Your uncle has some money he’s interested in investing. He’s seen you make some successful flips, and now he’s approaching you about a partnership. Sound pretty good, right? Well, yes and no. Investing partners are great because they give you the freedom to buy a flip house and do all the renovations, without worrying about a loan or interest. And you both win when you sell the house at a profit.
At the same time, things can get very complicated very quickly when you introduce family into the mix. So, before you commit to investing with a family member, read these reasons why you might want to reconsider.
Generation Gaps and Power Dynamics
First of all, can you imagine being your dad or mom’s boss? As you get older, they become more like friends than authority figures, but they’ll always be your parents. That means there’s always going to be a weird power dynamic that could make investing with them a bad idea.
Consider what would happen if you wanted to buy a property that your dad thinks is too risky or too run down. You know that the neighborhood is perfect for flipping, and you know that with the right rehab work, the house has a lot of potential to give you a really great profit margin. You can see how quickly the discussion about this could go downhill and turn into your dad yelling at you about wasting his money and you yelling at him that he won’t let you do your job. It’ll be like your teen years all over again, but with investment money and real estate deals on the line.
What Happens if the Deal Goes Sour?
Even the most experienced and successful house flipper will have a sour deal now and then. If your rehab budget gets out of control, the market tanks, or the house sits on the market stalled, what are you going to tell your private lender or investing partner? If you’re working with someone that you don’t have a personal connection with, you’re going to follow the necessary steps to repay them or take whatever other steps you agreed on when you began working together.
With a family member, that kind of deal can get sticky. One of the most common things I’ve heard about this situation is that the family member says, “I trusted you with my money. Now what am I going to do?” You didn’t actually do anything to break their trust, but they feel like you did. To them, all that matters is that they trusted you, and you didn’t come through. Family feuds and horrible Thanksgivings have been started over a lot less.
They Think They’re the Expert
When you work with an investing partner, you will know from the beginning that they’ll either be a silent partner or, if they’re not, that they have some expertise in house flipping. You don’t get that kind of guarantee when you invest with a family member. All too often, they assume that they know everything and that they can run your house flip better than you can. Before you know it, the whole thing’s a disaster.
So, should you never invest with family and friends? Well, never say never, but if you’re going to get involved financially with someone you have a personal relationship with, make sure that both of you know exactly what you’re getting into and what your roles are. Otherwise, you could be looking at some really awful results. In general, I find that everybody’s happiest if you keep your investing business and your family separate.