Should I Invest With A Friend?

[Jerry George]

Hey guys, first post TIA :)

So one of my friends from HS who I've kept in touch with but am not great friends with invests in real estate (flips, rentals, etc) and he is looking for investors.  To get started with him, I would loan him $25k and get a 7.5% return.  Looks like I'd get interest payments monthly and principal returned after one year.  So basically I'd be just personally loaning him money that he would use it to invest/work his real estate magic.  What's the term for this (me loaning money to someone in this manner)?

He's had some success over the past couple years but is just starting out and I would be one of his first investors.  I own a property in northern CA that I'm renting out but he is investing out of state.  So what do you guys think?  Good idea/bad idea?

My thoughts:

1.  I want to get more involved in real estate investing (not sure how active/passive though) so 25k seems like a reasonable starting point.  Not chump change but also not really something I would kill myself over if things went awry.  

2.  He is personally guaranteeing the loan - whatever that means.  Should I ask for any proof of net worth or what?

3.  Gut instinct = good investment.

[Arlen Chou]

As John D Rockerfeller had once said: 

"A friendship founded on business is better than a business founded on friendship".

Take it for what it is worth, but I NEVER do business with friends or family, even if it looks like a killer deal, unless I am willing to write off the money as a 100% loss.  

Good luck,

-Arlen