Tapping Friends/ Family for funds...pro or against?

Question

I'm curious to know if reaching out to friends and family for a private loan is generally a good or a bad idea.

If you do bring them in, what sort of interest rates and repayment structure do you offer?

Thanks in advance!

John Montgomery · Answer

I think it really depends on the situation, the relationship and the type of people who are getting involved. If you have a rich generous relative who loans you money and then you do your best with regards to the investment project, but you still end up loosing $20k; well it's only money and the loss wasn't due to your negligence. However, if you change any of the factors and the result could end up being very tense. What if they are only middle class and the $20k was 10 percent of their savings? What if they are rich but very greedy and vindictive? What if you aren't the hardest worker or there was something that you could have done but didn't? What if any of these negative scenarios are simply perceived by the other party? Many people say they would never do it. I think it can work out. It really depends on every individual case and a careful evaluation of the people you're going to be doing the deal with. Unfortunately, I think, sometimes the people closest to you are the hardest people for you to do a real assessment. I did a flip with my aunt who funded the project and it worked out fine as far as our relationship. I basically broke even, so she was made whole and it was actually a good thing for our relationship, but it's just so easy to see how things could go wrong.Not sure about current rates for family members. We did our deal back in 2013 and I paid her 5% APR, which I think was very generous on her part.Sorry for not answering.

Account Closed · Answer

That’s what works for me. I know some people want equity but not all. The variations of how the deal works is endless. The deal I talk about I paid for a everything else besides the downpayment (actually I paid a tiny portion of that too). So I am in for around 50k for everything. At the end of the day it’s just money.

Account Closed · Answer

Trust is in the writing of the legal document that gets drafted for the protection of both parties. Currently I give a 8% annual return (guaranteed by me) paid monthly with no equity share in the property. At the end of the financing term I will refinance and hand them back their entire investment. More than likely they will turn around and do it again with another property. They still need the retirement funds and I shoulder all the work and risk since it is my business and my credit supporting the properties. The 8% was a rate because they needed a certain monthly amount and they needed it from the start, so they didn’t want to wait on rent increases or equity payouts or anything else. But that means they get roughly 70-75% of the Estimated cashflow From day one. They are happy I am happy so that makes everyone happy.

Account Closed · Answer

I went it alone the first time to show proof of concept. After that I talked about it as a portion of someone’s portfolio for retirement investing. Currently I supplement a portion of a family members retirement monthly thru a dividend style payment plan. It’s a win win. They get about 25% of their needed retirement funds thru me and I get a property that is in my business name without strings attached if he should pass away before the dividends end. Once family learns how it is going I anticipate a few more similar situations.

Gian Cunanan · Answer

Thanks for all your inputs! There definitely are pros and cons. I'll have to make sure to be careful on who I choose to involve, and make sure everything is legally in black & white. Account Closed That is the structure I am considering. I take on the risk and guarantee the interest to the lender.

Gian Cunanan · Answer

Account Closed Yes, I was thinking that it would be good to give that opportunity to earn to family and friends first. As long as I could trust them and they are willing to trust me.I'm just wondering what is a fair offer considering I will bear the brunt of the risk.

Brent Paul · Answer

It can be good or bad depending on the investment and how educated they are on what you are doing. I can honestly say out of my family and friends I can maybe get 2 people that would consider this option. Proof is in the pudding. If you can show results and they can make a little something from that investment it could open more doors for you. But on the flip side if things go really bad that could close any doors that were open forever. In my family if you make one big mistake you hear about it for life.Personally I don't mix friends and family with business. It has gone very badly for me in the past with other things non real estate related.