Should I offer to invest?

Question

Hello guys,

I have a friend who has a home in a very prime location.  It's literally across the street from a top medical university. My friend was living in this home up until his mother passed and has since moved back into the home his mother left in his name.  Now he's trying to turn his other house into a rental property (apartments). However, he's struggling trying to pay both mortgages .  He's also having a hard time finishing the renovations.  I've given him some money as a friend to stay afloat but now I'm wondering if somehow this could be an investment opportunity for me.

I can't afford to give money away for free but, I honestly think that once the apartments are finished he will see good profit if priced right.

I asked him in passing about his rental property and I suppose he caught on. He's already asking how much I am willing to invest.  I just have no idea where to start on something like this...or even if its wise to do so..

My questions are:
Would you invest in his rental property? 
What type of deal options do I have? ( I.e. Pay for materials, Give Loan w/interest ,Help pay mortgage, etc)
How would you approach him with the deal? (Tell him what I had in mind?)

I appreciate all advice.

Steve Babiak · Answer

I think that is the wisest choice.

This friend of yours is the one with the serious debt.  If you were to structure this lending you proposed as a secured loan, you would be the second position lender.  So when the first position lender forecloses (could happen here), the second tends to get extinguished and goes unpaid.

Getting a place of your own to manage will actually put you into a better position of CONTROL over things like the tenants, and thus you can minimize some of the headaches.  There are headaches with lending too ...

Joel Owens · Answer

I would stay away from this at all costs.

If you are okay giving some money with the intention that you may never get paid back or only partially paid back then you might do it.

A lot will depend on how much money you have. If you have say 400,000 cash and the project would take 300,000 then the risk is too high to your overall financial high.

If you have 400k and you can throw 10 or 15k at something and if it goes bust you only got slight ding to your total cash worth then the risk is much smaller.

Plenty of things to invest in out there but the real question is how much risk you will have for trying that deal out versus passing and doing something else with the money??

Take friend , mother dying, person down on luck, etc. ALL OFF THE TABLE. This is purely a numbers deal plain and simple. Again that will change if you are viewing this as a gift etc.

Mike LaCava · Answer

Hi Jessica-
Try to see if you can get a proforma from him which basically a snap shot investment breakdown and profit analysis based on the projected #'s. this will show you the potential cash flow. There should be expense items in there for vacancy, mortgage payment, taxes, maintenance, repairs.......I would suggest you talk to a non biased third party and someone that has investing experience or even a banker contact to look at the #'s with you. this way you can make an educated decision based on the information provided to you. this way you are not making an emotional decision in an area where you should be making business decision. You can help your friend but if the investment is not a good one don't put your money into it.

Joel Owens · Answer

If you want strictly passive you would look at triple net investing 
(you would need a few hundred k to get started ) or you could look at buying discounted notes or hard money lending etc.

Flipping and rehab and other avenues require a more hands on and time intensive approach.

So it's about cash to start with, passive or active approach, and what kind of return you are wanting (ROI).

Jessica Elaine · Answer

Steve Babiak You're right.  I will just take my time and try to do my own project.  If he needs help with anything I could offer my time and learn that way. Maybe then I wont feel so insecure about going off on my on.  Thanks!

Jeff  S. I don't think so. He's been pretty generous in the past. Before things started going down hill he was very giving to those around him. Honestly, its the only reason I even gave him money as a gift. However, I think now he is desperate and is looking for money anywhere to finish his rental prop.

Uwe S. · Answer

Its an equitable decision Jessica. This propertie will be under water.
If you maybe want to invest in RE you should get better properties in your area.

-Uwe

Xing Zhu · Answer

Doing business with a friend is general not a good idea. It may ruin the friendship.

Jeff S. · Answer

Is there any chance he is trying to take advantage of you? Financially that is.

Jessica Elaine · Answer

Uwe S. It is high I agree.  I don't think his interests are in paying the house off, just probably covering the mortgage plus a little extra.  He was talking about being in the 1200-1300 range with utilities included. So..I'm not sure...I'm leaning towards passing on this.

Navi Veski Thanks! I don't currently have an agreement.  I was wondering how I would approach this to make a deal with him.  You are right on the money on where the property is located.  I probably will walk away from this.

@Joel Owens  I thought about buying my own home to renovate into rental property.  It's ultimately what I would like to do in the long run for the passive income.  However I'm new and a little scared of getting into serious debt.   I just thought this had less risk and would allow me to gain some knowledge with tenants and renting without actually having the headache of owning the home myself.  I figured we could come to some type of deal that would give me a percentage of the income for a certain period of time.  Now I'm not so sure.  I will add you! Thanks!

Joel Owens · Answer

"Would you still pass on this? If so what would you recommend for a first time investor looking to get their feet wet? I'm ultimately looking for some residual income. Thanks!"

It's hard to recommend a strategy without knowing your total strategy and where you are currently at with your investing.

Options will depend on how much money you have to start with as many forms of real estate investing have thresholds to barriers of entry. Also if you want the investment to be more passive in nature.

If you do not want to put on here how much cash you have to get started what many do is contact me directly or do a colleague request etc.

From there we can converse back and forth privately with discussions.

Should I offer to invest?

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