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Should I Use my Family’s Money to Buy Investment Real Estate?

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Private lendersTrying a venture like buying houses at a low price and selling them after they are renovated is sometimes a little tricky if you are a novice.  Some people have borrowed money from their moms, dads, or another relative.  If loaning you this money will not result in their losing their lifetime savings, this has been a way that some entrepreneurs have started their investment real estate careers.  There are, though, a few hard and fast rules that should be followed to the letter, if this is the way you decide to go.

  • Decide and agree on your loan terms.  The going rate of an  intra-family loans is 4.7%, but it is best to discuss what will be acceptable for you and the lender so that, in the end, everyone is a winner.
  • Create formal documents.  The best thing to do is hire someone who knows about intra-family loans and can use the correct language, the proper forms, and knows the laws involved in this kind of lending.
  • Next, you need to use a loan calculator and put in the terms both parties have agreed upon.  Then you will have the amount of your payments and the dates on which you are to pay.
  • Follow what your promissory note specifies as to your payment schedule.  If you see that you are going to have a problem paying on time, communicate with your family member, because,although they want to see you succeed, they are going to want their money back, as well.

 

If you decide to go with a hard money lender, these are the steps you will need to follow:

  • Hard money lenders will have the forms you need, and will assist you in completing them, if necessary.
  • When you have completed the forms as thoroughly as possible (the more complete the easier the process will be), you will fax or email the documents back to their office.
  • Once they have reviewed the forms, they can send you a pre-approval form if you feel you need one.  This can be helpful when you are submitting offers.
  • At the time that you have the property under contract and have submitted the contract and completed forms package, the hard money lender can usually give you an answer on your loan within 24 hours.
  • When the payment is in the hands of the lender, they  will order an appraisal, which can take up to 3-4 days to be returned.
  • Upon the arrival of the appraisal , the lender will schedule a “walk-through” of the property with you.
  • There are no up-front fees for credit reports, underwriting, processing fees, or application fees.  The only thing you pay before closing is the appraisal and inspection cost. ( There is the possibility of a fee for a structural engineer’s report, if it is found that the foundation needs  work.)

Using the family bank is possible, but what we have not even mentioned is the psychological and emotional turmoil that very often comes up when relatives lend each other money.  Sometimes feeling can take over and friction can occur.  If you decide to use a private money lender, you can see that most of the legwork is done for you.  Also, you have an objective, supportive team behind you who has done this many, many times.

 

 

 

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One Response

  1. Paul

    When I got started in real estate investment, I loaned money from my family and it didn’t turn out well. A lot of misunderstandings and changed terms have steered my to other financing avenues.