Help! I own an investment property with my family and we disagree

17 Replies

As a property manager I have customers who own investment properties with family members but they don't see eye to eye with that family member when it comes to the investment property.  I'm sure we have all heard stories and have personal experiences of owning businesses and investment properties with family members, I know I've learned my lessons.  I would like to give my customers some ideas and direction on where to start and some options they may have with how to address this situation and eventually solve it without causing too much family strife.

Thoughts?

The disagreements are related to the normal stuff.  How to handle or who to hire for outdoor/indoor maintenance, property management, whether to keep or sell the property, should we buy another property?  The family situations have been mostly one or both parents and their kids.  I would describe it as the normal disagreements found in many businesses and discussions between investment partners.  Given that does this require a family business/real estate lawyer?  Are there people that specialize in this area?

@Geoff Pettis Are these family businesses set up as LLCs or owned individually? Either way it sounds like all members have the same authority to do most everything, which is where the problem is and also may not be the best set up for the family for many reasons depending on their situation. A lawyer who forms partnerships and LLCs could advise what's best. Maybe whomever put in the most initial capital wants to be the sole person with authority. However, even with an LLC, the person making the day to day decisions can have personal liability in some cases, so it may make sense for the person who contributed the least amount of capital (if they have fewer personal assets) to have sole authority. If they insist on all having equal authority with no way to "break a tiebreaker" then I can see how there will be problems with some families.

@Harry Gamble Thanks for the input, your confirming my initial thoughts.  I'm seeing two separate challenges.  First is the overlap between what can be the challenging dynamics of a family business relationship and the flexibility or lack thereof of the legal structure of the entity that owns the property.  Great food for thought, what are the best legal structures for family members that own investment properties?

Above all else, it's a business.  Either there is a general manager/partner who calls the shots - and is also held accountable for those decisions - or each member takes on a specialty area to which they are accountable to the other members for its success.  The problem often times is that everyone wants to be the decision maker BUT not be held accountable for the outcome.  So, I recommend forming "departments" and giving participating family members HUGE titles - like VP of Tenant Acquisition and Retention, VP of Property Maintenance and Improvements, VP of Capital Expenditures 1-5 years, VP of Fiscal Management and Planning.  Then define what falls under each title.  Hold business meetings and get reports from each...keep it formal; keep it all business.  The legal structure is important but playing well in the playground makes for common goals and wealth creation.

An LLC is most common, unless the owners are seeking lending and the LLC doesn't have enough history to qualify for a loan, in which case it is done personally.

If some of the family members want to sell, then I think the best thing to do is sell the property. Let them go away and then the ones interested in real estate investing can invest other places. If there are five family members and two want to walk away, the three investors could finance the home to buy out the other two. Then you are left with three investors that want to be investors. They can put it in an LLC and hand it over to a professional property manager to figure out who's mowing the lawn, which application to accept, etc.

As Patricia said, there needs to be one person in charge, period. If they can't agree on that basic policy, they should sell the house and then invest in their own properties individually.

If you're licensed to sell, this is a great opportunity to help them sell and then help a few of them purchase their own investments. You can get 3-4 sales and a couple management contracts out of this!

As an addition to this discussion does anyone in the Twin Cities have a referral to a lawyer that has experience with family businesses in addition to real estate?

@Brad Schaeppi can help you out.  Key is to get a solid operating agreement up front so when these issues can be dealt with by looking at the operating agreement.  You can add any language you want, easier to agree on things in the beginning vs when problems arise.

Here is my experience on partnering with other people.  

I used to have partners with other people.  What ended up happen is everybody wanted to cash out and run away at the very first sign of inconvenience.  

Later on, I shared this experience with a business owner I befriended.  He told me something that made perfect sense.  Most people are W-2's and have W-2 mindset.  Meaning if they start a business they will always see it as a side gig.  In other words, if there is even the slightest inconvenience or risk, they will quit and run away.  

And since W-2's make up the overwhelming majority of the population, it is very hard to find another entrepreneurial minded individual to partner up with.  I'm gay and I've been told it is even harder to find another entrepreneur to partner up with than finding another gay dude to date.  

For example, when the pandemic shutdown and eviction moratorium hit, my business partner's natural instinct was to sell everything, pull back, and dig in.  I disagreed.  I thought now is the time to expand.  If we want to survive this, we have to expand and look for other sources of revenue while we still have the resources and strength.

I think of it in a military sense.  If our walled city is under siege, most people would want to close up the gates and hope for the best.  Slowly starve.  From my perspective, we need to fight RIGHT NOW while everyone still has the strength and we still have the resources to carry out a battle.  If we wait it out, it just means we will die slower.

Well, we fundamentally disagreed and parted ways.  I went ahead and used the remainder of my resources to obtain more properties from other landlords who are in distress. 

@Geoff Pettis it seems that the solution may be in your hands… literally. Perhaps tell them that you need to be allowed to fully manage the property or respectfully resign. They can expand your decision making authority. If they don’t trust you, then they should find someone they do trust.

In this case you take over all decision making, except perhaps the decision to sell. Make sure you have a good PM Agreement that defines your role.

Or just step down. This job is hard enough without owners’ disagreements making it impossible. 

Just food for thought 

Bob



It really depends on the situation.  It is hard to say without knowing what the scenario at hand is.  Family adds a layer to the mix.  Before I partnered with my brother , I made sure we were on the same page as business partners first with an understanding of this works if push comes to shove.  In the end, I wouldn't break apart my family relationship for business though.  Each person is different.

Originally posted by @Geoff Pettis :

As a property manager I have customers who own investment properties with family members but they don't see eye to eye with that family member when it comes to the investment property.  I'm sure we have all heard stories and have personal experiences of owning businesses and investment properties with family members, I know I've learned my lessons.  I would like to give my customers some ideas and direction on where to start and some options they may have with how to address this situation and eventually solve it without causing too much family strife.

Thoughts?

Limited partnership agreements. Done.