giving $25k instead of $35k, because they said thy can each gift $13k, is THIS also sketchy?

Steve Babiak · Answer

If they become an equity partner, then they would certainly have a chance at a profit share.  That could be a win for them if you do well ...

Mike Rodrigues · Answer

Steve, they have most of their money in portfolios that are returning a larger % than I could ever offer them.  The money they were willing to loan me was in a random CD, getting less tha1%, I am only willing to borrow from them if it is a win win for both of us.

Mike Rodrigues · Answer

Everyone thank you for your responses!  I planned on eventually forming and llc to protect whatever assets, but I assume this makes getting a loan more difficult and at a higher rate.  The purpose of me borrowing the money was to capitalize on the lower interest rates.

With that said if I can get me and my parents on the deed together that would seem to be the best option for me right now.  I haven't talked to them today, but they live in NJ and I live in FL.  Is the option even possibles for us?

Steve Babiak · Answer

Or your parents can fund the loan completely (assuming they have enough funds to do so) - then there are no bank restrictions to interfere.

Is this sketchy?

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