BRRRR'ing with Grandma's money??

Question

Hi all,

I'm a total newb to using outside money and was hoping I could get some advice from people who have gone down this road before.
I have done 2 deals so far, both duplexes with conventional loans and I'm looking to amp it up a bit. I recently met an older investor who is looking to sell off a quadplex and I'd love to purchase it. Problem is he isn't keen on seller financing and I don't have the money for a down payment.

Note: we haven't discussed price yet so this is all theoretical. I do know from county records what he purchased the property for and it was in 2012 for approx 90k under current market value. It could potentially sell on market for 220-280 depending on inside conditions.
My conclusion to solve the problem is borrowing cash from my grandparents who own a large dairy farm. They also borrowed money to my parents to start their business 30 years ago. The property is no slouch, but it could be improved. The plan would be perform improvements and refi out, returning my grandparents money in 9-12 months.

How would you go about structuring a deal with this scenario? I would like them to be rewarded well for giving me the opportunity, what is a fair rate for something like this? Or should I be offering points? Should something like this be structured through an accountant?
I guess I understand the theory behind this concept, but I'm not sure how to physically put the plan into action.

Thanks

Andrew Postell · Answer

@Eric Kovacevich a good rate of return would be 6%-8%.  You should ABSOLUTELY be prequalified for your REFINANCE step well beforehand. Most title companies can create a note and a Deed of Trust for you to document the mortgage on the property for you. Hope this helps.

Andrew Postell · Answer

@Eric Kovacevich these questions are EXACTLY why you need to get prequalified.  I don't know what your lender would say to those questions.  Now, I would encourage you to try to find a lender that will lend based on the ARV, and not require you to need a downpayment...but can you qualify for that?  That's why it's important for you to be prequalified for the REFI step of the BRRRR.  Your lender should be doing more than just giving you a letter.  They should be advising you on what to do and talking with your scenario with you.  I hope this all makes sense.  If you do need some good lender referrals try to lean on some other investors in your area to see if anyone has some good suggestions for you.

Eric Kovacevich · Answer

Thank you that does help with clarity.

What would being prequalified by the bank look like or say? Would it just be a letter stating that when the property is fixed up they will issue a loan upon appraisal and inspection?

When I purchased my last duplex my pre qualification letter just stated something like "buyer can purchase property upto 170k"

Would the bank be expecting me to have cash on hand for the amount of the 25% downpayment when refi'ing, or would they not be concerned about that as long as the property appraised 25% higher then what I owe my grandparents?

Hypothetically let's say the property is purchased at 200k put 10k in work and worse case the place only appraises at 240k. The difference between all in and appraisal is 30k but 25% of 240k is 60k. So I would need to come up with the remaining 30k as downpayment to get the loan moved to a bank. Is that correct thinking?