Partnering With Grandma on a Real Estate Deal a Good Idea?
One of the real estate investors we fund loans for came to me with an idea last week. His grandmother has a free and clear mansion in the Hamptons, NY. She offered to get a cash out refinance loan against the property and then use the cash to invest in real estate. She wants to be the cash partner, and wants her grandson, (my client) to be the sweat equity partner. But….does this sound like a good idea?
This real estate investor carefully weighed in all the costs involved in using his grandmother’s money on real estate deals. He uses hard money loans for financing the bulk of the purchases and uses his own money for down payment. Whatever the cost of the loans, he just takes that out of the back-end equity in the deal.
He calculated the numbers based on his grandmother’s cut of the equity, versus the hard money lender’s cut of the equity. Not only would it be more expensive to use his grandmother’s money, he decided that the mental stress of using her money just made the overall costs too high. To use her money on a deal, Grandma wants 65% of the back-end equity. In other words, grandma wants 65% of his profits! Using a hard money loan is definitely a cheaper option for this real estate investor. He pays us interest on the loan and a loan fee for giving him the loan. And we don’t take a cut of his equity like Grandma.
Money from family and friends may have a lower cost of capital than using a private money lender, but it’s important to consider the full costs of involving them in your deals. Whenever you involve a family member or friend in business, there are always intangible costs to consider. Sometimes it’s just cheaper and less stressful to use private or hard money loans to purchase real estate investments rather than involving family or friends.
Any thoughts on this topic? Please share your comments below.
2 thoughts on “Partnering With Grandma on a Real Estate Deal a Good Idea?”
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I speak with a lot of clients who have partnered with a loved one. If the deal goes well everything is of course fine, however when the deal goes bad there are a whole lot of extra emotions involved.
The one who is the instigator of the transaction feels a whole lot of guilt about losing the loved ones money. The instigator may or may not have explained the risk to the “cash partner”, however he still feels responsible for the loss even though it may not have been his fault. The instigator will generally do what he can to make things right, however that is generally not possible.
The “cash partner” will have ill feelings towards the transaction and can’t help to feel like the instigator is a bad business man even if they understood the risks. It can really harm a relationship sometimes causing a rift for years between loved ones.
I personally would avoid the family type of transaction. Go with hard money they understand the risks completely. And if the deal goes sour it is just part of the game. You will have to deal with the hard money lender, however it will be strictly business and you will be able to cut out all the emotions tied to losing a loved ones retirement.
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