Friends and Family Money
I have had some friends and family that have shown interest in investing with me. How have you set it up where you use other people's money? I was thinking about them owning part of the property or maybe them just giving me a loan so they can make money on the interest.
Hi Logan! This is a great question and gets asked frequently. I'm so happy you asked! First, I would encourage you to get some education on the process of accepting other people's money. There are some definite rules of the road you will want to follow. Also, just because this is friends and family money, do not get sloppy and think everything will be ok because you have that relationship. As long as everything is documented, expectations are set for timeframe, business plan for the property, what the money is used for, for how long, etc, you should be ok.
Now that being said, I do have a book out in BiggerPockets about private lending. We created it for a situation just like this! This can be a great resource for you as an active investor because you can talk to them about all the ways you are willing to help safeguard their money. You will get title insurance and adequate hazard insurance, there will be a closing attorney or title company handling the transfer of funds, and you will get legal documents drawn up (DO NOT use an online template) by an attorney familiar with lending in your state (which may not be the attorney that closes the deal because they often aren't generating loan docs, but receiving them from lenders). Taking this stance to be the educator in your network can help lead to more people coming forward that also want to work with you.
Now that being said, keeping someone on the debt side is going to be cheaper for you as an active investor. If they are a partner in the deal, they are obviously going to be expecting (and hopefully receiving!) some of the upside when the property is sold (or refinanced). Also, as a partner, they need to be aware that they can be part of the downside too. If the market bobbles and your ARV you calculated in the beginning isn't possible at the time of sale and there is a loss, they are likely going to be experiencing a percentage of that loss as well. Debt would mean the property would pay the lender back at something like an auction sale if the foreclosure proceedings happen.
There are a lot of nuanced things when it comes to lending, and most are state specific, so learning the guardrails for licensing requirements, loan term limits such as interest rate and fees, and what documents should be signed for the loan are going to be crucial.
I will definitely check out your book! That is what I am looking for. Because I am looking to get loans from others but also partner with some people and I want to make sure everything is put together correctly so we don't run into preventable problems. Should I just reach out to an attorney and talk with them to better understand the more state-specific details?
I would structure your deal as debt only rather than with an equity share. It's always cleaner and typically cheaper that way! Good luck and Alex gave some great advice and tips!
