Why Borrowing Money From Family or Friends Increases Your Investment Risk

“Neither a borrower or lender be.” So said Shakespeare, in the play “Hamlet”. However, if you are a serious fix and flip investor, it is more than a little likely that you will require funding from one source or another at some point. Where can you turn for quick, affordable funding?

Some investors choose to borrow money from friends or family, thereby making.

them partners, albeit silent ones. It is wise to note, though, that borrowing money from business partners can be a risky proposition fraught with many hidden complications. There are, in fact, abundant reasons for leaving your friends out of investment deals altogether.

Why Business and Friendships May Clash:

1) Your friends and family may not share the same level of comfort with risk that you do. Regardless of how well you plan an investment, there is always a certain amount of risk involved in fix and flip investing. You know where your comfort zone is in taking a risk. Where the line is for your family or friends may not be so clear.

2) Your family or friends may not be able to finance your investment with the terms you need. In a perfect world, a fix and flip property would be ready to sell right on schedule, the real estate market would never fluctuate, and the money would come rolling in like clockwork. In the real world, however, deals fall through, renovation schedules experience delays, and turn times are not always guaranteed. If this should happen and your financing source is family or friends, what will you do to lessen their financial exposure?

3) The personal circumstances of your family or friends could change. Even if everything is going smoothly with your investment property, suppose your family or friends experience an unrelated financial hardship during your agreed upon loan term. How will you handle their need while protecting your own investment?

4) Borrowing money from family and friends makes for awkward dinner conversation. When a substantial amount of money is involved, it is hard to forget about a debt when socializing casually. Because fix and flip investing calls for ready cash in abundant amounts, it can hamper the level of comfort you feel around your friend and make it uncomfortable for both parties involved.

5) Involving family or friends in your business ventures can lead to unpleasant feelings or resentment. Because it is nearly impossible to keep a financial arrangement with family and friends on a strictly professional keel, it is easy for feelings to be hurt. Often, there is a reluctance among friends to insist on written contracts to clearly outline financial obligations. In the absence of a contract, it is very easy for things to be misconstrued or forgotten. This is never a good thing for anyone involved.

6) If they lend the money, your family and friends may expect to have a say in your investing decisions. You have done your homework and understand where you are headed with your investment property. However, if you rely on family or friends to finance your venture, they may rightly expect to call some of the shots in the way that you handle your investment. This can be disastrous, in terms of personal relationships as well as quality of business decisions.

How a Hard Money Lender Can Help

Since it is a risky choice to solicit funding from family and friends, using the services of a hard money lender may be just the help you need. What do hard money lenders have that your friends do not?

1) Hard money lenders have money to lend. Unlike your friends, hard money lenders can supply sufficient money to completely meet your funding needs at terms that work best for you.

2) Hard money lenders understand the market and the risks inherent in lending. Because hard money lenders are professionals in the field, they have a clear understanding of your needs as a fix and flip investor. They do not base their decisions on emotion, but rather on the value of your investment property.

3) Hard money lenders keep every interaction on a professional level. While it is often the case that hard money lenders may over time become your friends, their goal is to maintain a good working business relationship with you, with no emotional strings attached.

4) Hard money lenders can visualize your investment plans and help you maximize your potential. With flexible financing options and a clear understanding of after repair values (ARV), hard money lenders will enhance your ability to get the job done with a minimum of inconvenience.

5) Hard money lenders can get you the funding you need quickly. With a quick, easy, and professional loan process, hard money lenders can provide fast money for optimal bargaining power in your negotiations with sellers.

If you would like more information about how a hard money lender can get you the quick, professional financing you need for your fix and flip investment, please contact us. We work every day to fund opportunities for enterprising investors.

Center Street communications are not intended to provide business, legal, tax, investment or insurance advice.  No Center Street communication should be construed as a recommendation for any business or investment strategy by Center Street or any third party.  You are solely responsible for determining whether any investment, investment strategy, business strategy or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your legal or tax professional regarding your specific situation.