Investing in real estate as a group
Investing in real estate as a group
I have been working with investors for over 35 years. Often, it’s a small group of people who invest together — a Mom and a Dad and their kids, or business associates who invest together.
A typical investment group may inherit some real estate, or have an income that generates enough cash to allow them to purchasing of investments. Often a mom, dad, aunt, or uncle will have a business generating cash to allow the family to invest together.
Successful groups will have an investment plan and build upon it. Often (but not always) these families/groups will invest within a limited geographic area, say up to 60 miles away from where they live or work, for ease of management. (Of course, as they grow capital and real estate assets, that may change due to limited local investment opportunities).
Things to consider
When you invest with friends and family, you have to deal with different personalities and life experiences.
Age/Experience – Investing successfully takes experience. Investing as a group brings you an opportunity to bring different levels of experience together.
Development — A structure should be developed to create an educational and experiential legacy for all members of the group. It starts with real estate classes, developing hands-on listening and decision-making techniques, moves to property inspections and leadership development, and then focuses on handing off assets through the formation of trusts, LLCs and wills.
Building consensus — Questions need to be answered regarding where the money comes from, from who, and how investment decisions are made. You may follow the old adage, “He who has the gold makes the rules,” or possibly make decisions by a majority vote or consensus.
Illnesses and death – Plans must be laid in advance to deal with these contingencies. (Maybe purchasing insurance to deal with estate taxes and property transfers.)
Accounting skills — Learn how to read real estate-related financial statements, learn how to borrow money and the impact of borrowing, and understand the tax implications of decisions that are made.
Legal/Financial planning — Not all members of the family have money. How are returns allocated to members who do not contribute cash? Investors need to work with an attorney to create legal protections for all members of the group, such as LLC formation. Sometimes the investors need to have their own attorney, rather than the group attorney, to make sure their rights and position are protected.
One way to plan for these cash needs is to carry enough insurance to cover potential litigation and backstop the insurance with a significant shared reserve account. Some of these operational costs include leasing fees, tenant improvements, and CPA and attorney costs.
Financial responsibility — Should you need to borrow money, you will need to consider several questions:
Who are the lead partners financially?
Will all the members of the group have an equal responsibility to guarantee the repayment of the loan?
What happens if the lead partners become incapacitated?
Suppose you want to buy a new property or refinance an existing one, and one of the family members filed for bankruptcy or has weak credit. How do you deal with that?
Income and property taxes — Taxes for the properties and the individual investors in the group need to be planned for and managed.
Cash use — You will need to consider the following:
Are there member draws?
Is money saved? Are reserves established?
Decisions need to be made to define what works for the long-term safety of the investments and the investors.
If there is a cash call, a resource shortage may occur. This needs to be planned for. If there is litigation, there needs to be a way to fund it.
Operational planning should be officially reviewed every few years
Needs change for all of us. Case study — We managed property for a family whose father bought apartments as part of his retirement plan. The kids inherited them together. There were four children, who in their late fifties decided to liquidate the assets. Their varied needs were as follows:
Wanted to build a new home,
Wanted to pay college tuition for kids,
Wanted to deal with medical bills,
Wanted to keep the investments for future cash flow.
They ended up selling a beautiful centrally located investment and dividing the cash. They could have refinanced and used some of the cash equity to pay bills or to buy another property, but the majority chose to sell. In this family, once the father was gone, no one had the time or desire to take on the day-to-day responsibility for the investments, or to buy another property. Forward planning might have prevented the sale of the asset and kept it in the family to deliver long-term cash flow.
Unrealistic expectations
As groups of investors get together, there needs to be a clear process for vetting investment decisions.
Solid goal setting and underwriting must be in place. It could be helpful for a small group to form an investment committee to vet all investments, ensuring that new properties have a chance of being winners.
Economic and financial conditions need to be considered. Develop a system of checks and balances. Decisions to buy and sell the investments need to be made as a group. Finally, no one person should control the money. Even here checks and balances are important.
A clear operating agreement needs to be in place to help direct the decisions.
Beware of members who are not altruistic and get greedy. The objective typically is to share the wealth, not to have it stick to one family or family member. Build checks and balances into the system to prevent this from happening. Allow the majority to vote to eject a “bad apple.” This process is beneficial to keep everyone on the same track.
The division of responsibilities needs to be fair and fall to those who have the skills. Who is responsible for:
Investment decisions – bringing deals to the table and underwriting?
Managing the risk ( i.e., dealing with insurance and attorneys)?
Leasing negotiations?
Property inspections?
Setting the percent of leverage?
Evaluating investment success?
Supervision of the property manager?
Generational Differences
As the leaders get older, they become more conservative. Younger members want more responsibility and to increase their net worth faster. Is that a problem? This potential conflict needs to be discussed and planned for.
Do the investment structures adjust to the ownership of the assets? Remember that sometimes a partner may want out. Maybe they have different investment priorities or just need the cash; this needs to be planned for as well.
In other words, as the need arises, the remaining partners might need time to liquidate assets to generate the cash to fulfil the needs of an existing partner.
How to get help to be successful
Find a property manager who can help you grow and manage your assets.
Find an experienced real estate attorney.
Find a competent real estate centric CPA.
Find a consultant with this expertise.
Consider an Asset Manager.
Look online for wealth advisors specializing in real estate.
Find a commercial real estate broker who:
Understands the group’s goals, priorities, and investment plan
Knows the local market
Has relationships and /or is able to create relationships in remote markets
Is able / willing to invest effort to ensure the entire portfolio remains consistent with the investment plan
Emotions
Let’s not forget we all get emotionally involved.
We fall in love with properties, locations, and tenants. Love may not equal a successful investment. Managing these emotions is critical to the long-term, multi-generational success of this real estate pool.
Younger members of the operating team need to be nurtured so they can take over in the future.
Summary
As a group of investors, it helps if you have a vision for your group. For example, your statement of purpose could look like this:
Our family real estate partnership is focused on building a diversified portfolio of cash flowing real estate and using that cashflow and equity to grow our investments to $10,000,000 over the next ten years.
Or like this:
The management team of LBC Industries has formed a real estate investment group to invest together for the next fifteen years to build our retirement. Our goals will be reviewed every year and adjusted as necessary to be in sync with the growth of our company.
The bottom line is that good leadership, communication, and planning will help families be successful with their long-term real estate investment goals and enable successful generational wealth transfer. Younger members of the family could ‘apprentice’ with the experienced members in various areas of responsibility.
For instance, in year one old-timer Sam will work with Chad and Sue on the property management responsibilities for the group.
Next year, Chad and Sue will work with ‘wise investor’ Rich to learn about underwriting and purchasing while Jane and Tim work with Sam. Clearly younger members need to have an opportunity to mature and learn.
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909 , Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
