Private Lending with Family and Friends

[Agustin Cruz]

Hey everyone new investor here. I have been reading the Bigger Pockets book on, Investing in Real Estate with Little to No Money Down, and I am wanting to understand private lending a little more. I have a few questions and if anyone could give some feedbacks or even better have short stories of their experiences I would be glad to hear them. Thanks everyone in advance!

1. Have you partnered up with family/friends to fund real estate deals? If so, how was your experience? Would you do it again?

2. If you have partnered with family/friends how did you structure the agreement?

3. Have you combined private money and hard money to fund a deal? What was that like?

4. Did you have any bad experiences, where an investment gone wrong when using private or hard money? How were you able to combat the situation?

Thanks again everyone for you insight!

[Jerel Ehlert]

I'm going to answer like the lawyer that gets hired when it goes sideways.

I've seen it done right and seen it go off the rails. Like "partnering" with anyone, the experience depends on the personalities involved.

For a "one-off", a JV agreement can work. For a long-term adventure, most times an LLC can work. It depends.

Find a HML who is cool with that up front and let them know. Sometimes, as long as the HML is in 1st lien position and private is coming in for closing costs or repairs, they probably won't care. Some really do care.

Yeah, I've seen lots of ways it goes wrong with PML but not HML. Usually happens when one side has one set of expectations, and the other side has a very different set of expectations. The PML is new and everything is scary and you used their entire nest egg. If you are new to REI, DON'T USE ALL OF ANYONE'S MONEY. Let's say you need $20K to rehab, get $5K from 4 different people on one note/lien (make sure these 4 *really* work well together). This way, no one person is at risk and they can talk amongst themselves, just make sure they don't feed off each other's fear. YOU have a duty to communicate, fully, early, and often - especially if the project goes off script. And your first duty is to protect your lenders, even if it means you loose money.

How's that for you?