If you want health advice, you might ask a doctor. If you want pointers on home improvement, you’d call a contractor. If you want expert tips on how to invest in property with family? You come right here.
You’re interested in property investment, but you’re not interested in going it alone. Instead, you’d rather pool funds with family to purchase an investment property together. Investing with family is a trick the wealthy have been using for generations. Despite the chestnut that mixing money and family is a mistake, with the right plan in place, investing with family can be rewarding and fun.
This post will provide five expert tips to safely invest in property with family. After reading, you’ll be armed with all the information you need to knock your alternative investment opportunities out of the park… without ruining your relationships.
Pros and Cons of Investing in Property with Family
Before we provide our top tips for investing in property with your family, let’s first discuss the pros and cons of pursuing this type of investment opportunity.
The Pros of Investing in Property with Family
The first benefit you can enjoy when investing in property with family is access to higher-value properties. If your investment budget would allow you to purchase a $200,000 property, partnering with two or three family members with similar budgets can help you access a property worth more than half a million dollars.
This increased budget may provide you the opportunity to buy a property that is a better fit for your purpose. For example, you could purchase a short-term rental property in a more downtown area.
Additionally, when you invest with family, you can partner with people you know and trust for maintenance and landlord responsibilities. Investing in a rental property requires more than just a pocketbook—you need to understand how to manage a property, find buyers or renters, and handle payments. Investing with family members means you will get assistance with all these processes and more.
Lastly, investing in property with family can help you build generational wealth. Not only can you invest in valuable property that you can pass down to the next generation, but you can also share investment know-how and experience with younger family members, helping them to succeed in their future investments.
The Cons of Investing in Property with Family
Investing in property with family is also not without its challenges. Firstly, you can face relationship challenges stemming from arguments or miscommunications regarding your investment property.
Additionally, the buying process can become more complicated when multiple investors are involved. Whose name goes on the deed? Who makes the final decision as to when to pull the trigger on your investment? These questions and more will be important to answer before investing with family.
Thankfully, these challenges can both be easily solved by starting with a game plan, aligning your family early and often, and implementing an investment alignment tool like Tribevest. Tribevest can help you create your group mission statement, pool capital, set up group voting processes, and more. Check out our features and pricing page today to learn more.
1. Understanding the Pros and Cons of TIC vs. LLC
When you are investing in property as a group, you may face two different options for property investment entities: a Tenancy in Common (TIC) and a Limited Liability Company (LLC). Which is best for your group?
At the risk of spoiling the rest of this section, you will want to pursue an LLC for your group investment. Let’s look at a few reasons why.
- Liability:
In a TIC, if someone is injured in your shared home, they can directly sue you and your co-owners. If you purchase the property as an LLC, your personal assets will be shielded from liability.
- Operating Agreement Requirement:
A TIC does not require an operating agreement. Though this may seem like a positive, you do not want to skip the step of creating an operating agreement. Skipping this step will set you and your family up for miscommunications and other challenges.
- Inheritance:
If you invest as an LLC, you can control who inherits your share of the property if you pass away. With a TIC, the ownership of the deceased’s shares automatically passes to their heirs, which can cause trouble if they are not the desired partners for this investment opportunity.
- Business Entity:
Lastly, the LLC is a better fit because it is a separate business entity. This makes it easier for you to separate family from the business of your investment group. Additionally, this step allows you to avoid probate court if one group member passes away.
2. Prepare for Unexpected Costs
If you’re looking to dive into property investing, you need to expect the unexpected. This chestnut is especially true when it comes to costs. Even if a property looks flawless initially, you must prepare and budget for unexpected repairs, renovations, and other property management costs.
You’ll want to decide on the capital every member of your group is comfortable investing upfront. Then, you need to ensure that you do not max out your budget on the property itself. Set aside a portion of your investable capital to put back into the property once your group has purchased it.
Trust us, and thank us later.
3. Formalize Rules and Processes
Remember when we briefly discussed the importance of your Operating Agreement? We’re about to double down on that.
The biggest mistake you can make when investing with family is leaving things up to a “handshake deal.” It’s easy to assume that a handshake deal will be enough since you love and trust one another. Instead, failing to formalize your business relationship with your group members will breed misunderstandings and, ultimately, resentment, which is the last thing you want when investing with family!
Create formal rules for your group in the form of an Operating Agreement. Employ the assistance of a lawyer if necessary, or use an alignment tool like Tribevest to keep all communication centralized and transparent. Set up clear voting procedures to keep your group organized and keep decisions unbiased and fair.
Taking these steps early on in your group formation process will save you a lot of headaches down the road.
4. Use a Group Investment Platform
Coordinating an investment group can be challenging. This is especially true when your communication occurs over several Slack channels, text conversations, and email threads. As a result, we recommend that you use a group investment platform to keep track of all documents, communications, decisions, and more related to your property. Using a group investment platform ensures that every group member is in the loop throughout the process.
You can use your group investment tool to stay organized. The right tool for your group will include features like cap table and ledger management tools. You can also use the right tool to pool capital into a single business bank account, keeping things transparent and fair across your group.
Tribevest offers the most comprehensive and easy-to-use group investing platform on the market. To see how we can help your group get started the right way, check out our platform today!
5. Approach it with the Right Mindset
Our last expert tip is to approach your group investment with the right mindset. By this, we mean to approach this investment opportunity the same way you would approach any other investment opportunity.
As much as you may trust the older members of your family, no investment is a “sure thing,” even if Dad said it was. You need to be prepared to be wrong about an opportunity and invest with the knowledge that you may ultimately lose that capital.
It’s important to approach family investing with the mindset that the entire group is learning and growing together. If you expect a single family member to have all the answers, you are setting the stage for future resentment and strife.
Remember: Investing with family can be fun! If you approach things the right way, take the proper precautions, and use the right tools, you can strengthen your familial bond and level up your wallets at the same time.
Build Wealth and Grow Together by Investing in Property with Family
Investing in property with family can feel intimidating, but it doesn’t have to be so difficult. If you follow these five expert tips, you can set your group up for investing success. When you invest in property with family, you can build generational wealth, learn about new assets, and make memories that will last your family a lifetime.
There’s more to investing in property as a group than these simple tips, however. You need an organizational tool to help you easily manage your group. Tribevest is the perfect tool for investing with family or friends.
You can use Tribevest to file your LLC, coordinate funds, communicate with group members, and more. Get started today to see how Tribevest can make your dreams of investing in property with family come true.
