How to use private loan money to pay down payment?

Question

I'm trying to figure out what my options are for creatively financing the purchase of a plex. I found a banker who is willing to finance to up 75% of a purchase if I can cover the remaining 25% in a down payment.

I also have a friend who is willing to contribute the entire down payment. I know that one option for financing the transaction would be to form an LLC where he would provide the money and get a percentage of ownership of the company (and thus ownership of the property.) If I'm lucky, I could negotiate retaining 10% ownership of the property for finding and arranging the deal. However, I'd prefer to retain control and instead structure the deal as him providing the funds for the down payment in a loan arrangement, rather than in an equity position. With that in mind, I'm concerned that a bank would have a problem with using loaned money to pay the down payment, though I know that's how things are done in Robert Kiyosaki's game Cashflow. (Yes, it's a game, I know. But, I wonder if he designed it that way for a reason.)

What are my options for structuring the financing of the down payment with my friends money? Also, if I can structure a loan, how do I actually accomplish that? (Are there best practices on how to do that? Do I need to figure out how to amortize it? If it's with simple interest, would I really need to pay my friend 10% of the entire loan every month or do I have other options? Etc.)

I realize that these are broad questions, but I'd like suggestions that are more specific than, "There are tons of ways to creatively finance the transaction!" If I didn't already know that, then I wouldn't be posting this question here. Sorry to be a cynic.

Marty Johnston · Answer

@Devin Bost all of the above are solid possibilities. One of the ways many investors obtain what you're looking to do is through utilization of Gap Funding through a Personal Loan(s) which are generally 100% unsecured, Personal Credit based loans amortized over 3, 5, or 7 years. Rates can vary widely from 6-23%, on average 10-18 with a common COVID spot of 15% at the moment. All fees are paid from proceeds so you're really looking at 100% financing with a blended rate somewhere in the mid to high single digits depending on what you can obtain from the commercial lender.Speaking of the commercial lender, we've seen many deals fall apart because an investor never confirmed or verified that they could utilize Gap Funding (in the way I present here, or any of the above) for the down payment/equity portion. When a hard pull was done prior to close, or bank statements were provided and required sourcing & seasoning, the lender can kill the deal because they want true equity/skin in the game from the applicant. This is more often the case for long-term mortgage products. 6-36mo I/O Bridge Lenders generally speaking, care less about sourced or seasoned down money, but always worth discussing with you lender before you proceed with any form of Gap Funding. You'll thank yourself later.Feel free to PM me for further discussion on this if you wish.Hope you had a great 4th!

Kenneth Garrett · Answer

@Devin BostYou can structure it multiple ways. I have done a LLC structure where the down payment was provided by a private lender as a debt investor. I used commercial financing from the bank which makes the approval process possible. If you are going residential not sure that will be possible. I paid the investor back over the next 30 months.

Jason Dillard · Answer

Go buy something 1/4 as big and give lender a 1st at a lower rate. It's safer for lender to have a 1st. You can protect the lender by buying at a discount. In essence, you become a cash buyer in the eyes of a seller. Make low offers and make sure the payment you are "creating" is well less than the net income. I have done this strategy about 300 times. Banks are for bigger deals. Private lenders that are treated well, breed private lenders. How much does the appraisal, bank fee, points cost with a private lender? Nothing, if you find the right private lender. Can you get interest only with a bank? Maybe, probably not. Private lenders are fine with it. Will the bank allow you to start your payments after you get the tenant, not pull your credit, or not personally guarantee the loan? Private lenders become more and more flexible the more deals you do with them.

BJ Everson · Answer

@Devin Bost is there any work needed on the Plex? Or just a flat out purchase and hold? Who’s name is on the mortgage? Does your private lender want to be part of the property for the long term or just looking for a short term play? Setting it as another loan is fine, I would just have it amortized over 20-30 yrs to keep the payment low. And you’ll need to do the math if the rents can cover mortgage, private loan and still a return for yourself. If there is work to be done then I would make it a loan and look to refi after the work and pay off your friend with the upward refi. If your private lender wants the long term then I’d go 50/50 sharing in the exp and income of the plex. Your 50 is deal sourcing, financing and running the rental while the private lender just provided down payment.

Matt Hurley · Answer

Long story short, what are you trying to achieve, and what does this private money lender want back in return? Private money's power comes from it's flexibility. Is this person just cash flush and looking for a short term return? Are they interested in real estate themselves? Do they need their capital back in 6mo.? 1 year? 30 years? Do they want to run a rental with you? Most importantly, how do you plan to pay this person back? 10% interest on a private loan like this is fairly standard, but it can be structured any way you want. I've had private loans offer full purchase price of a property with only a balloon payment plus interest at the end. My first property was purchased with hard money, which cost me over $14k in interest only payments over the course of the loan. There's lots of ways to do it, but the more important question is what is your goal, and what is the goal of this private lender?