Need Help on my First House Hacking Agreement!

[Nickolas Burns]

This is a hypothetical question and more to hear what you would do in this situation as I really need advice. So I am looking to purchase a 4 unit multifamily property and I will be using 3.5% down or a low percentage down as I will be looking to house hack this property. let's say it cash flows and doesn't have any upfront repair costs. So here is my question/dilemma.  I do not have the money to be comfortable to put a down payments on the house and don't want to rent as I am moving off of my college campus this summer and I want to start house hacking.

How do I get the money? My solution is a family member who wants to start investing. Except he doesn't want to just give me the money and I pay him back with interest he wants a piece of the property. This family member and I are very close so this would be a handshake deal with no formal paperwork and the down payment would be a gift and he would provide money for a security just in case something needs to be fixed. 

The pros:

I get to buy the property with his money and it is in my name 

I will get to house hack the property essentially living for free

The cons:

I will manage the property

I won't technically own the whole property which makes me worried about scaling up

The family member will provide the money and I will do all of the heavy lifting.

The family member will be getting a high RIO from this deal.

My Question: 

What should the terms of this agreement look like to make it worth it for both parties if the Family member doesn't want the interest but rather the experience of investing in real estate. 

It is worth it for me and at what % of the house does he own is it not worth it for me.

If the family member invests $12,000 what should he see as a return on his investment?

Thanks for reading this and any help would be great!! Keep in mind this would be my first real estate deal. 

[Kenny Dahill]

@Nickolas Burns, there are a few routes you can take.  Firstly, this should not be a handshake agreement.  This is a large investment for you.  Both parties are protected with an agreement that clarify states expectations and penalties.

• Hard Money Loan: Have them loan you the required $12,000 at a higher interest. Typical HML rates are 8-14% depending on underwriting. This will allow you to own 100% of the property, they earn money. They would be in 2nd position on the property, talk to a mortgage lender about this.
• Buy as a Joint Venture LLC: If they want a piece of the property pie, then do it the right way by creating it as an JV LLC. Although this will officially turn the property into an investment, bumping your down payment up to 20-25%.

Those are your two best options.  I can't stress enough the importance of formal agreements.  Even with close family, I still do formal agreements with my dad.