Borrowing $100k from a friend to invest??

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Borrowing $100k from a friend to invest??

Aaron L.
Kansas City, MO · Member since 2015 · 123 posts · 46 votes

Hi BP! I'm putting together a proposal to raise funds for a downpayment. I'm hoping to raise $100k and then use it as a 20% dp for a small multi-family property. My proposal is to borrow the 100K at 10% interest for a 5-7 year term.

My proposal includes:
-some examples of properties so the potential investor can see what type of buildings I'm looking at.
-some research on the economy where I plan to invest.
-my experience buying/managing rentals.
-my credit history.
-I have money set aside in an account for reserves which I can show the investor. However, I'm hoping to raise the entire 20% dp needed.
-a breakdown of how much money the investor will make over the life of the loan.
-My plan is to pay back the $100k in 5-7 years or less from the cashflow that the property generates. I will have a detailed schedule of how this will happen based on the cashflow.

Can anyone chime in and let me know their thoughts on this strategy? Are there any dangers/risks I'm not seeing? I'm hoping to keep this investor as strictly a debt investor, not an equity investor, but I'm open to structuring the deal in whatever way makes sense and creates a win-win scenario.

The investor I'll be talking to is a 65-year old high net worth individual who is a personal friend. He has absolutely no desire to manage real estate or be involved with any of the headaches that come along with searching for properties, rehabs, etc. His role would be totally passive.
I also have a list of 5-6 friends who I can approach for funding as well. Not sure if they will say yes, but I want to give it a shot

If you actually read this far, thank you! I welcome your thoughts & criticism.

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Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
8y

Just make sure you do this the right way. Get an attorney involved so that your money partner is well protected and make sure you are 100% looking out for their best interest and not yours. Your goal should be to make them money. If you do that, you will make money. 

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  • Troy Luster
    Investor · Atlanta, GA · Member since 2017 · 136 posts · 54 votes
    8y

    Think you're off to a great start!  Know you said you just want a debt investor, but paying back $100K in 5-7 is a lot of cashflow.  May have to consider some equity.  If your friend can afford to loan $100K, $10K may not be enough of an incentive.

    2Reply
  • Jeff Richardson
    Lender · Irving, TX · Member since 2012 · 175 posts · 76 votes
    8y
    How much cash flow are you expecting to pay off a $100,000 loan at 10% interest in 7 years?
    2Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    @Troy Luster Thanks for the comment. I agree that paying back $100k over 5-7 years is a ton of cashflow...I would have to make a payment of over $2000/mo! 

    So...if we did an equity partnership, how would you structure that? 

    Also, I just did a quick calculation and, if I paid the $100k back over a 7 year period at 10%, the investor would actually receive over $28k in interest. I think his money is just sitting in a low-interest fund right now...

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    You find the deal,he brings the money. Split the profit 50/50
    1Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    @Jeff Richardson That's a great question. I would need to make a payment of over $2000/mo for 7 years (at 10%) in order to pay him off. It would have to be a great deal in order to do that! 

    But if I could purchase a value-add deal of some sort where I could refinance after a couple years to pay him back early that could work..or I bring him in as an equity partner. 

    If I could put $100k as a 20% dp and then purchase a $500k building that's actually worth $600k, then it starts to make more sense. 

    1Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Also are you planning on not having any skin in the game? If I were a private money lender I would never lend to someone if they didn’t have any money in the deal. Just something to think about
    0Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    @Caleb Heimsoth I want to buy a $500k multi-family building using $100k from the investor as a dp, and then $400k in bank financing. How would you structure the deal so that it's a 50/50 split? It's not a flip. 

    I suppose we could have a plan to sell the property in 7 years, he would get paid back his full $100k, and then we could split whatever is left 50/50...but I don't want to sell the property ever. So I'm not sure how the 50/50 split would work...

    2Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    @Caleb Heimsoth Yeah, I was hoping to not have any of my own money in the deal, but I do have money set aside in a side account for reserves to cover unexpected expenses with the property. I won't have my own money in the deal, but what I am bringing to the table is my experience with small multi-families, as well as the opportunity for this investor to make a great return passively...is that enough? 

    1Reply
  • Jody Newman
    Honolulu, HI · Member since 2017 · 92 posts · 59 votes
    8y

    This is such a bad idea!  First,  its expensive money..  2nd  middle ager claims experience but doesnt have money.

    But since guy is old n wealthy go for it........lol.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y

    If it were me I’d keep it simple and split the down payment 50/50.  So 50k from you and 50 from your friend.  

    Also I’m not super familiar with commercial properties but you may have a hard time finding a bank that’ll lend to you if you have zero of your own money in it.

    0Reply
  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Aaron L. The lender may agree to that, but another way to pay the loan back is for you to refinance with the bank. After you have increased the value of the property by increasing income and decreasing expenses, you should be able to do a cash out refinance in less than 5 years to cover the $100K loan so the private lender can exit. The sooner you can do this, the more likely they are to lend you money again in the future.

    Also, I wouldn't offer him 10%. I would ask him "What rate of return would you be happy with?" This is from Matt Theriault of Epic Real Estate, not me. The lender may be happy with 6% or 8%. Then if you can pay him 10% at the refinance, you will have over-delivered on your promise.

    The lender needs to know how much they will get, when will I get it, and what happens if you don't pay.

    1Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    @Jody Newman haha. yeah, the guy is old, but I don't think he's dying anytime soon.

    Yeah, it's expensive money, but the alternative is waiting years to save up $100k of my own money. People use hard money all the time with rates of 10-14%...it's usually for a short term like 6-12 months...but what if I found a deal where I could refinance and pay the investor back in a couple years? Would it still be a bad idea then...?

    0Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    @Caleb Heimsoth I understand what you're saying about each of us bringing 1/2 of the down payment...

    But, if I need to bring 50k of my own money to the table in order to own 50% of a 500k building...why not just forget about the private investor all together and use my $50k to purchase a $250k investment that I own 100% of??

    I hear what you're saying about banks not giving me a loan if I have zero of my own $$ in the deal...maybe I would need to add the investor as a co-buyer which would enable me to use his $100k as a dp.

    0Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    @Anthony Dooley thank you for your comment. I like the advice about asking the investor what return he wants. 

    So, just to clarify, are you proposing a strategy where I would pay 100% of the principal + interest owed to the investor by refinancing the property, and not pay him ANY payments along the way? Are you saying he would have to wait to see any money (even interest) until I refinanced in a few years? 

    Or maybe I could pay him interest only payments along the way...and then pay the principal of $100k upon refinancing? 

    Thanks.

    1Reply
  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @ Aaron L Pay them interest only until you refinance, then pay off the loan. 

    2Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    @Anthony Dooley I love that plan. It would put me in a much better position month-to-month not having to come up with that large principal payment. Great! 

    0Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    @Jody Newman who says I don't have any money? Maybe I just don't want to use it on this deal... 😉

    1Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    8y

    Just make sure you do this the right way. Get an attorney involved so that your money partner is well protected and make sure you are 100% looking out for their best interest and not yours. Your goal should be to make them money. If you do that, you will make money. 

    4Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    Thanks for the advice @Todd Dexheimer. Yes, I do want this to be a win-win scenario because it's the right thing to do. Also, this investor is a personal friend who I've known for many years, and I don't want to do anything to jeopardize the relationship. 

    0Reply
  • Aaron L.
    OP
    Kansas City, MO · Member since 2015 · 123 posts · 46 votes
    8y

    @Todd Dexheimer do you have any thoughts on how to actually structure this deal so the investors interests are 100% protected? Should he have 2nd place on the note? 

    Would you consider a JV? I would prefer if he is strictly a lender and not owning the property...but I'm trying to figure out what's best.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    If it’s a hundred grand you can easily buy a property with him in first position. If I was a private money lender I’d never want to be in second position. From your questions and your answers it sounds like you basically want to buy a property with essentially 100 percent financing. This is incredibly difficult to do. Most people who do this with “no money down” traditionally are getting some owner financing or creating value and then refinancing. The only other option I can think of is let’s say I buy a property (commercial) for 300k and without doing anything it appraised for 400k, well then the bank may lend me the 300 and let me use the 100 equity as my down payment so I have no out of pocket costs. Obviously this is going to be a hard deal to find. With owner financing you could buy a 400k property, bank finances 300k, owner finances 50-75k and the difference is your down payment. Or you get all seller financing and they allow you to put less down. My point is (to my knowledge, which is limited so take it with a grain of salt), it will be very difficult for you to buy 500k property with 400 from the bank and 100k loan from your friend or someone else. I’d explore some of the options I mention above
    1Reply
  • Jeff Richardson
    Lender · Irving, TX · Member since 2012 · 175 posts · 76 votes
    8y

    In order to pay him 10% interest, you'd have to get a minimum of 19% COC of his investment to make the cashflow needed just to pay the $1,660/ month payment .

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    8y

    OPM has more value than your own so be very very careful with it.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y
    Originally posted by @Aaron L.:

    @Caleb Heimsoth I understand what you're saying about each of us bringing 1/2 of the down payment...

    But, if I need to bring 50k of my own money to the table in order to own 50% of a 500k building...why not just forget about the private investor all together and use my $50k to purchase a $250k investment that I own 100% of??

    I hear what you're saying about banks not giving me a loan if I have zero of my own $$ in the deal...maybe I would need to add the investor as a co-buyer which would enable me to use his $100k as a dp.

    Earlier, I thought you had a specific $500k property in mind. But now I find out that your whole thread is conjecture? If it was me you were asking $100k from (with you putting nothing down), I'd want to know: what $500k deal have you found, that should already be worth $720k, and will still cash flow positively even though it's being leveraged at 100% of its purchase price?

    And if you were able to show me, and I agreed, then yes, I might put down 100% of the deposit for you, for 50/50 partnership on the Title, and 50% expenses and revenues from then on.

    Because unless you agreed to that, I reckon you'd be out of luck with Lenders! 

    Haven't you heard? Lenders are not keen on you borrowing your deposit, as well as the rest!

    That is, unless the deposit is from a HELOC (or similar) - secured against a different asset!

    But believe it when I say: Your Deposit-Investor will want to take it out of your hide if you renege!

    Which means: Their loan would want to be secured against the same property you were buying!

    [Now, re-read from "Haven't you heard?" again. It goes into an endless loop from there]. My 2c...

    0Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    8y

    @Aaron L. I purchased a commercial building for just over 500k with a family loan of 100k. I tell you that so that you know that it is definitely possible especially if the family member or friend knows that you know what you are doing and you have experience. The money needed to be seasoned in our account for a while (2-3 months) in order to do this. This is not the typical situation where we had agreements drawn up though because it was a close family member and they just trusted me. However, I have partnered with several other people since and I have drawn up documents for those partnerships. Most of these deals have been doing what was suggested by @Anthony Dooley where I buy a distressed property with hard money, partner with someone on the rehab, and then I refinance the property and get all or the majority of my money back out of the property and I pay off the investor when it gets refinanced. 

    @Caleb Heimsoth you have made some absolute statements that may limit you in your investing career. When you say you would not be in second position that may be limiting. For instance, say someone found a pretty good deal on a property worth 110k fixed up that was selling for 17k. The first position was 17k but they needed 50-60k for the rehab. Would you consider being in second position on this deal? 

    Not all deals need to be split 50/50 with a private money lender. In fact, if you do that you may be conditioning the lender to expect extremely high returns without knowing anything about the process. This is a millennial mindset way of thinking - getting a lot for a very little amount of work.

    You also say that getting 100% financing is incredibly difficult to do. We have done it 9 or 10 times so far this year. We did it as you stated, we bought the property, added value, and then refinanced, and we left with little to none of our own money in the deal. Experience, having connections, and building systems, are key elements to making this happen but it doesn’t have to be difficult.

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    2Reply
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