Share Your Experience Working with Family Members?

[Alexander Persky]

Hi everyone, I am just getting started in REI. I have about 6-8 months before I can realistically purchase my first investment property on my own. For that I plan to go the FHA route to house hack a property, ideally a multi-family. However I would be able to expedite this process if I were to receive a loan from a family member. I am considering this route because a few of them have expressed interest to me in getting into the Phoenix market, it would be their first time acting as a lender, and would be my first time receiving private money. So, we all are on the same page about using this to make money, but more importantly as a learning opportunity.

It would be on me to structure the deals, and I don't really know a good starting point to doing that. I have seen plenty of examples of deals, but without much explanation to the why they are structured in such a way.

So to keep this simple, can anyone share their experience receiving loans from family members for financing properties? How did it ultimately work out? How did it affect the relationship between you and that family member?

One the flip side, can you share any experience you may have purchasing a family members property from them?

I am hoping to open up a discussion for anyone considering this route to jump start their REI career, and we can learn from those that have already gone this route to help make educated decisions. Thanks!

[Ryan Swan]

It can be a great way for both parties to invest in real estate. In my opinion, there are three rules to follow if you are going to be borrowing from family member(s):

1. Don't borrow more than the family member can afford to lend you. If you're borrowing $150k from mom and dad and that's literally their life savings, then that's far too risky of a loan to be making. Borrowing the same amount from rich uncle Steve who has $3m in the bank is a great way for family to help family and also diversify. 
2. This one sounds obvious, but don't borrow more than you can absolutely afford to pay back (even under worst case stressed financial models). 
3. Draft a contract and make the terms clear for both parties - this is still important even if borrowing from a close blood relative. I can protect both of you if one party suddenly dies and then the rest of the estate is trying to settle the debts. 

I've helped quite a few investors get started in multi-family using FHA...feel free to drop me a line if you want to learn more about the ins and outs of it.