Borrowing Money From Family & Friends: A Viable Option?
It seems like everyone wants to be involved in real estate. You probably have a Great Uncle, co-worker or someone you went to school with talk to you about investing in real estate. You may have even discussed all the success you could have and maybe even a little about how you would go about things. They throw out a number they are comfortable contributing and proclaim the rest is up to you. Before taking the next step and making any commitments you need to step back and think about your business. Whether you are investing with someone you have known for years or someone you just met at a meeting last month you need to follow a process. Without taking the proper steps to protect yourself and your business you may end up in a situation you could have easily avoided. If you are considering investing with friends or family here are five important tips you need to follow.
- Determine A Strict Repayment Plan. The more you treat borrowing money like a bank the easier things will be. Having the mentality that you will figure things out as you go doesn’t work. Money has a way of changing the way people think and sometimes even act. Even if you are close friends you need to have a firm payment arrangement in place. Without knowing the interest rate, payment frequency and everything about the numbers of the loan there will be some disagreements down the road. Eventually there will problems that alter the finances of the deal. Your friend or family member may want to keep things relaxed and simple but real estate investing doesn’t always work that way. When problems happen expectations may change. You may not feel you have to make a repayment or the repayment will be reduced. By treating your lender like a bank there will be no misunderstanding.
- Be On The Same Page. You need to have multiple conversations with your financial backer prior to any financing agreement. As unbelievable as it may seem some financial partnerships are thrown together with nothing more than an idea in mind. Your family member may have been sitting on some money just burning a hole in their pocket they are eager to invest. Their only source of real estate investing knowledge and strategy is based on what they see on TV but are ready to act. Investing without a plan is a recipe for disaster. You need to know exactly where, when and what types of deals you will pursue. There should be an understanding of the timeframe and projected return. You never want to have your partner question why you entertained a certain deal or what you plan on doing with it. Even if they want to be a silent financial partner you should seek their input before you make a single offer. There should be no second guessing your plan of attack once you get going.
- Get Everything In Writing. It is easy for feelings to get hurt in the real estate business. Regardless if your partner feels comfortable with it or not you need to get everything in writing. Even on a small scale you are probably looking at borrowing tens of thousands of dollars. You want both sides of the transaction to feel protected and comfortable moving forward. It should not be viewed as an insult for your partner to read your partnership agreement. In fact you should insist that they have their own attorney take a look at everything. If there are any problems it is much better dealing with them at this point rather than at the end of the transaction.
- Discuss Downside. Every new business or partnership has dreams of wild success. The odds are that you will not reach the heights you anticipate. In your discussion about how to run your business you also need to discuss the downside. Very few people in real estate are comfortable talking about the worst case scenario. They feel if they bring up bad thoughts eventually they will happen. The reality is that the best way to avoid the negative is by talking about it before it happens. You and your financial partner should bring up what you would do if things don’t go the way you plan. What is your exit strategy and what would you do if there are unexpected expenses? The more equipped you are in dealing with negatives the easier it is to react when they come your way.
- Length Of Commitment. How long do you plan on working together? Is this a one time commitment based on a deal you found in your local area? Are you looking to build a long term partnership? What would happen if you found a new deal that doesn’t require outside financial backing? Your real estate business doesn’t stop as you work together on your transaction. You need to discuss how long you intend the partnership to last. It is easy for a friend or family member to think things one way while you have a completely different perception. There is nothing wrong with seeing if you are a good fit together on one transaction and taking things from there. You can’t be so worried that you are going to upset your financial partner that you are scared to ask or talk about important questions.
Getting money from friends and family can be uncomfortable at times but doesn’t have to be. By putting as much as possible on the table before you get too far you can avoid dealing with negative items down the road.