Lending Money to Brother-in-Law

[David Lowe]

My brother-in-law is a contractor with plenty of experience and I believe he does good work. He has seen my success over the years with buy-and-hold properties and is interested in getting into flipping. He is looking for investors among his friends and family and has asked if I'm interested. He has a house locked up that is well below market value and will be doing the work himself (along with his subs). He has 4 investors already and is looking for a few more, with people investing between $25-100k. I am considering investing $25,000 as well. It sounds like this would be considered a personal loan, secured against the house. He is offering a 5% return on a $25,000 investment, and anticipates needing the money for 4 months. Is this a good deal? Are there any clauses I should make sure to include before signing anything with him? I am considering investing with him because I am having a hard time finding SFRs in Charleston at the moment and don't like having investment cash sitting in a savings account. His wife has a good job, so I am confident in his ability to pay the money back even if something bad happens to the house. He is trustworthy and does good work. I have never been on this end of a loan before, so any advice or tips would be much appreciated!

[Thomas S.]

A 5% return over a period of 4 months is not that bad (15% annually) the problem I see is that you are equating the risk of this loan to the fact that it is family (his wife has a good job). This is a mistake. Family increases your risk factor it does not lower it. Family will play on emotions when trouble hits. 

Your security is in your contract agreement not whether you have confidence he will pay back the money. If it goes south and he can't pay you are screwed and so is the relationship with family. Think about it. Is $1250 worth the risk.