New opportunity advice please

[kagarnett]

Hey guys, I'm new to this forum and 23 years old. I've been thinking about investing in real estate recently and I've just received an opportunity to become a capital investor in buying a new rental house as early as next week. The catch is, the three people offering this opportunity are three of my best friends (and the same age as me fwiw). They have been purchasing real estate to rent together for around 2 years now. My buddy made me an offer earlier this morning to be a capital investor on their next project. We will be meeting tomorrow morning for breakfast to discuss specifics and I will post again when I know details but I wanted to ask everyone on the forum their opinion. The offer thus far was an 8% return on whatever capital i invest. The capital that I invest along with the 8% interest would be returned in one year. I dont necessarily want to only act as a bank for my friends by just lending them money. There are obviously some major cons with that scenario. I trust the three of the them, they are very professional people but there is of course always a chance of something going wrong and the three of them not being able to pay me back in a year. I worry about being a straight lender to three of my friends for this reason. What should I propose tomorrow when I meet my friend for breakfast to discuss this? Do you think it's a good idea?

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[Dash man]

No, I do not, it is too high risk for only an 8% return. When I've bought real estate for investment I look for a minimum 10% return when I own the property outright. You will not have control and their experience level is obviously low with their age. You didn't give any details on how much you might invest or what your net worth is, but unless you're very well off and this is a minor amount for you, there are safer investments that return around 8%. If you do decide to get involved, you should consult an attorney before you invest or sign anything.


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[kagarnett]

No, I do not, it is too high risk for only an 8% return. When I've bought real estate for investment I look for a minimum 10% return when I own the property outright. You will not have control and their experience level is obviously low with their age. You didn't give any details on how much you might invest or what your net worth is, but unless you're very well off and this is a minor amount for you, there are safer investments that return around 8%. If you do decide to get involved, you should consult an attorney before you invest or sign anything.


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Thanks for the reply. I have a net worth of a little over $90,000.00 and no debt. This includes cash reserves of around $38,500.00, stocks of a little over $50,000.00, along with a company 401k that I've recently started funding. I wouldn't be investing much, probably somewhere between $5,000.00 and $10,000.00.

 

[Dash man]

While you're doing much better than I was at your age, I think you'd be making a mistake. You don't have enough where you should risk locking up funds for a low return relative to the risk and no control.


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[kagarnett]

That makes sense. What I would rather do is actually become a partner in the property instead of just loaning them money.

 

[pb4uski]

I agree with you that becoming a partner makes a lot more sense than lending money to them as long as you understand there is more risk/more potential rewards associated with being an owner. Wait to hear what they have to say, but you could counter that you would like to invest as a partner on the same terms they are getting.

 

[Rick_Head]

Look at the books for their previous endeavors. Will the next one be different?

 

[Dash man]

If you were to enter into a partnership, it should be as an LLC to protect yourself from liability. An attorney's advice would be wise.


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[38Chevy454]

I agree that you should not be playing bank to them, but if they want you involved, come in as an equal partner. If you did get involved, you and the other three would all be 25% equal partners in the purchase and rental mgmt. This way you are on equal risk to them.

By them wanting you to be the bank, it sounds like they do not have the 20% down money, and are attempting to buy properties using other people's money, with very little investment from them. Since the mortgage rate is 3-4%, they need to offer 8% to cover the secondary 20% money they want from you. The key is that your 20% is paid after the primary mortgage. If property values go down when sold, or a renter destroys the house and the others bail out, you could lose all of your money.

 

[someguy]

Gut reaction is look elsewhere.

Either way--but especially if you are talking partnership--I would be sure to consult an attorney. I believe if you own a stake of the size you are talking about, then you can be liable for any debts of the partnership/company. Put another way, if you put in $20K for a 25% stake, you could potentially be liable for more than the 20K you put in if things go wrong.

 

[Meadbh]

For all the above reasons....RUN!

Real estate investment has its place, but this adds a whole new level of risk.

 

[Totoro]

Same advice as the others, don't go for this.

Only exception I might consider is if

• lf each of the partners you lend to make themselves personally liable for the amount you loan to them and the bank hasn't done that as well.
• At least two of them have the funds right now to repay you, with a very reasonable chance that it will remain so in the next two years.
• You have the option to keep your money invested after the first year at same return rate.

In other words, if they don't need the money at all I might consider it. Given the interest rate, that very likely is not the case.

Stay away. Let banks and fools handle this.

 

[kagarnett]

Thanks for the opinions, I didn't take the deal. The 8% return in a year didn't seem worth risking a friendship with three best friends. There were no hard feelings and they understood.