Negotiating + Financing

One way to wrangle cash for a down payment: Bring in a second buyer

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Bernard Klein, 28, works in finance and along with his wife, has spent the last several years flipping New York condos, grossing around $800,000 in profits so far (an experience he previously chronicled for BrickUnderground). The pair has also launched a company called Blooming Sky to help others invest in New York real estate. Here, Klein explains an unexpected new strategy for cash-strapped—but credit-rich—buyers looking to come up with a down payment, and jump into the market:

Lately, I've been meeting a lot of people my age who have the same issue: They make solid salaries and have leverage-ability—meaning the ability to qualify for financing—but they don't buy real estate, because they can't come up with the capital for the down payment. (The typical down payment these days in NYC is around 20 percent—or more—of the purchase price.)

If you can afford to pay $2,000/month on rent, you can afford a mortgage, but if you can't come up with the down payment, you're forced to keep renting, which for bullish would-be investors can feel like flushing money down the toilet.

My wife and I were discussing this in terms of our own investments, and thought, "What if we could use our incomes to find an investor to buy into a traditional investment property?" At the time, we were looking at a $700,000 studio in Battery Park City, and wondered whether, in theory, we could get a loan on the place if we could find a second buyer to front cash for the 30 percent down payment.

For a buying partner with cash but no ability to get financing (a foreign buyer with no steady income stream, for instance), this would be mutually beneficial: We could use our invisible asset of mortgage-ability, they could get around their financing problem, and we'd both get equity in a New York City investment property.

It would work like this: For an investment property, the profit would be split 50/50 between the two buyers, the expectation being that the rental income would cover the cost of the mortgage and carrying costs, and that we'd sell at a profit in a couple of years, the market permitting.

As it happens, my mother is real estate broker and had a foreign client who had cash but no stream of income to qualify them for a mortgage. We made a bid together, but the deal eventually fell apart because they were nervous about putting so much money down with co-buyers whom they barely knew. We learned that with this type of deal, it's best to co-buy with someone from one of your own trusted networks like family, friends, and business partners. Don't post an ad on Craigslist in search of a random foreign buyer saying, "Hey, looking for a good investment?"

For instance, one case we know where this worked out perfectly: Two business partners, one of whom had income good credit, but no cash, and the second of whom had some liquid assets. The two of them found a $500,000 new development in Crown Heights that accepted 90 percent financing. The agreement was that the first person would live in the apartment with his wife and pay the mortgage and expenses, while the second partner would put up the $50,000 down payment. So they bought the place together—they're both on the mortgage—and plan to sell it in two to three years. They can reap the tax benefits of living in a property and paying mortgage taxes, then sell the place at a profit a couple of years down the line.

Obviously they had to structure the contract carefully, and it stipulates that they'll discuss selling in two years if the price appreciation is where they want it to be. (If you're thinking of entering into this type of deal, you'll always want a lawyer to put together the contract very carefully.) There's also a buyout clause, meaning that one has the opportunity to buy the other out of their share of the apartment, at a previously agreed-upon interest rate. For instance, if the buyer who's actually living in the apartment wanted to buy out his partner, he'd have to pay back the down payment, as well as whatever appreciation in value had accumulated. 

A more typical way to do this would be to buy in tandem with a family member, like a parent who has a 401K or extra money stashed away. Why not invest in your child, and start their trajectory as a property owner? And this way, the parents can share in the potential future profits, instead of just handing over cash to help with the down payment.


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