Lending to in-laws - Smart move or dangerous move

13 Replies

So I'm in a jam with my wife and I on opposite ends - my parents are buying a new place and need to borrow money ($120k).  Good relationship with us, they have excellent credit, financially responsible, 3 houses paid off - 2 of which are rental properties with steady tenants and 1 primary residence which I would update their bathroom and would go on the market in spring and likely sell for $400k.  They are amateur investors so asked my wife and I if we would lend them as much as we could and they would give us ~4% interest, rather than give it to the bank (sounds good/generous to me to keep the money in the family).

I have some available cash which I'm letting them borrow, but the majority would be my wife's money which she is saving for our house which we buy together in a year.  Right now her money is sitting in the stock market and I have no idea what return she is getting.

Wife's answer was an immediate no, based on principle and not numbers (her return % on stock investment).  I feel a bit insulted and sure my parents will as well, but wondering is this something to try to talk her into or is it too close to home and leave it be.

@Eric Burgh - So the $120k you have earmarked for something else later in the year?  What is their plan to pay it back when you need it?

My brother owned his house free and clear and agreed to put a loan on it so I could invest the money.  I paid the monthly mortgage and we agreed to an 18 month loan at the end I would pay the balance off plus $10k to him.  About 10 months later he decided to move to another city and get married and needed to sell the house, so I had to figure out how to pay it off early.  I did what it took to do so and not inconvenience him, but I had backup plans in place before even taking the money.  

So from your wife's perspective, she is already going to take the money out to buy our house, so any penalty/fees are already going to be paid.  She probably makes double the return in the stock market, so that is not a smart choice to take it out early, but more importantly, how will you get the money back in a short time period when you are ready to spend it on your own house?  I would also talk with a lender about how the cash inflow close to closing would potentially screw up the loan.  

I am sitting on cash that I have earmarked to buy a new house, it probably won't be till fall 2018 but I am apprehensive about loaning it out in case something wonderful comes on the market and now I can't buy it because I did a loan 

@Brie Schmidt

The money we do have is going to be towards our own house, but I don't see that happen until at least Fall 2018 (I'm not planning on looking or buying in Spring/Summer when the market is typically high).  We have no pressing issues to move (current place is convenient and spacious - but not suburbs which she wants).  Sure a deal may come along between now and then, but north NJ real estate prices are generally shockingly high so I don't see us finding something during spring/summer.

In terms of payback, I think they could either do monthly payments or lump sum.  The borrowed money is really just temporary until their primary residence sells, which given the time of year should be able to go on the market for Spring.  Primary is in good shape with the exception of the dated but clean bathroom, which is why we would fix it up and at that point it's completely move-in ready.

I would certainly hope she is getting more than 4% in the stock market, in which case I wouldn't argue to take it out unless we want stability and to lock in the money so it doesn't potentially go down within the next year.

Well, it depends on whether or not you want to be divorced.

On the surface, I side with your wife for the following reasons:

1. Unless you are getting first position on the new place - ie, you could foreclose if they don't pay it back - that interest rate sucks on a personal loan.

2. You already have the money earmarked for your own house, while your parents own 3 houses already.

3. Your parents could, and should, just take a loan against one of their own houses that is free and clear rather than asking you to bear the burden.

4. Anything could go wrong wherein their house doesn't sell, or takes forever to sell, and they won't have any real press to do anything about it since they are using someone else's money.

5. People who own hundreds of thousands of dollars of real estate, free and clear, asking to borrow money from their children, seems obnoxious to me.

Frankly, I see a hundred ways this could go wrong. It will ruin the relationship you have with your wife if it does. I never loan money to family unless I can consider it a gift. Can you gift your parents $120k?

They asked if you would lend as much as you could. Since your wife's money is otherwise invested "as much as you could" is only the money you personally have available isn't it.

Not realistic to "assume" she is in a position or willing to throw in with you to suffer a loss. 

Give what you can and the rest they can get from the bank at the same rate. No down side for them so no reason for you to assume your wife should take a loss when there is no benefit to your parents by doing so. 

Where is your reasoning, financial or otherwise, to involve your wife's money when there is no upside for you or your parents and a potential down side for your wife.

Regardless it is your wife's money and you must respect and support her decision.

PS: if you are married, and you are willing to loan them some of 'your' money, why would your parents have to know the source of the funds? You could loan them whatever you have, not touch the money your wife has, and say it's from both of you, which would technically be the truth in a community property state. Then everyone is happy. 

I still wouldn't do it.

Why don't your parents just take out a HELOC on their house until it is sold?

If you want to loan them money that is yours and maybe is sitting in the bank go ahead but I dont think your wife should liquidate stocks if she doesnt want to. They have paid off properties they could access. I have been in situations where I independently gave money to a relative but I would not access joint money or my husbands funds to loan or give to a relative without his agreement. If you feel like they would be insulted with less then the 120k maybe things are not as good as you think. That is a lot of money to propose loaning. If they ask your other money is tied up. I dont share a lot with family on finances because of this kind of request. It can fracture familes.

Looks more like a relationship issue than real estate. I don't think your wife should liquidate her stocks that was earmarked for both your goal in order to loan your parents. Since they already have houses that are fee and clear, have them tap into the equity-- the rationale to borrow money from you and your wife at 4% instead of giving to the bank isn't adequate. They would have a longer payback time borrowing from the bank instead of interfering with you and your wife's shorter deadline. I do agree with the comment saying it's a bit obnoxious of your parents. How would you feel if this situation was switched and it was her parents tapping into your stocks which you spent time/money building? By all means, give your parents what you can, but do not involve your wife and do not take money that you yourself will need for your future house. That is showing her your parents' goals are more important than your goals together. If your parents were in a bind, that would be a different story and I'm sure your wife would be willing to do whatever to help. If your wife had that 120k not invested in anything, that would also be a different story. But the undertaking here for her-- having to deal with liquidating and transaction fees is uncalled for.

First, your parents have enough equity to get the cash they need. Second, your money in the stock market is likely making more than 4%. And third, your wife is not on board. Let your parents handle their own financials, it sounds like they don't NEED your money, and it didn't sound like you're in a great position to lend it to them.

Thanks everyone for the input.

We're certainly going to forego lending to them, and I told them already that the money in tied up in stocks and making more than 4%, they understand.  I think at first I was just shocked by the immediate and fierce"no" I received from the wife and took it as she had something against my parents.  My initial post was more of a general question if this is considered an off limits move, but it seems like it's really more specific on the details.

I certainly assume and hope the money in the stock market is making way more than 4% on average. As for my parents, yes they can take out a HELOC which is the plan and the reason they offered us ~4% return, but they made the offer with the assumption that our house money was not tied up in the stock market, and was sitting safely in the bank.

Had the stock market been volatile and we cashed out of the stock market and had the cash in the bank, I'd say the 4% isn't a bad offer.

@Eric Burgh As others have said, there are WAY too many things that could go wrong.  

If it were a dire hardship situation, sure.  But this isn't that - especially where they have available equity.

Lending between family members has the potential to destroy relationships that are a lot more important than money.

I never ever lend money to family or friends. If you do, you should consider it a gift since there is the possibility you will never see it again. But they would never do that.......says the millions of people who have been stiffed by family and friends.

@Eric Burgh I think in the same terms as @Russell Brazil . BUT Putting aside the facts that are the amount of money and percentages, etc. My family lends money to each other sometimes and the few times I have seen it has worked rather nicely they get paid back in a timely fashion. SAYING THAT! That is if your family can look at this as just a business transaction. Knowing they have to pay you back by a certain time and a contract is made up.

I also agree with @Von S. from your situation it seems that it is a relationship situation. Choosing to give the money to your family is easy. I think you need to figure it out with your wife first it seems.

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