With it becoming more difficult to obtain financing when investing in several properties, it often makes a lot of financial sense for family or friends to pool their resources to invest in the market. Sometimes, the joint investment is designed to help a young couple get their first home, while other times it's just a group of two or more investing together for the profit and fun of being involved in a money-making project. Whatever the motive, one always has to exercise caution when investing with family or friends.
There's little doubt that partnerships with loved ones sound like a wonderful solution. Pooling investment resources and expertise with someone you feel you know incredibly well to create a strong investment team with a single-minded goal can be an exhilarating proposition.
There are many benefits to pooling money and talents. However, with the positives can come downsides that you simply wouldn't have to deal with if your partners were not close family - such as intense business discussions held over the Thanksgiving dinner table.
One thing to keep in mind with family investment partnerships is that all the past family baggage and old set-in-stone behavioural patterns come along for the ride, and the partnership can get a little crowded with all these ghosts on board. Still, family investments can lead to amazing results. The key to making a business relationship among family or friends work is to set some clear guidelines at the beginning and then stick to them.
Here are proven tips for making your real estate partnership with a friend or family member a complete success, from people who've learned the hard way.
- Acknowledge upfront that differences in opinion will occur on a regular basis and that these are healthy and need to be dealt with in a business-only discussion.
- Discussions of business should be held during scheduled meetings, not every time you get together. For instance, birthdays, Thanksgiving dinners and other family gatherings are for family, not for business. Schedule regular business meetings to deal with and update the business issues.
- All parties must agree to work very hard to be adults and keep business disputes well apart from family relationships. Remember, these are business deals, not life or death. Family must always come before money.
- Design a dispute-resolution process for when the inevitable impasse occurs. Decide ahead of time who will act as this independent resource to help broker a successful resolution to the issue at hand.
- Acknowledge that one party will always think he or she is doing more work than the other. Schedule a regular twice-yearly meeting solely to discuss the division of labour and expertise.
- Treat it like a real business. All joint-venture agreements, cash infusions and divisions of responsibility must be put in writing and agreed to by all parties involved - no exceptions. Have a written contract, not just a hand shake.
- Define rules to deal with the inevitable situation in which one partner wants to buy a certain property and the other doesn't. One party may still decide to purchase a property on their own, so how will this affect future investments? Regardless of the specific details, it is critical that these discussions are had long before you agree to get into business together. Disputes will always be much smaller when guidelines are set ahead of time.
- Decide in advance on an exit strategy for the partnership by determining exactly how the business venture will be terminated if and when the time comes. In this process, remember to address the key elements such as property valuation, portfolio liquidation, partner buyout and sharing of tax liability and if one partner buys out the other. It is much easier to deal with all these details before there are large dollars on the table. Do it early and have it in writing.
- Consider bringing in a clause in case one side wants to buy out the other; this ensures fairness in determining the offering price. Keep an eye to fair dealings at all times, with a workable exit strategy for either side should the need arise. You may even want to include sample math in the agreement so that everyone is clear on how it will work.
Remember: You want the friendship or family relationship to come through the whole process intact and enhanced, not in tatters. By organizing your friends or family joint venture correctly from the beginning, you will keep disputes to a minimum and fulfil your real estate investment's potential.
Don Campbell is a real estate investment educator, analyst and investor. He is Canada’s bestselling real estate author of Real Estate Investing in Canada version 2.0. Visit www.realestateinvestingincanada.com
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