But Is it a Good Idea?
Borrowing money from friends and family is usually a terrible idea unless the transaction of the loan is done in a professional and businesslike manner. Anything else is poised for potential disaster to strike if things don’t go according to plan.
The best way and to avoid confusion and misunderstandings, is to have a loan agreement or a promissory note that outlines the terms of the loan, like the loan amount, interest rate and repayment schedule. Unfortunately, this is rarely done with friends and family. This is a huge mistake. Memories and expectations can change over time and having a discussion about the loan terms 6,8 or 12 months later is extremely difficult, especially if the entire amount of the loan is not available to pay your family or friend their money back. Unfortunately, I see this way too often.
You must be clear that they are not your partner and have no say in the project. If you do give up any equity, (piece of the profit) like I just mentioned above, make sure to spell out the terms explicitly or confrontations and arguments can spring up at the end if things don’t go according to your “verbal” plan. By treating loans between family and friends as a business transaction, investors can safeguard themselves from damaging an important relationship because of money.
Working with a private lender like Peak takes out the emotional, family, friends, relationship and keeps it strictly business with a personalize touch.
Let’s take a look at some of the advantages and disadvantages of borrowing from family & friends.
1. It’s a very informal and convenient way to get money
2. Usually there is a quick transferring of funds
3. Can get low interest rate
4. There are no processing or legal fees
5. They are more understanding with any missed payments or payback timeline.
1. Risk losing relationship if the loan is not paid back in its entirety including interest.
2. Delays, by disagreements or disputes over the terms of the loan if it was not in writing
3. Constantly being asked for updates and giving their opinions of your project
4. Your lender coming up short with renovation money during project which causes delays
5. Having to answer why the house is not selling yet