Family Loans for your
Rental Property Investment

Why not use family loans for your rental property investment? Read the journalist "experts" and they say "Don't do it!" Yet, many people do loan money to family members. Even Sam Walton got $20K from his father-in-law to start Walmart. Never rule out an obvious source of funds. I've borrowed from both sides of my family and never had a problem.

National Family Mortgage provides an excellent guide to setting up a family loan. Of course, they want you to spend money to help them set up the loan and manage payments. Not a necessity but this is quite useful for the lender.

If you are borrowing from a family member you do not want them to be put into a situation where they may get in trouble with the IRS. If the total of all loans (plus imputed interest) is less than $10,000 a year then the IRS could consider your failure to pay interest on the loan or repay the loan at all as a gift. For loan totals greater than $10,000 you really need to pay interest on the loan, otherwise the IRS will assume an interest rate, called "imputed interest" and create a tax liability for your relative. Creating a promissory note with an interest rate will alleviate your relative of getting in trouble with the IRS.

From the standpoint of the borrower, if the loan is not set up properly, you won't be able to deduct the interest charges on your tax return. Consider using the collateral of the property you are buying to secure the loan.

If you are getting a tax free loan from a relative you should ask them to write a note saying that 1)you were solvent and the the loan is a 2)"demand" loan - meaning that they can demand repayment any time. By this way the IRS can assume imputed interest and if it's less than $10,000 per year your relatives are off the hook for paying taxes on the imputed interest. For more details on tax ramifications of family loans see this article on safe ways to loan money.

There's never any harm in exploring all sources of money for your rental property investments. Just know what you are doing and have a plan to repay the loans.

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