Should you get private money from your family and friends to invest in real estate? For some, it might make sense; for others, maybe not.
Let’s talk about the pros and cons of working with your loved ones. And stick around until the end, when I’ll give you some quick tips and address some concerns about this topic.
Pros of Getting Private Money From Friends & Family Members
First, here are the pros of working with friends and family who may want to invest with you—whether that means immediate family members or just friends from high school or college.
1. They like you.
You have a rapport with them. They like you because you’re you. They know you and trust you. They don’t want to do this for you because you’re some juggernaut real estate investor (even if you are). You don’t have to go and prove yourself as an investor to them.
2. It’s a phenomenal way to build wealth.
What’s great about this is you get to share the gift of wealth building with people you actually care about. It’s a win-win arrangement! You’ll be motivated to create financial freedom for not only you but also them.
3. They are likely to refer you to someone else.
They’ll be eager to spread the word about you to their friends, neighbors, and so on after the deal goes well. Friends and family are great referral partners.
Cons of Getting Private Money From Friends & Family Members
Now for the cons. Here are some reasons you might not want to get involved with friends and family when it comes to doing business.
1. The deal could potentially go wrong.
What if things go wrong? I can imagine the fear of this. It would be awful to lose lots of money that belonged to someone close to you. But I have an answer for this. We’ll talk about it in a bit.
2. You may be tempted to forgo paperwork.
It’s very important to still have all of the necessary paperwork drawn up and signed by all parties. Just because someone is your friend doesn’t mean it’s okay to skip this step. I’ve seen it go sour (as I mentioned in the video with the friend who leased to another friend—or more accurately, former friend—without a proper lease in place). My own mom lends me money for my business, and guess what? We still sign paperwork.
3. They might not even want to know about the deal.
This might seem like a good thing. You don’t even have to bother explaining to Aunt Sally about the deal. Or your brother doesn’t even want to know what the money’s for. He trusts you and wants to help. It’s not okay for the lending party to not understand what they’re getting into.
How to Deal With the Cons of Borrowing Money From Friends & Family
This is how you need to view working with friends and family in general.
When it comes to the paperwork, do it! Don’t ever not do loan agreements or property equity agreements—no matter what the lender might say or who the lender is. Just do it anyway.
In terms of them not understanding the deal, it is your duty to explain it to them. That is part of your role in this transaction. They have to understand what they’re getting themselves into, including timelines and when they’re going to get their money back.
And finally, the “what if it goes wrong” thing. Do not do sketchy deals—ever. Underwrite super conservatively, and don’t go after lean deals that will only work if everything goes right. Do this with friends and family and all the other partners you have throughout your investing career.
Build in room to fail. Then the failure can come out of your profit versus their pocket. Always ensure you’re doing deals that have padding in them.
Most importantly, believe in your business! If you don’t think you can bring friends and family into your business comfortably, there’s something wrong there. You need to take another look at everything.
Have you ever done business with friends or family? How did it go? Are you considering it? Why or why not?
Let me know in a comment below!