private money for down payment

[Richard Moreno]

Hi BP, 

I am looking to buy a 6 unit building, but I don't have enough for the 25% down payment. But I do have a client that might be interested in lending me the down payment, which would be about $200k.  Not sure how I want to proceed with a partner? How should I structure this loan?? What I told him is that I would like to own this property outright at some point. Should I treat it as a loan and pay him interest or treat him as a blind investor, where he will receive 50% of rents, and when the property has enough equity or I am able to pay him what I owe him, refinance the property? 

So basically I would get a commercial loan and my partner will put up the 25% down payment for that loan.

[Nathan Grabau]

My biggest consideration here would be what your commercial lender allows you to do. If they have a DSCR requirement, then having a second loan associated with the property might to get their approval on. Also, you might have cashflow issues depending on the term of the loans. In most markets, if you reduced your rent by 50%, have no way to cashflow. On my 20% down 3.75% interest rate properties in Ames, which is a more balanced market between cashflow and appreciation, after I pay my mortgage, I end up with less than 20% of rents in cashflow, with today's rates that would be closer to 5%.

So if your property hits the 1% rule, you probably cashflow at today's rates around 400-800 dollars. If you give 100% of that to the investor, you can only give them an interest only rate of 2.4-4.8% which is not too stellar for private money. 

You'll have to talk to the investor about how they would like to be paid. That being said, if you are putting 0% of the money down, and you get 30% of the deal for managing/ facilitating it, and then you have an option in the partnership agreement to buyout the other partner at what they put down, plus 8% a year, while they are enjoying cashflow and appreciation and everything else, that deal might work. 

The way you have to think about it is through value creation for the investor. If there is not some form of sweat equity, or path to increase rents, or conversion to add more units that creates equity, the investor then needs to be able to get a return in a different way. 

It is probably more advantageous for you too to put equity towards new deals instead of buying out your partner. If you can go around finding deals, and walking with 30% of them, for no money down, that is a great business for you.