Why You Should Use Friends' & Family's Money for Investing

You’re afraid that friends and family will never talk to you again if a deal goes bad. Should you take their money to fund your real estate deals?

We don’t want to take money from our family and friends because we’re afraid. We’re afraid that we might lose our family’s and friends’ money in one of our real estate deals — and that would mean that those friends and family members won’t ever talk to us again and that we let money get in the way of friendships.

Plus, the next Thanksgiving dinner might be a bit weird, huh?

Let’s drill down on our fear. Maybe it isn’t as bad as we think.

When I take money from other people to do a deal, I feel an overwhelming sense of responsibility to preserve their capital and produce a reasonable return — much more so than when I’m using my own money. I will make really darn sure that the deal I’m doing is so solid that the probability of LOSING money is remote. The margin of error is big enough that I may not make the profit I’m projecting, but it would have to be CATASTROPHIC to lose any part of my investors’ capital.

So the probability of losing your investors’ money is (hopefully) going to be remote.

But let’s say it happens. You buy a house to flip, the construction costs are way higher than anticipated, and the house won’t sell for your estimated after repaired value, and you find yourself having to drop the price until it sells.

Instead of you making $30,000 profit, you lose money — $5,000 to be exact. Despite you having done three previous profitable deals, a lot went wrong with this deal: you were off by $35,000 on a house that was supposed to have sold for $190,000 with a construction budget of $40,000.

What Are Your Options?

Option # 1:

You could call your 4 friends and family investors and tell them they each lost about $1,200 of their principal and wouldn’t get the interest you promised.

They would not be very pleased, but they made good money on your previous three deals. Plus, they love you, right? So in reality, they’re not going to stop talking with you. In fact, if you’ve communicated well with them during this difficult time, they’re even likely going to invest with you again.

Isn’t this really the worst case scenario?

But if you’re a good steward of other people’s money (which you are), you’ll likely consider…

Option # 2:

Eat the loss yourself.

This means you’ll honor the commitment to your investors, return their principal and pay them the agreed-upon interest and make them whole. They will feel bad for you that you took a personal loss, but their respect for you will grow exponentially.

In the off-chance that your project loses money, won’t the worst case scenario actually not be that bad at all?

In other words, the probability of you losing your friends’ and family’s money such that they will never talk to you again are remote.

Now that we’ve analyzed the worst case scenario and concluded that it’s actually not as bad as we thought, let’s look at the opportunity cost of NOT taking money from friends and family.

If You Don’t Take the Money

When we first set out to look for investors for our real estate deals, we must start with our own personal network, which of course will consist of people we know: friends, family, neighbors, and co-workers. They’re all “friends and family” because we value our relationships with them and don’t want to jeopardize that for a deal gone bad.

If we disqualify friends and family as investors, we make it VERY difficult for us to raise money, especially when we’re just starting out. And the worst part of that is that this difficulty is self-imposed and entirely unnecessary (as we’ve seen).

So overcome your fear and take money from friends and family!

If you do, you’ll be able to raise money faster, which will give you confidence to start reaching out beyond your personal network.

Always ask yourself, “What would you do if you weren’t afraid?” and that will help identify the thing that’s holding you back from accomplishing something great. Raise money from friends and family, and you’re well on your way to achieving your real estate investment goals.

I dunno, what do you think? Would you take money from friends & family?

Let me know in the comments below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.