Pride Comes Before a Fall

My father-in-law figured out the benefits of real estate investing decades before there was a Bigger Pockets. Working as an architect in the 1960s and 70s he started a side gig purchasing single and multi-family properties around his home town of Pittsburgh. When I married his daughter in 1992 he was free-lancing part time as an architect and living off the passive income from his rental properties. It seemed like a really good set up. One I wanted to emulate.

I was drawn to him in other ways, as well. He has a gigantic intellect. He could (and still does) talk endlessly about architecture, art, wine, and European cultures. He speaks 4 languages. He paints. He sculpts. He travels. He is fascinating to be around.

I was in the Navy when I married his daughter, so we didn’t spend much time in Pittsburgh. When we did we never really talked about his real estate business. He might mention a maintenance or tenant issue in conversation, but my direct questions were always met with evasive answers.

How many properties do you own?

Oh, 15 or 16, I’m not really sure.

Many people don’t like to talk about their money, and he seemed like one of them. It seemed rude to press, so I never did. I asked my wife a question or two about it, but it was obvious she didn’t know anything about his real estate investments either. He just kept that business to himself.

It wasn’t until decades later that my wife’s youngest brother, also an architect, also a real estate investor, started to discover there might be some problems. Brother-in-law was also investing in Pittsburgh properties, and he and father-in-law were sharing some contractors for maintenance. Some things he was hearing led him to look further into his father’s affairs, and the news wasn’t good. He pressed his septuagenarian father into coming clean with all of us at Thanksgiving a few years ago.

Here is the short version of events: As my Father-in-law aged he started to let things slip with the management of his properties. He wasn’t screening tenants thoroughly. He wasn’t inspecting his properties regularly. There were significant repairs needed. He had almost completely abandoned keeping books. Cash flows on the properties had gone negative years earlier.

He was no longer working as an architect. After burning through his savings, he started taking loans secured by his rental properties. He was in default on several loans and the bank was moving toward foreclosure. He was also behind on real estate taxes. He needed tens of thousands of dollars to keep his ship afloat.

We were stunned. We had noticed that he seemed to become a bit more forgetful over the years, but we never put it together that it might be impacting his real estate business. Certainly not to this degree. We sat in silence for a time, trying to get our heads around these issues.

Youngest brother had done a little homework. He showed us what was owed and what the properties were worth. He had some rough projections on cash flows if restored and managed properly. There seemed to be value there, but we knew we didn’t have all the details. After the holiday we were all scattering back to our homes far away, and the bank was breathing down his neck. Nobody had any better ideas so we all ponied up some cash to buy time to get a more thorough understanding of the situation.

Things got worse before they got better. Years of neglect had to be repaired. Some nightmare tenants had to be evicted. One brother talked his father into selling a couple of properties without consulting the rest of us – learning an expensive lesson in depreciation recapture taxes. This led to Powers of Attorney being put in place, which was a bitter pill for some to swallow.

The most difficult and stressful issues arose from the fact that we suddenly had a family in business together, but no business relationships had been established. My father-in-law suddenly found himself not fully in control of his own affairs for the first time in his life. My wife and her brothers were suddenly uncompensated partners in a business adventure without structure, processes, or clearly defined goals. There were some very tense moments.

Fast Forward.

It has worked out, but success was not always certain. Fortunately, there was enough value in the properties to get us where we needed to be. There is (once again) sufficient passive income to support my father-in-law. He is 80, and while some health issues have arisen, he remains able to live on his own. He also still participates in the operation of his real estate business; coordinating most of the maintenance and being ‘on call’ for tenant issues. None of his children live in Pittsburgh, so his presence ‘on the ground’ is valuable.

My wife and I keep his books, both business and personal. One of my wife’s brothers screens tenants and deals with those issues when they arise. He also follows up on repairs and maintenance. The other brother is his father’s personal secretary; dealing mostly with health care issues. It is not an even distribution of labor, but we all have different skills and different levels of availability. This has worked itself out over time as the arrangement producing the least friction.

The plan now is to keep this going for as long as possible, but his deteriorating health leaves no doubt more changes are coming. When he can no longer live on his own he is moving to Virginia to live with us. This will leave a hole in the Pittsburgh operations that needs to be filled. He resists hiring a property manager, but I don’t see how it can be avoided. We need someone on the ground in Pittsburgh when he leaves. The tax issues from the prior sale of a few properties has us all in agreement that we are better off keeping this operation going for the rest of his life to take advantage of the step up in basis his estate will receive. A somewhat morbid, but highly effective tax strategy.

As the dust settles I can’t help but contemplate how this could all have been avoided. (I am a financial planner, after all!) Planning could have mitigated some of the financial and emotional pain we experienced as his empire slid toward ruin. I urge everyone reading this to consider how it would impact your family if you were no longer able to manage your real estate affairs. What does a successful outcome to that situation look like? Put the mechanisms in place now to ensure that you have a successful outcome. Get your loved ones involved. Don’t make them argue it out over Thanksgiving dinner.