Reasons NOT to Invest With Family and Friends – Part One

Having fallen into this trap of investing with very close friends, so close they were considered members of our family, I feel compelled to write about this experience and hope the warning does not fall on deaf ears. Probably like myself people will say ‘Oh it won’t happen to me’ ‘My family/friends love me and know me, they know I wouldn’t cheat them‘. Maybe you wouldn’t but were money is concerned rationale goes straight out the window.

So here is my list of the reasons NOT to invest money, credit or any other funds from investments, RRSPs, 401K, etc, that belongs to family or friends.

Were money is involved among members of a family or between friends, the only people that generally benefit from this transaction are lawyers. If you watch any legal TV show, or movie, the crime or the motive is closely connected to an amount of money, that somebody else wants, needs, deserves, earned, won, lost, stole, found, expected.

You have control over someone else’s money, hopefully you have contracts, and the contracts were checked by a lawyer before accepting the money. You will now be the one to blame for standing between them and their money. Fear and suspicion breeds mis-understanding, and nervousness, and anger. Your family or friends will want to believe that the money is safe hands, but there will be little voice that is telling them ‘i haven’t seen my money, or they haven’t mentioned it, for a while, have they stolen it?’

It should have been a clue regarding money and relationships when you read about ‘Money being the number one reason for divorce’. As previously mentioned every transaction and agreement should be fully recorded and under contract, hand-shakes don’t cut it. It is very easy to tape the conversation and have it transcribed into a contract. We usually have known the potential money lender/partner for many years, either family or friends, but bringing money into the equation makes this a business, and as such, peoples perspectives alter dramatically even though they may not be aware of it. If ever anything changes, make sure it is legal and signed by all concerned…..

  • correct dates, closings, exit date, interest paid.
  • location,
  • interest rate, term
  • exit strategy,
  • use of property,
  • type of tenants,
  • lease/no lease, month to month, 12 month lease contract,
  • mortgage info,
  • property insurance, take lots of photos.
  • tenant insurance,
  • maintenance responsibilities,
  • management – yourselves or professionals,
  • outside maintenance, snow removal, grass cutting,
  • ‘in case of emergency’ what is your plan of action?
  • ‘contingency funds’,
  • if tenants skip out owing rent,
  • tenants damage property – recourse.

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