Funding through Friends and Family
Relationships are complicated as it is. Adding money into the mix can muddy things up further. As a real estate investor, having funding is important to ensure that you are able to close the deal on that property you had your eye on or to be able to complete the renovation project and have the property ready for sale. But so are your relationships with those who are important to you. You need to carefully think about the option of going to your friends and loved ones when you require funding.
Here are some reasons why relationships and loans are a less than ideal mix:
– The money may be tied up to your investment. If you are thinking of converting a foreclosed home into a rental property, the money only comes in trickles as you receive the monthly rental payments. This means that you cannot immediately repay the full amount if they need this at short notice. If you are into fixing and flipping, you may not be able to finish the renovation or sell the property as quickly as you expected.
– You and your loved ones may not have the same tolerance for risk. You can be the aggressive type that feels challenged with the risk involved in the real estate business. The same level of risk may get family and friends nervous if they have a lower risk tolerance.
– It may be harder to keep business and personal matters separate. Since your friend has loaned you some money, he may think that this gives him the right to have a say in the way you spend the money. You may also feel obligated to go with your friend’s “suggestions,”which can spell trouble for your ventures. It can be great to have the freedom to make business decisions without interference from others.
– The loan can cause a strain on relationships. For one, it can make things awkward between you and the one who gave the loan. And, if you have delays in paying, this may result in fights between you and can even have a rippling effect to the rest of friends and family.
Some things you can do if you borrow from friends and family
Your friends and family may want to support you since they believe in your endeavors and your ability to return the amount you have loaned from them.
– Avoid pressuring loved ones into giving you a loan. Otherwise, you will hear “I told you so’s.” Communicate your need with loved ones but graciously accept it if they turn you down.
– Treat it as a last resort. If you already have a loan with the bank and are just waiting for the loan to be processed, you can consider taking a loan from friends and family to enable you to act quickly when you need to. However, if you need quick access to funding, you can try getting a bridge loan from a private lender. This may cost more, but the benefit of keeping business from the personal may well be worth it. Hard money loans also have short processing times so that you can get the funds you need very quickly.
– Insist on having a written contract. This shows how serious you are about repaying the loan. It also gives the lender the reassurance that he has the recourse in case he has a hard time collecting. Loved ones may be hesitant in asking for a contract, but having one protects both parties.