How to Structure Deals With Friends/Family

Question

How have you structured loans/financing with friends and family? I may have some family interested but I'm not sure how to structure a deal with them. Please provide any success stories and/or failures and any other creative ideas you may have.

Account Closed · Answer

It depends what kind of deals you are looking at doing.... Do you plan to flip, buy and hold, rent to own? Each of these would lead to a slightly different approach. Generally speaking, you can either (1) use your friends/family as the bank, I.e. use their money as a loan to be repaid over a certain period of time at a agreed-upon interest rate, or (2) use them as equity partners, where you split profits/cash flow according to each partner's stake. Each scenario has risks and opportunities for them and you. You need to figure out what you and they are comfortable with.

Ryan Hilbun · Answer

Buy and hold. I'm looking more into the VRBO market right now. What do you do more of, loans or equity deals?

Account Closed · Answer

@Ryan Hilbun

I have only done loans so far. I like it better because I don't need to consult anyone before making decisions, and once I pay them back we are done (or they can choose to re-invest). Either way there's a predetermined way out and period of partnership that's appealing.

Marko Bukva · Answer

@Josh Miller

@Josh Miller HI Josh, if you still have that document from 5 years ago ;-)

I would love to see it and start from somewhere.

Thank You

Blake G. · Answer

@Josh Miller I know this is an old thread but I'd appreciate a copy of the documents mentioned above too. :-)

Marc Knapp · Answer

I have been pondering an unusual situation for a while. I thought I would throw this issue to the Bigger Pockets community. My father has two properties in his name that he is no longer interested in managing. There are a few unique conditions that I will explain so that you all can better understand the situation. First, both properties have been in the family for many years, one of them for over 100 years. Second, one property is currently raw land and the other is an empty residential lot. I estimate that the raw land site would be a good location for a single family rental home, because I have a SFH nearby that is generating a nice cash flow and ROI. The empty residential lot previously had a SFH home, that was destroyed by a fire. Third, my father wants the properties to provide in-part for my mother's retirement in the event he passes and his pension ends. Unfortunately, in their current condition, the properties generate a loss after paying property taxes.

My wife and I would really like to start managing these properties and turn them into cash-flowing  assets. We are opposed to entering a joint ownership arrangement with my parents, especially since we want to build and are willing to pay for it, and my parents are not.

Now, one option would be for me to wait to inherit the properties. Another situation my arise, where I would purchase these properties from my mother should she ever need liquid funds in retirement. This second option would accomplish supporting my mother in retirement and keeping the properties in the family. The unfortunate issue with both of the above solutions is that the properties will remain as is, with negative cash-flow for many years. My father has said he has no interest in building or rebuilding on either property. My mother has also informed me she has no interest in building on the properties, but she would like to keep the property in the family.

The two options I have come up with are a ground lease agreement or a seller financing agreement with an extended loan term.

For the ground lease option, my wife and I would build houses on both lots and have a long-term ground lease and pay rent to my mother to provide for her retirement. There are a few disadvantages I can see with the ground lease alternative. We would be building on land that we don't own, which could be problematic when the long-term lease is up or if my mother needed to sell the properties and we were not ready to buy. Also if I were to inherit the properties while I am still under the lease it might be confusing to be renting from myself, although I suppose with different entities it is possible.

For the seller financing option I would structure the purchase agreement such that the terms of the loan would allow for a low down payment, and that monthly payments would not start until x years into the future or until we reach the estimated time of completion for the building construction. My mother is agreeable to these terms. Also we would make provisions that would enable my mother to call a portion of the loan due at one time to cover her retirement/expense, i.e. $50,000 in any 1 year period. This appears to be the better option to me as my mother would receive steady loan payments with interest and could call a large amount due to cover any expenses, and we would be able to own the properties and build on them.

Just as an additional note we are not concerned with the stepped up basis of buying the properties instead of waiting to inherit the properties with a lower basis, because we do not intent to sell.

I know I am fortunate, and I am very grateful to my parents. I don't like to think about their passing, but it is better to have a plan than bury you head in the sand.

Sorry for the long post. Thanks members for your input.

How to Structure Deals With Friends/Family

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