"Lend money to an enemy, and you will gain him. Lend money to a friend, and you will lose him".
Although I'm para-phrasing this quote, thought to be from Benjamin Franklin, it is as true now as it was back then. Asking a family member or friend to pick up the tab at dinner because you forgot your wallet is one thing, but seeking a legitimate and considerable capital transaction from someone you have a familial or personal relationship with can sometimes be a bad decision. Here's why you shouldn't burden them with something like that, and why Hard Money is where you can turn for fast and affordable funding.
Table Of Contents
6 Reasons Why Borrowing From Friends And Family Can Backfire:
Risk-Taking Comfort Levels
Your level of comfort in regards to taking risks may not coincide with your friends' and family's. It doesn't matter how well you plan an investment, there will always be a certain amount of risk involved with Real Estate investing, particularly Fix & Flips. Just because you know where your comfort zone is in taking a risk, doesn't mean you should assume where the line is for your family or friends.
Even if a member of your family, or one of your friends is willing to entertain the idea of lending you money, when it comes down to the nitty gritty, specifically rates and terms, there is a large probability that you won't see eye to eye. Sure, in a perfect world, a Fix & Flip project would go exactly as planned, be ready to sell right on schedule, the market would never fluctuate, and the money would just come out of your ears. In reality however, deals fall apart, rehab schedules get delayed, unexpected problems arise, and turn times are not always guaranteed. Assuming any of these possibilities actually occur and your funding source is family or friends, what can you do to decrease their financial exposure?
Your family or friends' personal circumstances could change at any time. Even if everything with your investment property is running like clockwork, suppose a completely unrelated financial hardship occurs to your family member or friend during the loan terms you've agreed upon. What happens when it's time to handle their need AND protect your own investment?
Having borrowed money from family or friends can make for awkward dinner conversation. When a sizable amount of money is involved, it can be difficult to not mention a debt when socializing casually. Because Fix & Flip investing calls for accessible funds in abundant amounts, it can absolutely hamper the comfort level you feel around your friend or family member and also make it tense and embarrassing for not only both parties, but for anyone within earshot if a discussion goes in a negative or distasteful direction.
Feelings Of Resentment
When family or friends get involved in your business ventures, this can unintentionally lead to unpleasant feelings or resentment. In theory, it's simple enough. But because it is nearly impossible to keep a financial arrangement with family and friends on a strictly professional level, feelings can get hurt. Although they are used to clearly outline financial obligations, often times, family will be reluctant to insist on written contracts. It is this absence of a contract, that makes things very easy to be misconstrued or forgotten. This is obviously no good for anyone involved, and can do serious, and in some extreme cases, irreparable damage to even long-term relationships.
An all-too-common occurrence in this type of situation is your family and friends expecting to have a say in your investment strategies and decisions. You have done your due diligence and understand where you are headed with this project. Realistically, relying on family or friends to fund your venture, can harbor expectations of calling some of the shots in regards to the way that you handle your investment. This can be disastrous, for personal relationships as well as the quality of business decisions.
4 Ways a Hard Money Lender Can Help
Because this prospect of soliciting funds from family and friends can be risky, using the services of a Hard Money Lender just may be the right answer. Why a Hard Money Lender instead of one of your buddies?
Hard Money Lenders have money to lend. Unlike family and friends, hard money lenders can produce sufficient funds to completely meet your financing needs at terms that work best for your situation.
Hard Money Lenders understand the market, and thus the inherent risks involved in lending. Because hard money lenders are professionals in the industry, they have a working knowledge of your needs as a Fix & Flip investor. Rather than on emotion, they base their capital placement decisions on the value of your investment property.
High Level Professionalism
Hard Money Lenders remain professional in every interaction. While often times hard money lenders may over time become your friends, their focus is to foster and nurture a good working business relationship with you, without the distracting and sometimes toxic involvement of emotion. There's a time and place for the use of emotion, and Real Estate investing is not one of them.
Hard money lenders have the experience and know-how to visualize your investment plans and help to maximize your potential. Having flexible financing options and a clear understanding of After Repair Values (ARV), Hard Money Lenders will increase your confidence in seeing these investment projects through to completion while minimizing the stress and inconvenience.
Make The Wise Decision
Securing funds through family or friends can be tempting, especially when compared to traditional lenders. But unfortunately, there are many Borrowers who only consider these two options when seeking capital for Real Estate projects. Armed with the knowledge presented in this article, hopefully they will now rest assured that they have a safe, secure and guaranteed source of financing for any Real Estate investment, without the added risk of potentially damaging a relationship unnecessarily.