Family wants in on investing

12 Replies

I am extremely new to investing. Currently have 1 rental that I purchased in May. I just found a duplex that I would like to place an offer on for a buy and hold. I currently have the funds to do this myself However a family member wants to get in on investing as well. I guess my question is, if they fund some of the deal what strategies would you use for them to profit from this deal. Such as a percentage of the monthly income or how else would they profit?? Sorry hopefully this question was not too confusing. Look forward to hearing hour suggestions

Have you had a conversation with your family member on their expectations of getting into the deal with you?  Or on your expectations?  

Just to keep things simple - I usually split the income after all expenses from the property based on the % that each person put into the deal.  If you are doing all the work on the deal you certainly could split the income more like 60% or 70% to you 40% or 30% to them or some other version of that.  Not to make it sound too simple but it just depends on what both of you want to do and get out of the deal.

Whatever you end up doing make sure you have a contract with them and that EVERYTHING is in writing and signed!

@Kyle Perry I am in the midst of setting up a very similar thing, both with family members and other 'silent investors'. 

My current partners and I have 25 doors and are out of cash so to speak for more. So how do we get more units? Private, Silent Partners! 

The basic structure is for the partner to bring the down payment of 20-25%, and we do ALL of the 'work', meaning finding properties, rehab management, finding and placing tenants, ongoing PM, and all financial planning too. 

With this structure in our market we should EACH be able to make about an 8-12% compounded return over 5-10 years. For them it is probably safer than the stock market and they can use 'cash' or Self Directed Retirement funds. We make a better return than we would as just being a PM for them and participate in the equity growth. A  true 'win-win'

Dan Dietz

If I was using a family member for funding, I would pay them some fixed return annually and they would be nothing but a source of funds, just like a bank. This removes 99% of the friction that's going to arise if they become your 'partner' in the deal. IE If they wanted to invest $10k, I might agree to pay them 8-10% once annually, or something a bit lower semi-annually, etc. And have some kind of written out - i.e. they agree to invest $10k for 5 years at 8% annual, and then can cash out any time after that with some kind of notice (3 months, 6 months, 1 year, etc). 

In this fashion they get their return, and you get to run your property however you see fit. I know a lot of investors wouldn't want to go this route because they want to hedge their bets ("What if I don't make much money, then I'll still have to pay them interest!"), but in my opinion you should treat investor funds no differently than you'd treat the bank's money. If you borrowed $10k from the bank to do the work, you don't get to not pay the interest because it was a tough year. 

Originally posted by @JD Martin :

If I was using a family member for funding, I would pay them some fixed return annually and they would be nothing but a source of funds, just like a bank. This removes 99% of the friction that's going to arise if they become your 'partner' in the deal. IE If they wanted to invest $10k, I might agree to pay them 8-10% once annually, or something a bit lower semi-annually, etc. And have some kind of written out - i.e. they agree to invest $10k for 5 years at 8% annual, and then can cash out any time after that with some kind of notice (3 months, 6 months, 1 year, etc). 

In this fashion they get their return, and you get to run your property however you see fit. I know a lot of investors wouldn't want to go this route because they want to hedge their bets ("What if I don't make much money, then I'll still have to pay them interest!"), but in my opinion you should treat investor funds no differently than you'd treat the bank's money. If you borrowed $10k from the bank to do the work, you don't get to not pay the interest because it was a tough year. 

Yup, that's what I was going to suggest. Use them as a private lender. People "looking for" "private lenders" invariably come up against HML re-branding themselves, but still charging their normal rate/fees. In your case, you have an actual private lender that will/should stomp the guts of HML in terms of rate/fees.

You can offer them 9% which is going to beat the ROI they'd consistently get on Wall Street, and you're going to pay them 0 to 1 points, which is going to beat what any HML will charge you. Win/win.

Thank you guys!

So for instance lets say they give me 10K for the down payment at 9% for a minimum of 5 years. which would be $900 annually. Then after the 5 years they have the option to get their money back.. So I would then return their 10k and they would have made an additional $4500 (900 times 5 years)

I just want to make sure that I am understanding correctly.

Also lets say they do want their 10k back in 5 years. How exactly would I get that to them? Refi or whats?

Thanks again everyone

Never do business with family. that's my take. instead, offer to help them learn so they can invest on their own. Teach a man to fish, and all....

Originally posted by @Kyle Perry :

@Chris Mason @JD Martin see above response please. Thanks guys

 You understood correctly. In 5 years or whatever, if they want their principal back you just pay them or refinance out to access the cash.