8 Reasons You Shouldn’t Mix Family With Real Estate Investing
“Keep your friends close, enemies closer, and family as far away as possible.” — Engelo Rumora
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
We all love our family very much, and we’re always trying to help them out or make them happy. We want to see our family prosper, and real estate investing can definitely help accomplish that. However, as I quote above, when it comes to business, especially the sensitive area of real estate investing, it makes sense to keep your family out of it. “Why’s that?” you may ask. Here are a few important reasons.
8 Reasons You Shouldn’t Mix Family With Real Estate Investing
1. Generational gaps cause conflict.
Scenario: Parents tell their children to get a “normal” job.
Most of our parents have been brought up the old fashioned way, giving them a stereotypical view of life. Our parents might want us to take life step by step. They want us to go to college, get a degree, buy a house, and spend the rest of our lives paying it off! That was the way of life during their time, and to them that defines “success.”
It’s almost impossible to shift their thinking. Instead of getting agitated or showing them what investing feels like, it’s better to listen to them — and then ignore what they say. I have seen way too many investors give up on real estate just because their folks wouldn’t see their point of view. That’s because real estate investing needs a different way of thinking. So it’s more important to just follow your dreams and leave the generational gap for what it is.
2. Feuds happen within families frequently.
Scenario: Fights repeatedly happen over inherited properties.
Check any type of family business in any country, and you’ll see a history of feuds. You will see family disputes about who owns what share of the business or about how one family member was duped by another. Disputes over inherited property happen all the time.
In real estate investing, you’d see family back out of a deal just when they’re needed the most. They might have gotten a better deal elsewhere, and you’re unsure whether to be happy for them or feel sorry for your situation. And these feuds don’t just happen between cousins. There have been many instances when I’ve seen feuds over business between parent and child, siblings, and married couples as well.
While I don’t say that this is true for every family that invests together, the numbers are quite alarming. Add personal implications into professional endeavors, and it’s easy to see why it’s smarter not to mix work and family. Some of the best deals we’ve ever bought were estate sales where the siblings were greedy and just wanted to sell their house for anything they could get.
3. Trust issues run rampant.
Scenario: “But I trusted you.”
If you thought that issues with trust only existed when you didn’t know people, here’s news. Trust-related problems can come up with family as well. In this case, you may have to deal with “over-trusting.” We maintain strict professional boundaries with colleagues, which ensures the success of a business. We tend to trust our colleagues at face-value, but do not give credit where it isn’t required or deserved.
On the other hand, the comfort of family relationships can adversely affect this equation. This is because family members tend to over-trust each other, which can lead to clouded judgment. Not all decisions that a family member makes are right, but because you trust them, it can lead to losses and disruptions. Think, for example, about contracts. “You’ve seen it, so I’ll just sign” is a simple statement built on trust. But just imagine what would happen if the deal goes south just because the paperwork wasn’t complete or correct. What would your family member say? “I trusted you.” Those three words will put all the blame on your shoulders. Decision-making becomes emotionally driven, and common sense takes a backseat.
4. Just because they’re your family doesn’t mean they have experience and expertise.
Scenario: Your cousin might own a few properties — but that doesn’t make him an expert.
Family members often lack the experience you require from a real estate investor, which makes them unsure. Their expertise often lies in other subject areas, and they’re here just to dabble. True, in some cases you may know a cousin who deals with real estate. While you might feel that this cousin can help you get a home, it may not be entirely true. This is because they could lack expertise in the particular needs you have, or they have no networks in your neighborhood.
Also, families that invest together do it because of goodwill, and this comes with a lack of expertise and experience, two aspects that can prove costly when making a deal. For a business as demanding and dynamic as real estate, expertise is the most important strength to have. Knowing your investment portfolio, knowing where to invest and at what time to invest, and having great negotiation skills are key.
5. Family members can be incompatible in their goals.
Scenario: A father wanted to simply make money from a deal, while the son wanted to build his investment portfolio.
We get to choose our business partners, but never our family. Therefore, when you involve your family in business, you could end up having “compatibility issues.” A family member who is compatible in personal life won’t necessarily be compatible in professional life as well. More often than not, people who get along well personally can have contrasting goals in their professional lives.
Most people who have good personal relationships do not take worst-case business scenarios into consideration. This, in turn, leads to incompatibility at work and distress in goal setting. Similarly, bad business relationships lead to bad personal relationships as well.
6. Money matters can bring out the worst in everyone.
Scenario: A son sues his father, who was one of his partners at their real estate firm. The reason was that he felt he had been undervalued. The father lost the case.
Families thrive as long as they have a common understanding about money. However, lending on or financing a deal, especially in real estate, can change equations. Once a huge amount of money comes into the picture, conflicts may arise, which in turn can adversely affect business decisions. Browse the internet, and you are sure to find hundreds of stories where one family member sued the other because they felt that they had been unjustly treated over a business deal.
7. Family creates a lack of leverage.
Scenario: “OK, whatever” is the catchphrase in most decisions.
One factor that most people don't consider while working with family is that they lose leverage to operate. In a professional relationship, you can demand rework, be harsh with deadlines, and even haggle on price. However, when it comes to family, it creates an awkward and difficult situation, where haggling is just not an option. Everything is based on how a professional decision could affect your personal lives, and this lack of leverage just hits both.
8. Family can lead to subpar work.
Scenario: A person called in his friend to do the interior of his apartment. He definitely saved money, but the quality of work was bad, and there was nothing that could be done about it.
With family, legal paperwork feels awkward, and often you end up working without proper contracts in place. When you do not have a contract, each party assumes fictional details about the deal. This leads to disparity between the two of you, and work suffers. Also, because family is involved, you might not be too strict with deadlines either, causing delays or slower speed of work. There have been many stories of how family and friends have had to see work suffer just because of family relations.
After all, they have your best interests in mind, but relationships do suffer when any of the above issues come up. They suffer when a business goes down, creating financial implications. They even suffer when business improves. Spouses who are in the same line of work find it difficult to take a holiday together, as one of them needs to be constantly on the job. And as a result, irrespective of whether the real estate deal turns out good or bad, the family suffers.
While there are some occasions where mixing real estate investing and family may work, it isn’t a bright idea in most cases. That’s because, more often than not, you end up putting a lot of mental and emotional energy into the wrong issues. You tend to feel obliged to help those you love the most. More importantly, at the end of the day, while this stresses you out, it hurts your family too, making matters worse. And that is an outcome you do not want. The next time a family member you know asks for assistance or guidance, provide those two in a different way. Just don’t try to get them into business with you — because you could end up in a court, publicly fighting with someone you care about very much.
Investors: What do you think? Do you have stories of working with family effectively — or stories of disaster?
Let me know with a comment!