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Lending family members money(8 posts)

Lending family members moneyjrm
Nov 16, 2003 11:02 AM
last night my sister called me asking to lend her and her husband a pretty good chunk of money to buy a 2nd house to fix up and sell in one years time. She mentioned a return of somewhere between 25 and 50%. It would be a one year thing tops, take the money and run ala the day to day traders in the 90's during the stock-market boom.

Part of me is saying sure its more than I'm making now in other places. And its a calculated risk investment because its with family. I also want to be supportive and cooperative.

But theres this annoying voice wondering if the inflated housing market can withstand one more year of expansion and whether this expansion will be accompanied by favorable interest rates for borrowing.

I could say no stating that i don't want my relationship with my family to be reduced to money. This lending would also put me in a kinda tough spot.

one, if a possible worst case scenario is played out i may need some of this money to live on while i find work. if the worst case scenario isn't played out then this chunk of money will mean i have to dig deeper into my investments to put a down payment on a house.

Does anyone have some good sound advice on this front? I'm caught in a bind and need to make a decision fast.
I wouldn't do it if I were you.KG 361
Nov 16, 2003 11:08 AM
Come up with an excuse or "just say no". My in-laws do this all of the time and it ALWAYS leads to hard feelings, people not getting repaid, yada yada yada. It may not endear you to this family member, but you will be happier in the long run, IMHO.
Shakespeare via Polonius ( I believe):moneyman
Nov 16, 2003 11:23 AM
"Neither a borrower nor a lender be."

If you value the relationship, say no. These things have a way of becoming very messy and causing a great deal of long-term grief.

If they are credit-worthy, there are plenty of places for them to borrow money. If they expect to make 25-50% return on their investment, and they can borrow money at 8%, that's a pretty good return. But you shouldn't be their banker.

$$
Polonius it was53T
Nov 16, 2003 2:58 PM
Neither a borrower nor a lender be,
for it dulls the edge of husbandry.

In other words, too much debt reduces you ability to make good financial decisions.

Your sister is not really looking for a loan, but offering you an investment opportunity. Turning houses around can be quite lucrative and low risk, if the right people are involved. These people are a realtor who is certain of the market values and trends, and a builder/project manger who has renovated houses correctly before.

If you are not intersted, I would simply tell her that your Certified Finacial Planner has counciled you to put your money in other low yield instruments, like bonds and fixed income funds, to keep your risk low until the economy picks up.
Don't know if it's good or sound, but...PdxMark
Nov 16, 2003 12:18 PM
I'd treat any loan to a family member as a likely gift that might be repaid. In other words, be prepared to choose between the money and your relationship with your sister. For me, loaning an amount that would put me in a bind would be too much - particularly for a speculative sideline investment for a family member.

If the return is going to be so good, they can get the money through commercial channels. Alternatively, you can go in on the deal with them so you're on the title for the property. That way you guarantee your interest in the money, but you'd also include exposure for any liability that arises out of the project.

I've loaned money to a sister & brother-in-law twice. They signed promissory notes both times. The first loan was $500, and it was repaid. The second loan was $5,000, and it wasn't. Both loans were to help them get out of financial binds.

The first time I loaned the money without much comment. The second time I decided I had a right to express my opinion about how they could keep from repeating their financial mistakes. They took the words to heart or changed their ways on their own account. In either case, they got out of their bind and have been in great shape for years. Our relationship is fine. I think of the $5,000 as being part of the cost of having family.

In both cases, I could afford to lose the money and they had serious financial problems. Lending more than I could afford to lose for a speculative investment, which required them to perform alot of hard work for any return, would be beyond my capacity for financial compassion.
re: Lending family members moneyDuane Gran
Nov 17, 2003 7:13 AM
Like many, I try to avoid this sort of situation. I believe the trick to doing this right is to act like a bank. Draft up a contract and get a lien on something they own if a normal bank won't back them on the investment. If they are put off by this formality, it is a cue that they don't think of it as a business relationship. Consider this, if they get tight on money (and who doesn't) who will they pay last?

If this is their first investment property I definitely wouldn't do it. There are too many hidden variables to predict property value. Although I think real estate is the best place to invest money, I would only trust someone who has done this 10 times already.
2 recommendationsDougSloan
Nov 17, 2003 8:19 AM
As above, one solution is to treat it like a gift. Tell her it's a loan, and to repay it when she can. But, resign yourself to the fact that it may be a gift.

Alternative 2. Do it right. Do a promissory note and a 2nd deed of trust or mortgage (depending upon your state). Record them. If they sell the house or refinance, you'll have to be paid out of escrow. Just resign yourself to the fact that you may not be paid until and unless they refinance or sell. But, when they do, you darn well will be paid. She won't even have any choice. That's what I would do.

Doug
"never a borrower nor a lender be" (nm)ColnagoFE
Nov 17, 2003 11:04 AM