Everyone wants more money for real estate investing, but what are the real pros and cons of raising capital from friends and family members?
Family and friends are often recommended as a great resource to approach for working capital and seed money for real estate investing, especially in the current mortgage and small business lending environment. However, it certainly isn’t without its risks and pitfalls.
So what are the real pros and cons of borrowing from or investing in real estate with money from people you know and how can you make it better?
The advantages are pretty clear. With conventional mortgage lenders sluggish, expensive and often downright brutal on underwriting today, many real estate investing pros are desperate for an alternative for raising funds. Friends and family can offer easy access to startup funds, short term borrowing and even long term financing.
There aren’t really any qualifications to borrow from those you know, meaning it doesn’t matter how your credit is, what your debt-to-income ratio looks like or the LTV or property condition. It also means velocity. After all it usually just takes them signing the check or transferring the funds to your account online; providing huge benefits for locking down sweet deals and discounts on the fly. Plus, of course there will likely be no one more lenient when it comes to repayment issues.
At the same time, while this could be your dream financing source for real estate investing come true, it can have some pretty serious negative ramifications too.
No matter how great your intentions and planning, things can and do go wrong. This could mean paying them back late or even losing their money. Some people can even get incredibly greedy and envious when they see all the money you are making.
Minimize the potential downside by making sure everyone is on the same page in terms of roles and responsibilities. Be clear about the best and worst case scenarios, make sure everyone is aware and comfortable with them, and plan out clearly defined exit strategies for each possibility. Never move forward without a written agreement.
Have you, or do you plan to invest in real estate by raising funds from from friends and family? Has it affected your relationships or would you recommend it as a great source?