Investing in real estate with family members isn’t for everyone, but those families who can, will reap a lifetime of rewards. Here are some potential joys and pitfalls of such an investment.
Here are the joys:
Jointly managing a successful real estate investment will strengthen family relationships, fostert eamwork, and provide a sense of shared accomplishment.
It is particularly satisfying when the financial, emotional, and educational rewards benefit your loved ones. Family members, especially younger ones, can learn valuable lessons about real estate, investing, and financial management through their direct involvement.
Multi-generational investing offers unique opportunities by taking advantage of the diverse strengths and challenges of each age group. Older people usually have better credit, higher incomes and possibly more experience that they bring to the table, while younger people often lacking the ability to purchase on their own may have more different skills, along with more time, energy, and desire.
Finally, joint family investing can build a lasting family legacy, creating something tangible to be passed down through the generations.
Here are the complexities:
The challenges of investing in real estate with family members can be addressed with a little focused effort. It starts with clarifying constraints, contributions, goals, and expectations. This is tantamount to determining the potential for working together and is the only way to craft a structure to address everyone’s needs.
Because real estate investments involve financial risks, understanding those risks and minimizing them is especially essential for a family-owned investment. Families have shared life experiences and share long-term mutual commitments that factor into play. If the investment doesn't perform as expected, it can strain relationships, as some members will likely be more financially dependent on the project’s success than others.
The varying goals of each person and expectations from the investment may lead to conflicts. For instance, some may view it as a long-term investment, while others may seek quick profits. Similarly, not everyone will have the same role or make the same contribution, so this requires spelling out who manages the property and how it's to be managed. As well, discuss each person’s commitment level and management style. A reasonably formal process for identifying and resolving conflict is helpful to ensure that everyone’s thoughts are heard and addressed to the highest degree possible.
Inherent in a joint family investment are likely differing legal and tax complications. Discuss and plan for navigating these implications to avoid misunderstandings and serious issues affecting the investment.
Without exception, plan for when and how members can exit the investment. Life happens, and things come up in life that cause circumstances to change. Maybe it is not required to sell the property for someone to exit. What is important is that there is some flexibility afforded to members that leads to fair outcomes for all. This situation can become especially tricky if the property is inherited.
The keys to navigating the complexities are straight forward. Relying on professional advice to address legal, financial, and tax implications is the best way to avoid mistakes and ensure that members are satisfied with the outcome. As with all relationships, successfully working with family members comes down to good communication, trust, mutual respect, and patience. Balancing these emotional aspects with the practicalities of investment management is crucial for success in this venture, as well as putting formal agreements in place to provide clarity and transparency for all.
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