Investment Property With Father

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cosmonaut
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Investment Property With Father

Post by cosmonaut » Thu Jun 28, 2018 8:10 pm

Me: 35, lawyer, been working 3 years (a lot of graduate school in 20s). Current salary: $260K, but hard to predict salary over long-run, and it will likely decrease substantially in 1 to 5 years when I decide to take a job with better work-life balance. Partner and I do not plan on having kids; she works but does not contribute to savings.

Debt: 65 K (law school + undergrad). Will be paid off March 2019. I rent in HCOL area with no plans to leave in short-term, but could conceivably want to purchase a house in next ten years in another location.

Savings: 50K 401K, 11K Roth IRA, and 30K vanguard brokerage.

My father has made his living in real estate for the last 20 years. He has 50K in a 1031 exchange fund and has offered to make me a partner in a property to-be-purchased with his 1031-exchange money down and my credit (roughly $250 K purchase price). As long as he is alive and well--he's 61 and has some medical issues, but nothing life-threatening--I would have no responsibility in managing the property. I would likely receive some small monthly income and get the benefit of tax deductions. I currently have no interest in managing real estate and expect that I would sell the property when my father dies or becomes incapable of managing it.

From my perspective, while there are certainly risks in becoming his partner---e.g., sustained vacancies (though he's had something like 3 months in vacancies total across 40 properties in 20 years) or my father's early death which could generate a loss for me upon sale---it seems to me silly not to roll the dice.

Would you do this in my shoes? What factors should I be considering that I may not be thinking about? Thank you for your time.

123
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Re: Investment Property With Father

Post by 123 » Thu Jun 28, 2018 8:48 pm

People who keep business and family seperate may have fewer family/business conflicts.

If your credit is used (either in whole or in part) to acquire the property the liability for that obligation will likely reduce the available credit available to you for other purposes (i.e. your own home or other real estate transactions) as long as the debt remains unpaid. Adverse circumstances which neither you nor your father can anticipate may cause a partial or total loss. Adverse circumstances can include change in governmental regulations or requirements.
The closest helping hand is at the end of your own arm.

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unclescrooge
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Re: Investment Property With Father

Post by unclescrooge » Thu Jun 28, 2018 10:56 pm

Unless I completely distrusted his judgement, I would absolutely do it.

When he is unable to manage the property, just hire a property manager.

Don't listen to the naysayers.

If you avoid all volatility in investing, you'll end up poorer.

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Pajamas
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Re: Investment Property With Father

Post by Pajamas » Thu Jun 28, 2018 11:01 pm

Why doesn't he simply use his own credit for financing the property?

I recommend being very hesitant when someone approaches with an investment deal or similar offer and that advice doesn't change because it is a close relative. If you had asked him if you could partner with him to learn the business, maybe it would be different.

Also agree that it is best not to mix business with family or friends. It is sometimes successful but even under the best circumstances will stress the relationship. If you value your relationship with your father, be cautious.
unclescrooge wrote:
Thu Jun 28, 2018 10:56 pm
Unless I completely distrusted his judgement, I would absolutely do it.
What if you distrusted his judgment 50%?
Don't listen to the naysayers.

If you avoid all volatility in investing, you'll end up poorer.
I don't think volatility is a deciding factor in this situation, or even a major factor.

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unclescrooge
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Re: Investment Property With Father

Post by unclescrooge » Thu Jun 28, 2018 11:13 pm

Pajamas wrote:
Thu Jun 28, 2018 11:01 pm
Why doesn't he simply use his own credit for financing the property?

I recommend being very hesitant when someone approaches with an investment deal or similar offer and that advice doesn't change because it is a close relative. If you had asked him if you could partner with him to learn the business, maybe it would be different.

Also agree that it is best not to mix business with family or friends. It is sometimes successful but even under the best circumstances will stress the relationship. If you value your relationship with your father, be cautious.
unclescrooge wrote:
Thu Jun 28, 2018 10:56 pm
Unless I completely distrusted his judgement, I would absolutely do it.
What if you distrusted his judgment 50%?
Don't listen to the naysayers.

If you avoid all volatility in investing, you'll end up poorer.
I don't think volatility is a deciding factor in this situation, or even a major factor.
If OP distrusted his father's judgement even 25% I doubt he would have posted here.

clutchied
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Re: Investment Property With Father

Post by clutchied » Fri Jun 29, 2018 12:36 am

My dad and I were set to buy a 4plex about a year and a half ago and during close he bailed on me...

it's actually been a huge benefit but it felt pretty awful at the time.


the difference is that my dad knows zero about real estate.


It feels like your dad is trying to see if you want the family "business" or not. That's a huge portfolio and one that requires a decent amount of work but would be life changing to inherit.

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Sandtrap
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Re: Investment Property With Father

Post by Sandtrap » Fri Jun 29, 2018 1:58 am

Your dad owns 40 rental units (properties) now?
And, has offered you part ownership in a 1031 exchange valued at $250k of your credit (you will owe this) on 1 property?
. . . . hmmm.
Has your father made and accumulated substantial wealth over the 20 year period of finally owning 40 properties (in his name)?
Are most of these properties highly leveraged or "free and clear"?
What is your annual ROI (return on investment) starting from day one?
What is your liability?
Title in who's name?
Who will manage such property?
Would you have an exit plan?
Is the use of your credit and financial input needed or would this 1031 exchange take place with or without you?
If you are needed as far as finances, credit, etc. . . why?
Would this deal reduce your own personal credit availability should you need it for other things in your life going forward?
If your father passed away, how would that be a financial loss for you?

A few random questions I would be asking in your position. . . and more.
aloha
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inbox788
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Re: Investment Property With Father

Post by inbox788 » Fri Jun 29, 2018 2:13 am

cosmonaut wrote:
Thu Jun 28, 2018 8:10 pm
He has 50K in a 1031 exchange fund and has offered to make me a partner in a property to-be-purchased with his 1031-exchange money down and my credit (roughly $250 K purchase price).

As long as he is alive and well--he's 61 and has some medical issues, but nothing life-threatening--I would have no responsibility in managing the property.

I would likely receive some small monthly income and get the benefit of tax deductions.

...I would sell the property when my father dies or becomes incapable of managing it.
I don't understand the partnership. Are you equal co-owners? Unequal? Is there a contract? Will you split the profits down the road? How? If he should meet his maker, will you simply inherit his half, or is there the remote chance it goes to someone else? Is there an exit clause for either of you?

What would he and you do if you didn't invest in this together [opportunity cost]? What could he do with just 50k in 1031 exchange fund? and you you simply not use your credit capacity at the moment and maybe accelerate your home purchase?

Things to consider. Would you invest if this as an unrelated business partner? If you had $300k cash, would you invest in the property outright?

You're right to consider whether you and your father should be investing in the the first place, but beyond that, you have to consider whether the investment itself makes sense, and then consider whether tying everything together makes sense. They're all quite high bars to pass, and entangle you in complications that may not be worth the risk or generate enough return for risk.

BTW, 50k in a 1031 exchange seems quite low. Is this a residual amount? Do you know the size of the property sold and the holding period?

cosmonaut
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Re: Investment Property With Father

Post by cosmonaut » Fri Jun 29, 2018 8:53 am

Thanks for all of the input. To address some of the questions so far:

The 40 properties he owns and manages are not owned outright. Roughly 25% of the portfolio will be owned outright in 2026 and the remainder at varying dates over the next 20 years. He has business partners, with 1/2 stakes, in about 30 of them, and the other 10 are his. One business partner is a very close friend and he is the partner in 90% of the 30 properties; other family and friends are the partners in the others. He does all of the managing himself, with occasional help from the close friend. I believe his stake in the properties, once they are paid off, will be something on the order of $2.5 million in value. He has not amassed significant wealth. He can't retire and he can't hire a management company to run the ship, without changing lifestyle significantly. He takes a draw of just under $100 K / year. He has used all excess cash over the years to do what he can to finance additional acquisitions, and partnered with others where necessary. My parents own their $800 K home outright. I have recommended cutting life expenses for years so that he can increase contributions to ordinary investments, but that has not happened for various reasons, and I believe my parents have approximately $200 K in cash / brokerage account.

We would be equal co-owners. Upon his death, his half-interest in the property would pass to my mother and then to the children (me included) in 1/3 shares. We have not hammered out details, as we have just started discussing this, and I could try to push for a different arrangement, but I wouldn't feel great about doing so. We will need to discuss title issue. We would split all profits.

I think the 1031 exchange transaction would go forward with or without me, though I think he would look for financing from one of his usual sources. I think he's offering to me (as opposed to the close friend or other relatives) solely because he'd rather have me reap the rewards. (To be clear: he needs the financing and I understand that it isn't a straight-up gift.)

He would certainly be happy if I wanted to learn the business and eventually take over for him, but I've been very clear that I'm not interested in this and he understands and accepts it. I would have no role at all in management, though I'm sure we would talk about it, and I would obviously be involved in any substantial discussions about the property....roof caves in and I'm sure that we're on the phone discussing it, though I would defer on all the decisions about how to handle messes.

I trust his judgment almost completely. He is an incredibly generous and honest person. He has made the real estate life work, starting with almost nothing at age 40 (after making a big career change), and---with one exception on a project he sold at a loss---he has been positive cash flow accounting for all expenses on every property to date.

I expect that the deal would surely reduce my available credit for other purchases going forward. I also expect that, if I ever do buy a house (and I can easily imagine staying in my very HCOL area and renting for 10 to 20 years, though nothing is certain), I will not be buying anything close to the biggest house I can afford, and am not particularly worried about being able to finance that purchase, though maybe I should be.

Shallowpockets
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Re: Investment Property With Father

Post by Shallowpockets » Fri Jun 29, 2018 1:55 pm

He owns 40 properties. Within the next 20 years his stake will be about $2.5 million. He will be 81 then.
He can't retire.
That sounds "successful" but only marginally. He is making a living, that's all. He can't retire are your words. He has had twenty years of doing this. Seems like he should be able to retire.
Now, he offers you a chance at this. At this, what is outlined above.
I don't see any big upside for you here. Not to plunk down $250k of your own momey.
Seems like your father has cobbled together a sort of makeshift real estate empire based on a near constant infusion and acquisition of properties through a friend and family network of financing.
The numbers don't add up in a way that allows him to retire. And the same game with similiar numbers will not add up to anything you couldn't get by investing that $250k at a lower risk using the BH principles.

cosmonaut
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Re: Investment Property With Father

Post by cosmonaut » Fri Jun 29, 2018 3:41 pm

Shallowpockets wrote:
Fri Jun 29, 2018 1:55 pm
He owns 40 properties. Within the next 20 years his stake will be about $2.5 million. He will be 81 then.
He can't retire.
That sounds "successful" but only marginally. He is making a living, that's all. He can't retire are your words. He has had twenty years of doing this. Seems like he should be able to retire.
Now, he offers you a chance at this. At this, what is outlined above.
I don't see any big upside for you here. Not to plunk down $250k of your own momey.
Seems like your father has cobbled together a sort of makeshift real estate empire based on a near constant infusion and acquisition of properties through a friend and family network of financing.
The numbers don't add up in a way that allows him to retire. And the same game with similiar numbers will not add up to anything you couldn't get by investing that $250k at a lower risk using the BH principles.
Thanks. I’m not sure, but it seems like you think I’ll be putting money into this, at the expense of investing in the market. This is not the case (or at least not the plan). While surely possible that vacancies down the road, or renovations that aren’t properly budgeted for, could force me to put money into the project, I will not be investing any cash up front. Instead, I will be using my borrowing power to put myself in a position to own a stake in a property, where, if all goes well, I will see modest short term profits and eventually part-ownership of a real estate asset. So I don’t think its right that I won’t get anything that I couldn’t get by following bogleheads principles. The alternative isn’t to put all of my savings into my brokerage account—-I will do that independently. The alternative is to do nothing.

bearwithbear
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Re: Investment Property With Father

Post by bearwithbear » Fri Jun 29, 2018 4:10 pm

Cosmonaut,

I would do it. Your school debts will be gone in less than a year. There is 50K your 401K which hopefully suggests that you are making contributions while getting out from under the school debt. And it reads to me, that this is something that both you and your father would like to do.

Given what you have written, it is a go.

Bear

Carefreeap
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Re: Investment Property With Father

Post by Carefreeap » Fri Jun 29, 2018 4:42 pm

I would pass.

As someone pointed out he's been at this for 20 years and he can't retire at age 61.

You would not enter into a deal like this on your own. Dealing with a family member will make it worse. My father and brother have just started speaking again after 10 years due to a real estate deal gone bad.

You don't say what kind of attorney you are and I'm guessing not a real estate attorney. You should know that all properties have some kind of problems.

Save yourself a big headache and buy your own house using your funds.

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