Borrowing Private Money - Family & Friends

23 Replies

Good Morning BP Community,

I'm looking for your experience and/or advice on borrowing money from family & friends. Although I don't have an opportunity to make an offer, I want to get money sourced ahead of  when I find that first opportunity.  Some of my questions:

  • What interest rate do you offer?
  • Do you use some sort of formula for different loan amounts that you use when borrowing money?
  • Do you offer a different rate for family and friends?
  • How did you approach them with your request?
  • How did they respond?
  • Were they skeptical at first and warm up to the idea of lending money or did they get turned off by the idea?

I've thought a lot about my business plan and am inclinded to present a Power Point Presentation via WebEx or GoToMeeting.  To me it shows that I've got a business plan and I'm serious about pursuing this business.

Any insight, thoughts, experiences anyone can offer would be greatly appreciated. Have a great day!

Cheers,

Michael

I've found that it is best to have a project in hand to show people for them to get excited about becoming an investment partner. Typically I pay 6% which is a lot better than the 1% they are getting at the bank. Or, if they want to split 50/50 they put up all of the money and I do all of the work. They take the hit if the project loses money. Make sure everything is in writing just like a real business or Thanksgiving conversation can be awkward, because people "mis-remember" details.

Just tell them casually what you are working on, see if they show any interest. and if they do show interest, explain what it will take to complete the project.

Once you do one and show how profitable it is, they will flock to you or be jealous and say it was a fluke. Only a few will be interested.  

I have never offered a deal to my family/friends that I wouldn't offer to an outside investor - Currently I do have two family members that are capital investors.  They got the exact deal I had structured and already done with outside investors. If you could only get a cash partner at 50/50, why would you give a family member less than you would a stranger?  

I have done a loan twice, and I have never offered loan terms worse than I could from other sources like HML. One of them is right now. Currently, I'm using a $50k loan right now from a family member for a flip I'm doing in cash and I'm giving them 12% APR. If the only money you could get would be at 10% interest, why pay them less than you would pay a stranger?

There are two reasons I treat them like any other investor or money source: 

  1. I never want to look back and think that the only reason I accomplished what I did is because my family gave me special deals.  I wanted to make sure it was fully my accomplishment with no special leg up.
  2. I also don't ever want them to feel like I'm taking advantage of them and that everything is fair both ways.  

My numbers are really simple.  I offer 10% simple interest, interest only payments for 20 years, with a balloon at the end.  They triple their money in 20 years, with 10% income on it for those 20 years, and I get free money.

Hi @Austin Fruechting

Thanks for your thoughts.  I like that you keep it fair and balanced regardless of you funding source. Keeps it honest and doesn't impact the relationships with friends or family.  Those are life-long and we have to live with those for a long time to come.

Cheers,

Michael

Hi @Account Closed ,

I was just in Scottsdale yesterday.  Small world.

I like your idea of 50/50 split with them funding the project.  If the math works, project is scoped properly and it stays on track, no reason for them to lose anything.  Win-Win all the way around.

Cheers,

Michael

How would you structure the 50/50 split? So, 100K house and you pay your private lender 12% interest only on the 50K until you can refinance with a traditional lender? Assuming the typical time frame for refi approx 6 months, you pay back the 50K "balloon" once you get refi approval.

Any details I could be missing?

Originally posted by @Ben Unger :

How would you structure the 50/50 split? So, 100K house and you pay your private lender 12% interest only on the 50K until you can refinance with a traditional lender? Assuming the typical time frame for refi approx 6 months, you pay back the 50K "balloon" once you get refi approval.

Any details I could be missing?

 Sorry Ben, you didn't put my name on your post so I wasn't aware you posted.

First, and this is critical, this is a non-lienable debt...an uncollateralized loan.  If this is attached to the property, it doesn't work.  If it is unattached, it becomes free money.  If it were attached to the property, and you flipped that property, the 1st event would be to pay it off.  You want to avoid paying it back...in this case for 20 years.

This allows you to use the money many times over, making a profit with each use.  Your only "expense" during this time is the interest only payments based on 10% simple.  You could refi the money out, thus adding a mortgage to each deal (remember, each deal has 100% equity since there are no liens on these properties), or you can do equity sharing which would offer many more options and no added cost/expense.

The key is getting this initial cash like substance (initial loan) in and out of as many deals as you can per year.  Every re-use of those initial funds reduces the cost per use.

Hi @Joe Villeneuve

I'm not sure I see the tripling of the investor's money in 20 years.  I'll use the following example:

I borrow $50,000 as an uncollateralized loan for 20 years at 10% simple interest per anum.  That means that I would be paying back $5000/year for 20 years, which works out to $100,000.  That's only doubling the investment, or am I missing something in my calculations?  Or are you adding in the balloon payment of $50,000 due at the end of the term?

Just want to make sure I understand you correctly.

Also, what questions have you had to deal with when proposing this type of structure? Did you receive any push back since it is an uncollateralized loan?  Do you find people willing to invest with this strategy?

Thank You,

Michael

@Michael Reyes  The usual questions involve risk.  The way I structure this, there is less risk than if it was collateralized.  Here's why:

With a Collateralized loan, the risk control is a negative control...meaning it only comes into play when a negative thing happens...after it happens.

My system is proactive...meaning my system prevents the problem (non-payment) from occurring in the first place.  If you're interested PM me.  There isn't enough room here to explain how, but mostly the basis for why it works in the limits I have on this discussion.  It's really works though, and because of it, I have very little resistance getting 7 figure non-collateralized loans.

If you partner 50/50 on each property each investor understands they share the risk equally. If you take the money as a loan you will be responsible for the debt regardless of whether the investment fails or not.

It is very high risk investing but even more so when using family and friends to invest. I would advise you get started on your own and once you have a couple of successful properties you then approach people for private money. 

Risk is very high in real estate investing, best not to put family and friends at risk till you prove you can succeed on your own.

@Austin Fruechting or others, how does the borrowing from friends and family work legally?  Is there anything you need to set up (business entity, etc)?  Contracting work with a lawyer?

How would the bank view this if you're using the money you borrowed from friends and family as a down payment for a full mortgage / what do you need to disclose to them?

Originally posted by @Ezra Okon :

@Austin Fruechting or others, how does the borrowing from friends and family work legally?  Is there anything you need to set up (business entity, etc)?  Contracting work with a lawyer?

How would the bank view this if you're using the money you borrowed from friends and family as a down payment for a full mortgage / what do you need to disclose to them?

 Document everything and have contracts that spell it out. Don't leave anything ambiguous or unwritten. You can work with a lawyer, or purchase some personal loan contract stuff from a site like legal zoom. 

Banks often do ask for a few months of bank statements and if the down payment isn't there, they may not like it or allow it if the loan is just is in your name. 

Originally posted by @Michael Reyes :

Hi @Joe Villeneuve

I'm not sure I see the tripling of the investor's money in 20 years.  I'll use the following example:

I borrow $50,000 as an uncollateralized loan for 20 years at 10% simple interest per anum.  That means that I would be paying back $5000/year for 20 years, which works out to $100,000.  That's only doubling the investment, or am I missing something in my calculations?  Or are you adding in the balloon payment of $50,000 due at the end of the term?

Just want to make sure I understand you correctly.

Also, what questions have you had to deal with when proposing this type of structure? Did you receive any push back since it is an uncollateralized loan?  Do you find people willing to invest with this strategy?

Thank You,

Michael

 First, if you start with $50k, and you end up with $150k...that's tripling your money...right?

Second, the biggest question I get is "how is my money protected?".  They see this as being very risky, which I agree.  So, all that means is you have to put a risk control in place to cover the risk.  In my case, this risk control makes this type of arrangement far less risky than the typical mortgage (collateralize) loan.

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