When you decide to invest in property, it often involves a sizable amount of money. Sometimes, especially when other options are not available, you may think of borrowing from friends or family. Financial dealings with the likes of Cousin Bob may sound tricky but, if handled properly, could end up being a winner for both you and Cousin Bob.
Making a friendly pitch
The Federal Reserve Board Survey on Consumer Finances confirms that every year approximately $89 billion worth of loan transactions take place between friends and families. So making a friendly pitch isn’t something you will be alone in doing. But according to Thomas Fox, director at Cambridge Credit Counseling, make your pitch as if you were asking any financial entity for a loan.
According to Mr. Fox, borrowing to invest in property, or anything else, requires that you plan what you can afford to borrow, and decide realistically on repayment plans – as you would do with other institutional lenders.
Does this way of getting a loan seem too formal? Well, it is! Cousin Bob has the same rights as Mr. Smith, the Bank Manager, to sue for recovery if you default on repayments.
Similarities between private and institutional loans
Taking on a private loan by Cousin Bob has to be done formally. Otherwise, borrowing from friends and family to invest in property might not be such a bright idea after all. When it comes to lending you money to Cousin Bob and Mr. Smith has a lot in common, for example:
- Both Bob and Mr. Smith will require a formal Promissory Note, outlining the terms under which they lend you the money.
- The Note should spell out the amount lent to you, the rate of interest charged, as well as a repayment schedule with dates and installment amounts.
- There will be a Mortgage or a Deed of Trust prepared giving Bob or Mr. Smith the right to foreclose in case of default on your loan.
- In return for the loan, Both Bob and Mr. Smith hold a lien on the property you invested in.
Keeping it in the family may be good for you
While private loans are needed to be formalized, formalization offers borrowers protections too. For instance, as long as you honor the repayment plan, family disputes cannot be used by Cousin Bob to foreclose or demand instant repayment.
Borrowing from family can also provide additional benefits:
- Favorable interest rates: It is more likely that Cousin Bob will be amenable to lend you money to invest in property at a better rate than Mr. Smith. Yet the lower rate may still benefit Bob.
- Favorable repayment plans: While institutional lenders might not have flexibility, it terms of repaying your loan, Cousin Bob may accept a less aggressive repayment schedule. However, encroaching on Bob’s generosity might not be a good idea.
- Favorable tax treatment: You receive the same favorable tax deductions with private loans that you do for traditional loans.
Keeping it in the family may be good for Cousin Bob too
Family members, lending you money, benefit from the transaction as well:
- Favorable interest rates: With the current investment climate as it is, lending you money may yield Cousin Bob more than he could make investing in a GIC or a Government Bond.
- Predictable income stream: And the repayment plan, of the loan provided to you to invest in property Dallas, will offer Bob a dependable income stream.
Can’t make a payment? Here’s what to do
Private loans given to people are as susceptible to the occasional missed payment as institutional loans – whether it’s because of job loss, illness or other reasons. The best way to deal with family members who have given you money is to discuss openly the reasons why you can’t make a payment. Ducking Bob’s calls or skipping the family Thanksgiving dinner is not the way to deal with the situation!