DIY - The IOU Mortgage
After my BP Podcast interview, I receive several inquiries about how I pulled together a multi-investor mortgage partnership to buy a single family rental. Well I don
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Comments (16)
Is the guide complete?
Lafontant Cherilus, over 10 years ago
Al Williamson, thanks for sharing, it's very interesting to continue, and you make some great points.
Michele Fischer, over 11 years ago
Michele Fischer I meant to flag you for my earlier response. Please see above
Al Williamson, over 11 years ago
Dawn, only one pull out. Hey, you're previously wrote about jealousy and investment envy. From that lens, can you see how this group set up can attract folks who would like to have some local real estate in their holdings but could not do so on their own? But to answer your question directly, it is difficult to get 5 to 6 percent interest WITH liquidity AND secured AND drive-by-able (my new word). For someone investing in an improving neighborhood, one that shows promise, this funding strategy might be a handy tool.
Al Williamson, over 11 years ago
Al Williamson don't you find that the people that have the money to invest are savvy enough to find other investments that earn more than 6%? And since 2006, have you had anyone pull out or has everyone you initially recruited stayed in?
Dawn Anastasi, over 11 years ago
3. Yes Investment amounts varied between $5K and $15K. Although, I use online bill pay to make monthly payments so any amount would work. It was no trouble after set up. 4. Appreciation - Investor only get interest payments (currently 5% APR); no appreciation. I will simply buy them out as I go to sell of the investment. 5. I picked the rate to ensure an attractive investment and health cash flow. I'm willing to increase interest rates once the market permits me to increase my rent. 6. Replicate - I would set up a partnership for each property or check out new crowd funding options. 7. Motivation - In 2006, I created this as a learning exercise and because I was interested in the mortgage side or RE. The learning goal was to a) get more people interest in the area I was trying to redevelop via having skin in the game b) build a track record for myself c) create a mechanism so my friends and family could participate in REI with me. 8. Time and cost - I did not use a lawyer; I researched on my own. I think the notary and presentation materials were my biggest expense. Dawn A. I recruited all at once buy signed folks up over four to six month period. I simply paid down my unsecured loan each time a new investor came on board. Hope that helps.
Al Williamson, over 11 years ago
Michael Faulk 1. Pay back terms -> I asked for long-term money only and promised to return principle investments in 60 days. That would give me time to find a replacement investor or use my personal funds. 2. Why 10 investors -> When I sent out my letter of intent to potential investors, I asked for them to indicate how much they would be willing to invest. So I knew about 12 -14 people were interested and I knew people would flake out. So I actually now only have 10 investors, myself included.
Al Williamson, over 11 years ago
Al Williamson I appreciate you sharing your strategy. Did you recruit all the investors at once? Was there any verbiage in your partnership agreement about allowing new partners in? As general partner, do you control this?
Dawn Anastasi, over 11 years ago
If it is interest only, they are not getting payed back - ever? What are buyout options? How long did you hold the unsecured loan? Was 10 just how many people you had interested, or were you managing to 10? I assume the amount is variable? Was it hard to attract them? Do the limited partners have any say in any of your decisions? Do they share in any appreciation? How did you set the interest rate they get? Does it change? If you replicate this to purchase additional properties, would it be another partnership, or expand the existing partnership? Is this motivated by wanting to create a win-win investment with friends and family, or to get around the tough loan climate? How much time and cost was it setting up the lien and partnership? Did you use a lawyer, or DIY? We currently have relatives invested in us via an informal unsecured loan document. Ours isn't interest only, it is structured as a 15 year mortgage. It's intriguing as another funding option. Thanks for sharing!
Michele Fischer, over 11 years ago
What's the price range property are you typically going after or do you do? How much do your partners invest and what are their returns? Do you invest and what do you receive?
Brian Mathews, over 11 years ago
Brian Mathews I'll add more details to my post, but to answer you directly: 1 - price range: I've only constructed this type of mortgage once for a property I bought for $192K. I may use a similar process to supplement my down payment on a 40 - 60 unit complex. 2 - Individual investor contributed between $5K to $15K for a 6% interest only monthly payments. No payments go when I have a vacancy. Investors/limited partners are for the mortgage only; they do not have equity stakes. Terms also state I'll buy out any investor within 60 days if they want out. 3 - I own the largest share of the mortgage partnership - invested $65K. I don't think it's necessary to buy in that much, I probably only needed to show I had skin in the game.
Al Williamson, over 11 years ago
I figured it would have to be in the $200K range to make it worth it for an investor. You need a decent sized pie to get enough slices out of. Too much above that here and you are moving out of rental property range. There are some, but if you can afford a mortgage $300K+. You'll probably buy a house unless you are just in area short term and are more of a gypsy. Not impossible, but narrows your prospective tenants. I figured probably better for apartment type of deals.
Brian Mathews, over 11 years ago
That sounds like a very helpful process that I would be glad to have shared. Not having much of a financial backround the more I can learn about how to set up financing the better. Like I've read multiple times a lot of us newbies are scared about finding the money and the more options would help me figure out how to do it.
Steven J., over 11 years ago
Steven Johnson I'll upload an example of my documents. Let me know if you want me to dive deep into something specific. I won't hold back.
Al Williamson, over 11 years ago
I'm sure that a lot of people will be interested in learning more, Al. Would you be willing to potentially share your redacted agreements (names and or amounts removed) for folks to check out? Those might be cool to see in the FilePlace here on the site....
Joshua Dorkin, over 11 years ago
Ok, I'll start updating the post and learn how to FilePlace
Al Williamson, over 11 years ago