Real estate investing has long been a vehicle for building wealth. If you find the right opportunity, it continues to be exactly that today. You may have found a potential winning property, but it can be difficult to take advantage of if you don’t have the cash or credit to secure it.
What should you do? If you’ve considered typical financing but simply won’t be able to go a conventional route, you might be thinking about your family or friends.
Is it a bad idea to borrow from friends and family when it comes to buying real estate?
Financing real estate investments can be tricky and tumultuous. With an industry that is always fluctuating, you must be prepared for the ups and downs, be realistic about the pitfalls and have a plan to address difficult situations should they arise.
You also need to take the proper steps to protect yourself and business from any outstanding debts or even liens. If you are planning to ask a relative or friend for some financial assistance, here are some important things to keep in mind.
Determine the Best Repayment Plan
Like any other financial agreement, you must determine the best repayment plan — that is favorable to all parties involved. Remember, unpaid debts can seriously impact your credit ratings, history and especially your overall reputation. With this in mind, treat the lender as if he or she were a bank or financial institution. Make sure to keep track of all communications, paperwork and repayment terms across the board. Also, it is important to keep abreast of the interest rate, payment frequency and everything related to the loan from start to finish.
This way, you can secure what you need for financial real estate investing — but also ensure the lender receives his or her payments on time. In many ways, this is like ensuring return on investments (ROI) for all types of commercial and/or business investments.
Make Sure You Are All on the Same Page
Make sure you and your financial backer are on the same page. Never leave anything to chance, ensure communication is crystal clear across the board. Remember, investing in real estate without a sound and viable plan is a recipe for disaster. With this in mind, make sure the timeframes and projected returns are clearly spelled out. There should be no second-guessing on the plan once you and your financial backer are in full agreement. From timely deposits and monitoring funds to maintaining proper communications and paperwork, it is imperative to make sure you are all in agreement on all levels of the deal.
Put Everything Down on Paper
When it comes to borrowing from friends or loved ones, you must get everything in writing! This will protect both parties in the transaction, especially when it comes to the financial details and repayment terms. Both the borrower and lender should also get the documents notarized, as well as have their respective attorneys look at them to ensure they are legally binding. By getting everything down on paper, you can easily find any discrepancies and/or issues as well. This will expedite the transaction, and allow you invest in the real estate venture without any costly delays or problems.
Discuss Any Potential Downsides
Every new business partnership strives to achieve maximum success. However, the reality of any venture also includes downsides or unforeseen circumstances. With this in mind, it is important to discuss potential issues with your financial backer across the board. In fact, you should both create an actual list of the pros and cons of borrowing and lending money for real estate financing. This way, you both can create backup plans in case any of these potential problems become realities.
Downsides may also include real estate ventures that did not go as you and your financial backer(s) planned. If this becomes a tangible problem, you will have to implement any backup plans discussed in your binding agreement. This can include return of initial investment monies, along with any interest that may have accrued during the entire process. However, your plan may have called for a partial return or possibly a new investment with your own funds to make up for the deficit.
Length of Commitment
Another important aspect of borrower-lender agreements is the length of commitments. How long do you plan on working together? It is this a one-time deal based on a potentially lucrative real estate deal in your area? Are you both looking to forge a long-term working partnership? These are some of the questions you both need to ask — and answer — before any agreement is signed on paper.
Both the borrower and lender should also discuss if additional financial backing is needed? And if so, will this be via another family member, friend, or even third-party investor? There are so many things to check and secure before any financial real estate investment comes to fruition.
Borrowing money from friends and family can be uncomfortable at times. However, you can secure a positive and favorable experience for all parties involved. You can also secure a better experience by putting more on the table yourself. This way, there will be less stress for lender(s) that agree to fill the remaining balance or void.
Whether for short-term or long-term real estate projects, financial backing is essential in achieving your desired results. However, it should be beneficial to all investors involved, whether they are friends or family members. By keeping a close eye on all particulars of the deal, you can avoid costly mistakes and issues across the board.
Stay on Track of Industry News
Investing in real estate also means you have to stay on top of the industry news. This includes current market trends, along with projected forecasts and outlooks. With the current market looking good for 2018 — this may be an incentive to secure investors from your family. Similarly, you can showcase the current statistics and trends to friends — in order to gather their confidence about investing.
Still, you must always be honest and let your backers know that these are all but trends. Trends can shift in the blink of an eye, especially in the New Year, which promises to be great for some investors, but not so great for others.
Caution and Opportunity
When considering borrowing from family or friends, always be realistic, honest and use caution. While it’s easy to become enamored with the potential of making money in real estate, the impact of situations not going as planned can create tremendous stress on your close relationships. On the other hand, practical, well-planned and well-executed real estate opportunities can be beneficial for everyone — and set you on a path of building wealth and achieving financial freedom.