Mortgages & Creative Financing

Sometimes It’s Better to Pass on Other People’s Money When Investing: Here’s Why

4 Articles Written

A few weeks ago, a close family member came to me for some financial brainstorming. He had just received a large windfall from the sale of his Chicago-area home. We opened the conversation joking about all the frivolous things he could do with the money. As the conversation moved toward serious, we arrived at a juncture where he clearly wanted more than my advice. He wanted my help.

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For financial planners, syndicators, flippers, landlords, and lenders, this is the moment you work toward. Someone trusts you enough to open the door and put the money on the table. The best among us are the ones who recognize and seize this opportunity.

The thought immediately flashed into my mind. I happen to know a deal that could use $100k in funds. Conventional wisdom says I’m the guy who can push this over the hill and assure the project gets funded. It’s perfect, right?

Today, I want to discuss some cases where you should take pause before you take funds.

Some investors will ruin your life, and in some cases, you’ll ruin theirs.


Related: Private Money Lenders: How to Fund Your Deals by Forming Powerful Partnerships

Minimal Risk Tolerance

The classic archetype for a tough sell. Unfortunately, some high volume producers will see this as a challenge rather than a warning sign.

Undoubtedly, great money has been made pushing people beyond their level of risk tolerance. Just remember, we’re talking about friends and family here. People you will see again.

Some of the signs: Overtly conservative investment strategies like certificates of deposit, treasury bonds, or cash. Others have problems with institutional trust (banks, government, other people). Analysis paralysis throws low-risk types into a downward spiral. They lie awake in bed at night considering all the worst possible outcomes.

These investors will be most eager to point out your faults and take issue with minor setbacks. It shouldn’t shock you. They are trying to confirm their gut instincts.

You’ll meet and know many folks in this category. And you know what? They’re better off with an easier choice, something they trust. People hate being forced into a decision, even a good one. When you get one of these investors in the door, they’ll spend the rest of their days finding a way out while losing sleep.

High Liquidity Needs

We tend to know who these people are. Sometimes it’s the case of their own financial vulnerability. In many cases, it’s occupational. Small business owners always need cash reserves. Missionaries and digital nomads travel through occupational hills and troughs. People with big (and growing) families run new, daring financial plans every year.

For some, a seven-year hold period is like an eternity. You’ll know the friends who tend to deposit, withdraw, and redeposit 60 percent of their savings through the year. For some people, this is just their nature.

The worst situation is for these investors to treat you like the bank. Attempted withdrawals and the repeated bother. Even if you get them to the end of the line, you’ll be exhausted. For their part, they may not even appreciate the return on their money. They lost something else they valued and did not even realize: flexibility.


Critical Viewpoint

Some people do not understand why landlords would rent to working class tenants in B and C-class neighborhoods. The media has led many to believe that real estate investing is buying luxury condos at retail price in Manhattan or San Francisco. Flipping TV shows have further divorced would-be investors from the drudgery of contracting and rehab. Some investors get the basics but expect unbelievable numbers out of a market that cannot support the rate of return.

For these folks, the debate is not worth it. Intrinsic value and income analysis is not fact, it’s partially belief. Investors have a way of seeing value in places where it’s unpopular. Private equity groups, Berkshire Hathaway, and smart landlords understand the intrinsic and unexpected value proposition. For investors who are unrealistic, it’ll be hard to get them back to earth. They’ll always “know a guy” who got an unbelievable return on investment in the local market.

Related: 4 Simple Steps for Newbie Investors to Start Raising Private Money

Recommend the best literature you can, and help them in the way they’re comfortable. These investors will be critical of your choices and likely to seek other locations for their money in the future. It may take a market crash or failed investment before they heed your advice.

Verify and Keep Moving

Get used to these encounters. If the pessimists have anything to say about it, the above is representative of 80 percent of the public.

You’re stuck with the family you got, and it’s hard to make new old friends. Do not ruin these relationships with an ill-fitting investment. Always keep in mind what an exit would look like. If you can’t say “we lost everything,” then it’s not the right person for your deal.

Investors: What are your thoughts on using other people’s money? When is it a good idea and when can it spell disaster?

Leave your comments below!

Trevor is a partner and software engineer with Neosavvy, a New York consultancy. Trevor is a landlord and value investor focused on long-term, buy and hold through partnerships. Trevor writes about passive investing, real estate, and personal finance at
    Sarah Shockley Rental Property Investor from Jacksonville, FL
    Replied over 4 years ago
    Wow this is a viewpoint I don’t often see on BiggerPockets! Excellent insight, very thought-provoking article that rings true to my own experience. Reality is that not everyone is cut out for real estate investing.
    Trevor Ewen Rental Property Investor from Weehawken, NJ
    Replied over 4 years ago
    Sarah – I have several friends and family members who remain persistently off my ask-list. The scenario I run in my head is “How could I explain X to this person?” If the outcome is really rough, it’s best avoided.
    Replied over 4 years ago
    OPM is when I can borrow to the limit, as long there is cash flow. I bought a property for 3.80 Million at 7.35% CAP RATE. CTL loan was willing to give me 4 Million loan, but that would give me 3 K per Month Negative flow for 25 yrs Fix loan. Instead I put Down 800 K from 1031 X and got 5% COC for my retirement and equity planning. Bad deal, if I went for 4 Million, your thoughts?
    Trevor Ewen Rental Property Investor from Weehawken, NJ
    Replied over 4 years ago
    Kris – There are so many factors. It’s better than a treasury bond. If the property is easy to manage and comes with great prospects for growth, you may be a happy man in ten years. That’s the best case, but hard to say without knowing more.
    Krishna Patel
    Replied over 4 years ago
    It is nnn, so no work, just monthly checks for 25 yrs guaranteed by corporation Walgreen’s.
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied over 4 years ago
    Great points, Trevor. So many are looking for leverage no matter the costs. Borrow from your this or cash out your that. Certainly not worth the cost of a relationship with family or a friend. If the ‘we lost everything’ conversation would ruin them, no way. There is also the risk of partnering with crazy accidentally. How many stories and podcasts was failure dissected to find a partnership that didn’t work out was the reason? Too many. Well done and thank you for sharing!
    Replied over 4 years ago
    Get a Non-Recourse loan. All you lose is down payment.
    Trevor Ewen Rental Property Investor from Weehawken, NJ
    Replied over 4 years ago
    Steve – Indeed. My life is just a series of bad decisions either ‘narrowly avoided’ or ‘recovered from’. People are the make or break, even a good product or property can’t save the interpersonal dynamic.
    Todd Witt Investor from Jefferson City, Missouri
    Replied over 4 years ago
    Great article Trevor. Understanding the person’s risk tolerance is very important. If you know that being invested in real estate is going to cause someone significant stress and heartache, it seems unethical to convince them to invest with you. Afterall, the whole point of investing is to increase quality of life for everyone involved.
    Trevor Ewen Rental Property Investor from Weehawken, NJ
    Replied over 4 years ago
    I believe it was Morgan Stanley who told his friend “Sell your investments until the sleeping point.” Basically suggesting that if you’re lying awake at night worrying, you own too much risk.
    Jay Orlauski Realtor from Fresno, CA
    Replied over 4 years ago
    When I was a financial consultant at a credit union – I turned away several clients that I knew would not be comfortable risk – it wasn’t worth it to me to force the issue on anyone -I simply wanted to make the best plan I could for them and sometimes that meant not investing in my products – I would send them back to the CD counter to get something they we be comfortable with and could “sleep at night” with – in many cases, they would object – and insist that they had the tolerance for risk. Seems like once they realized I wasn’t trying to “sell” them on anything, they had more trust in my judgement and felt more comfortable with the investments. When my extended family saw me making money in real estate – they wanted to put their money to work and I was able to pay them back with great yields. But then I started an non real estate related business and there they were ready to put money to work again – unfortunately – it didn’t work out as well the real estate had – so it got a little uncomfortable for awhile. Now my motto to my family is ” I love you too much to do business with you.”
    Trevor Ewen Rental Property Investor from Weehawken, NJ
    Replied over 4 years ago
    Jay – Assessing the risks of our own pursuits is very hard. As business owners and managers, we derive great value just from ‘trying things.’ The character value alone is worth the process. Investors receive none of this benefit. They either get paid or they do not.
    Justin R. Developer from San Diego, CA
    Replied over 4 years ago
    Thank you for refreshingly insightful writing that exchanges some of the typical click-bait for some actual substance! I struggle with this as we’re moving into more partner-based projects, and I like how you framed risk tolerance as another skill to look for in a partner/investor. Up to now, I’ve generally structured anyone else’s investment – regardless of whether it’s short or long term – as debt with a performance-based kicker for the project involved. Lower returns for them, but it’s made the risk conversation simpler. Thanks for planting some new ideas!
    Trevor Ewen Rental Property Investor from Weehawken, NJ
    Replied over 4 years ago
    Good point Justin. I think that private loans make the risk relationship a little easier. Investors are more like partners, they have to be willing to ride the roller coaster with you. This takes the right kind of friend, family, or colleague. For some people (even if they have the money) it’s best to let it lie.