Borrowing money from parents for down payment

[Kristina Lugo]

I'd like to purchase a 2 unit building with a 203k loan that I'll eventually BRRR. I have some money in savings, but not enough to cover a down payment, closing costs, and reserves to hold me over for a few moths while I manage the construction and vacancy.

I'm considering asking my parents to withdraw $10k from their 401k. This will be used for a down payment and closing costs while my personal savings will sit in reserves. I've never asked my parents for money, so I'd like to approach them with a simple strategy. I'll show them the numbers, how the property cash flows and the plan to cashout refi to repay them the loan plus the 10% withdraw penalty.

I understand all investments involve risk, but how can I protect their investment from any loss? Lets say the whole deal tanks. How can they recover their $11k?

Thanks so much!

KL

[Sue Hough]

Kristina,

 First off I’d like to shake your hand and give you a big hug for sincerely trying to protect your parents investment!   You are a wonderful woman. Second I’d like to shake your hand for having all of the numbers to provide a positive cash flow. 

 Now that I’ve gotten all of the good vibes going, there really is no way to protect your parents investment should the whole project tank. I did have a similar situation and the bottom line is at the end of the day if the property is worth less than all of the loans there is no way to recoup the money invested.   This becomes especially hard with Family.

 I would advise when you present your calculations you also have a heart to heart about the reality of what an investment is.  I received some very wise advice quite some time ago and I know it is very relevant here; do not invest money you cannot afford to lose. If losing the money you are investing is going to change the quality of your life, don’t do it. 

 I wish you the best of luck ,

Sue Hough