Posted over 3 years ago

Is it Smart to Invest with Family and Friends?

There are two types of real estate investors: those who partner up with other investors, and those who fly solo. Both ways have their pros and cons, and one isn’t necessarily better than the other. It comes down to who you are as an investor (and a person, in general), as well as what your strategy and objectives are. Ask yourself this: Will having a partner help you reach your goals faster and make the most sense for your unique circumstances?

If you do decide that teaming up is the best approach, the next question is, “Who will be your partner?” And this is where it gets tricky, friends. Investment partners bring a lot of great things to the table, but they also represent an element of risk that cannot be ignored. Finding the right person is critical to your success as a real estate investor.

For many investors, the first place they go looking for a partner is among their family and friends. This makes perfect sense, because A) they already know them and no one wants to partner with a total stranger, and B) they trust them. And trust is the most important thing to have when entering into a real estate investment partnership.

But just because lots of investors go the family/friends route when it comes to partnering, it doesn’t necessarily mean it’s a good idea. If this type of arrangement is something you’re considering for your next investment, whether it’s a turnkey property or a fix and flip, there are certain steps you need to take before entering into an agreement.

Think Objectively About Who You’re Asking

First, you need to consider this individual from an objective standpoint. Put aside the fact that they’re your brother or your oldest friend, and really take a look at this person. What sort of work ethic do they have? Are they completely trustworthy? Do they handle their finances responsibly? Have you ever seen them throw someone under the bus? These are the questions you need to answer, but it’s critical that you do it as an objective party.

Weigh the Pros and Cons

Next, consider the pros and cons that would come with a partnership with this person. Some of the pros might be that you’d save money (i.e., they’d be fronting some cash; therefore, you’d be responsible for less) ; they might have expertise in an area that you don’t; you can bounce ideas off each other; if the poop hits the fan, your risk level is reduced. Cons include the fact that you’ll make less profit off the investment; your partner might not live up to your expectations; and you’ll lose some autonomy because all decision-making will be shared with them. Think carefully about each of these factors and how the person you’re considering fits in.

Understand that Your Relationship Will Be Tested

Business and friends/family don’t always mix. Any time money is thrown into the mix, an extra layer of stress is added, and this stress will undoubtedly have an impact on your relationship. There will be times when you disagree on something or your goals don’t match up, and you must have a plan in place for navigating these moments. You also have to be very careful about separating emotions from logic, because there will also be times when you get angry or upset with this person. However, you can’t let this emotional response drive your decisions; logic must prevail, and you both need to be on the same page with that philosophy.

...And it May be Destroyed

There’s a chance that something will do more than test your relationship; it will break it. You must recognize this risk and be willing to accept the outcome.

So, is it smart to invest with a family member or friend? Maybe. It all depends on the people involved and the circumstances at hand. Consider the factors above, and be honest with yourself and each other. And please, PLEASE, do not enter into a partnership with anyone without careful, thoughtful evaluation.