fbpx

The High Cost of Real Estate Investing with Family and Friends

Rev N You Man

The biggest thing holding me back right now is lack of money for deals. I’ve done some joint ventures but I am struggling to raise more money,” shared a real estate investor I met recently. As we continued to chat I asked about the joint ventures he’s done. His real estate investing success to date has only been by raising money with immediate family members.

real estate investing with family and friendsAnd it actually took him 3 years to convince his sister and brother in law to work with him in the first place! The toll that is taking on his confidence and his emotions is huge. It’s so huge he doesn’t even know the price he is paying but I could see it written all over his face.

One of the worst things you can do to yourself and your family (and even close friends) is try to raise money from them.

We’ve learned this the hard way – and it took us years to clue into the price we were paying.

When you try to raise money from people you love and who love you, you’ll find that one of three things happen and each one comes with a GIGANTIC emotional price:

 

  1. They don’t want to say no and hurt your feelings so they avoid you or avoid the subject. It becomes awkward and strained.
  2. They say yes only because they want to support and help you. Subconsciously you KNOW they are investing with you because of your relationship and it plays enormously on your confidence and your ability to raise money outside of the family.
  3. They say no and you feel hurt. “Why don’t they trust me? Why don’t they believe in me?”

This is all assuming things actually go well on the deals you’re doing too. The price you will pay if something goes wrong can be monumental.

The Even Higher Cost of Real Estate Investing with Family When Things Go Badly

One investor I know got into investing with his brother. He spoke so fondly of how the two of them brought their big families together every year for major holidays. All 40+ family members would pile into a warm, love and laughter filled house to celebrate the season and each other.

This happened for many years until a real estate deal the two brothers did together turned bad and suddenly they couldn’t stand to be in the same room together.

Now, the entire family is torn apart and there are no festive get-togethers anymore.

This is not my story, but it is a true story. The investor that generously shared this story with me in the hopes that others learn from his situation said that “When we first got into REI, looking back on it, I was blinded with excitement about getting into the game that I really didn’t step back and figure out whether my values and goals matched up with my family members. I really wish I would have figured that out sooner, as I soon found out that my idea of an acceptable rental property was not their idea of an ideal rental. The way I handled tenant-landlord issues was also different. I always found myself defending my decisions … and at the end of the day I felt like an employee, not a partner, so I really had no choice but to leave.

He seemed so sad and regretful. I can promise you he wishes he had never mixed family and real estate.

I recently met someone else who brought his parents into a deal four years ago that cost his parents an unstated sum of money as the deal ended up totally falling apart. All money invested into the deal vanished. The money was definitely a loss but the real cost of that situation in my view is the tremendous guilt this guy feels about the mistake. It weighs heavily on him every single day. I am not saying he wouldn’t feel guilty if he’d lost someone else’s money but I am suggesting that the guilt he feels over his parents is far greater because he knows they invested in HIM more than the deal.

Investing with family members can be tremendously rewarding when things go well but there are a lot of areas where things can go bad. I believe the RISKS of raising money from your family are higher than with anyone else you can work with.

That is what you have to watch out for. Most of us would much rather have our familial relationships than a few extra bucks from a real estate deal.

Before you even get into a business relationship – whether it be a loan, a partnership or a corporation – with any of your close family members:

1. Is there really a good fit? Is everyone bringing something of value to the table? What is most important to each person? Is there alignment in that?

A lot of times the ONLY reason you’re lending money/borrowing money or working with someone IS because they are a family member. That is absolutely the WRONG reason. Philip McKernan (author of two best selling real estate books and business coach) suggests that borrowing money from close family is not a good idea because they can never clearly evaluate the deal or the risks. They are blinded because of their close relationship to you.

Have an open discussion about risks, problems and the kinds of deals you’re going to do. If you aren’t on the same page about what types of deals you’re going to do and the kind of tenants you want to work with, it could be a huge horror story. You’ll find you are always butting heads and constantly working harder than you need to just because of the drastically differing opinions.

2. Discuss roles and responsibilities – then put them in writing

This is one of the challenges we faced over the last few years with our corporation. When we first started my Mom and Dad provided our new corporation with some short term loans. Dad was handling nearly 1,000 calls from potential seller leads, my Mom was overseeing renovations, and Dave and I did everything else around negotiating, managing and raising money for the deals.  After a year or so Mom and Dad started getting tired of working so much and were not interested in putting more money into the company – short term or otherwise.

That left Dave and I to fund anything that the company couldn’t fund itself AND do all the work. Even though we knew this would be the case when we started the corporation, Dave had some hard feelings about this for awhile. It could have festered into a big issue but we had a corporate meeting and revised our roles, responsibilities and compensation levels.

At the start of investing together as a family, we had a legal contract for our business drawn up and had some roles and responsibilities laid out in that agreement but we hadn’t CLEARLY outlined roles, responsibilities and compensation. We’ve now done that and, quite frankly, we may just get to the point where we come to an agreement to buy my parents out in the near future.

In any company, roles, responsibilities and compensation have to be clear and fair or there can be hard feelings. Family is no different.

3.   Treat the business relationship like a business relationship. It’s very common to go easy on a son or daughter or even a parent when you know their personal struggles. It can also be possible that you’ll take advantage of the fact that someone knows your struggles to use as an excuse to not live up to a commitment you have made. But a commitment is a commitment in business – and it has to be the case when it’s family.

One investor I know put $20,000 of his own money into a few troublesome properties because he didn’t want to make a cash call to his relatives. He put MASSIVE financial strain on his wife in order to save face with his parents and siblings.

It all stems from the fact that the core of the relationship is an emotional one not a business one. If these were non family investors who evaluated the deal and the investor on it’s business merits versus invested in the deal because it was their brother or son the cash call would have been easier.

4. Create Work / Home Boundaries

My biggest pet peeve of getting into business with family and even friends is that sometimes social get togethers become impromptu business meetings. I live, work and play with my business partner so it can be REALLY hard to separate work and home. That gets exponentially more difficult when we visit with my parents. We try to set the boundaries so we know when a lunch is a meeting versus a family catch up time. We create agendas for our meetings and take care to ensure that get togethers aren’t impromptu business meetings.

5. Communication is critical. Assuming is deadly.

This could be an entire book and it probably is somewhere, but the big thing is that you can’t assume that you KNOW what someone is thinking just because you’ve known them all your life. Ask for each person’s view and LISTEN. Watch for nonverbal cues that someone is holding back and be prepared to push for honesty. Be as quick to express positive results and outcomes as you might be to point out issues and challenges. Finally, focus on one issue at a time. Make sure expectations and plans are clearly articulated before moving on to the next issue. Write it down for even better results.

Creating a successful business requires all of the above regardless of who your partners are. It just becomes a slightly different situation when you’re working with family members because of the blood ties and lifelong relationships you have.

It can be fun to work with your family. It can be satisfying to come together and create something great together. There can also be enormous challenges if you aren’t partnering with the right folks for the right reasons. Hopefully you’re now ready to take a step back and decide with different eyes. For me, it’s not about telling you NOT to invest with your family (I do and I have!). What I am saying is there is a BIG price and you must weigh that carefully before you proceed.

 

Published April 18th, 2012

Image Credit:©Julie Broad

 

Send Us A Message

If you have questions about points raised in this post, or if you’d like to learn more, then send us a message and we’ll get back to you as soon as we can.

rev n you podcast Cover Photo

Growth Requires Discomfort

 When trying to grow, whether personally, professionally, or in our context within real estate investing, you’ll know you’re on the right path when this

Item added to cart.
0 items - $0.00