Is borrowing from family and/or friends really a good idea?

Question

A lot of people seem to get into difficulty when borrowing from relatives and friends for their first property deal, so I wrote a blog about it;

http://www.biggerpockets.com/blogs/4226/blog_posts...

It would be interesting to hear from the community about your experience with this particular situation. Thanks!

Aly W. · Answer

I've read you shouldn't rent to anyone you have to sit at a Thanksgiving or holiday table with...same thing probably applies to borrowing ;)

Chris Simmons · Answer

It's one of these catch 22 scenarios.  When you are first starting out and don't have the ability to access capital by other means but need it, you are often limited to friends and family.  The high likelihood that you won't be a glowing success after your first deal or two is a big part of the reason you don't have access to other sources of capital.

I am more conservative now....mostly due to age and experience but I have borrowed money from my Father in Law and he is hounding me to borrow more.  Yes, we have a  formal loan agreement that I drew up.  It is fairly neutral in terms....not overly favoring the lender as is common with commercial loan agreements.  It is a simply 2 year balloon note that pays interest quarterly a 5%.

He knew that I invested in real estate for a while.  When he heard a few years ago that I was going to start buying rentals he shook his head at me and said I would lose everything.  After #2 got rehabbed and rented, he admitted I was pretty good at this and wanted in.  He simply was getting no income from his money sitting in a savings account and was comfortable lending it to me.

Because I am well positioned and he has money to invest, I see no problem with it.  I get a couple rentals the non traditional way, he goes from .2% to 5% interest on his money.  If you know what you are doing, are comfortable taking the risk and understand the ramifications of defaulting on this kind of loan, then there should be no problems.

If this is the last of grandmas money and she can't afford new dentures....go elsewhere.

Jesse Waters · Answer

David, I enjoyed the blog post.  It was a good & insightful read.  When it comes to me and my business, I cheated, I had a business partner & we both put money up equally & both put our credit on the line for our first few deals.  I have asked around with friends & family if they would be interested, I have even had a few seriously interested & my father will be partnering with on our upcoming deal.  I always thought that real estate should be a team sport, not just with the out side professionals used in the process, but people with a direct interest in the success of your own business.

That being said, I realize that my reputation would be seriously on the line either with success of failure.  As one guest on the pod cast pointed out that Thanksgiving could be real difficult if a deal was going bad.  "Could you pass the gravy & $25k please."

So, after I bought my first property, I felt like an all star, had a plan for the next & casually put it out that I am looking for partners.  No real takers, but I really wasn't interested.  To sound cheap, I have a long term agenda.  I would love tons of partners/investors etc.  I wanted to get it out that I am looking & open, but I wanted to get a series of success under my belt first.  Although, past performance doesn't guarantee future success, its a pretty strong indicator.

We are currently courting a potential investor that was refered to us through our accountant.  To me, just the referal alone, was a serious vote of confidence for our business, methods, strategy & success.

For the first time investor, I would say do one deal on your own, learn the game, get going, then bring someone else in.

Personally, I would have a hard time investing with someone who had no track record, I would have to very seriously consider the terms of the deal, my protections & vet the deal very carefully.

Sorry for rambling on.

JW

Account Closed · Answer

@Chris Simmons makes an excellent point regarding the financial situation of the family member you are borrowing from.  If losing that money is going to cause a future financial hardship for your family member, don't take advantage of their generousity and borrow from them.

I borrowed money (in the form of a "gift") from my brother for the downpayment on my current home.  At the time (over 10 years ago), it was the norm for him to have multiple uncashed paychecks in his wallet that in total exceeded what I was borrowing.  He had neither the time nor the need to go to the bank to cash them.  Had I failed to pay him back, he might have been upset but it wouldn't have had much impact on his financial situation.

Is borrowing from family and/or friends really a good idea?

Most Popular Reply