Let’s see here, you borrow 10K. Interest only for a year at 15% is $1500. So you deduct that from your taxes. That saves you $420 at a 28% bracket. In turn the relative pays income tax on the $1500 at 15% or $225 or a net $1275. What would be the difference if gifted them that amount? You would also be able to protect them from an untimely death if you made them a partial beneficiary in an insurance policy for the amount owed.
I don’t think you’ll grasp this but why not use the relatives money for short term financing where you are in and out quickly. When you apply for long term financing from an institution do it such that you are buying at 60% of value. You make more deals by marketing and finding motivated sellers not by financing to throw cash at properties. Accumulate your cash so that you borrow from institutions only for that killer deal.
My question is similar to that posted by Tyler below, but I’m so new at this I need a few more things explained. I bought a duplex this year, and got a good deal on it. In explaining the deal (and future plans to make more deals) to my family, certain members asked if they could participate in future deals by lending me money for down payments. I agreed to this, and offered 15% interest only (with 3 year balloon) to one of my parents. No points.
I’ve found a property, and I’d like to make an offer. From the posts below it sounds like I should contact a title company to write the promisory note- is this correct?
I plan to contact my state’s attorney general to find out about usury rates. My parents live in another state- should I be concerned about the usury rate in my parents’ state (New York) or where I and the property live (North Dakota)?
I’m not sure what post you reference but most notes are written to document the terms. A deed of trust or mortgage is recorded to provide remedies against real estate if not. If there is trust why is a note required or even public notice. You make an agreement with your parents and follow through. When there are siblings, circumstances that may change, or possible misunderstandings then it may be beneficial to document everything.
One way to avoid usuary is to do a participatory note. A guaranteed interest rate plus a portion of the profits. If it is not enough you can still give them more.
Usury interest rates on real estate secured loans are typically based on the state where the property is physically located not the location of the lender.
Bud,
Thanks for your response. I’m trying to protect my family member- should I die an untimely death I’d want my debt to them recorded. In addition, I believe I’m entitled to write off the interest I pay on that note, since it’s an investment property (I may be wrong about that- I have an appointment with my CPA early in Jan). And finally, I intend to buy more properties in the future; when I apply for financing, I can’t leave off the amount due to my relative in my financial disclosure statement- I’ve been advised that that would be loan fraud. This is new territory for me, I’m trying to do this properly so I can make more deals.