Using Family Money for Development Land Purchase

[Eric Franzen]

Hi all,

I've been reading the forums for a while now, but this is my first post. I'm turning to y'all because I have looked around on BP and online and haven't found quite the scenario I'm looking for. Hopefully you can help!

I am going to be buying a single-family house on a large multifamily-zoned lot using 100% cash from a relative. The plan is to use third-party private money for the purchase because the property likely won't appraise close enough to the $275k purchase price to make a conventional loan pencil out very well; that will also allow me to save my own money to pay for design and permitting to redevelop the land.

My question is around how best to structure the $275k infusion. The simplest option seems to be a direct personal loan to me (with favorable terms, of course) that I could turn around and use in what would effectively be an all-cash transaction—as far as anyone outside the family is concerned. But my concern is how this will affect my ability to get a construction loan later on if the land loan is on the books as debt.

Does anyone know if/how a private loan (a demand loan, NOT a mortgage) appears on paper to a lender? Are there any tricks or alternative structures that would be better to use to buy property for a development project? Are there ways to structure the money as an equity contribution without actually giving up a big chunk of the project to my private lender?

Thanks in advance for the help! And please also let me know of any other posts or additional research sources that might be helpful to consult.

[Nik Moushon]

If you are looking to develop the land its easier to not have debt on the land to get the construction loan. BUT you can still get a construction loan with a land loan. It just takes more to convince the bank to lend on you.

The biggest plus to having no debt on the land is you get to use it as collateral for your construction loan. So you dont have to have cash up front for that loan. Again, its not a MUST, just an easier way.