We’ve all heard the horror stories: So-and-so loaned money to his brother and now they don’t speak anymore. The couple down the street bought a vacation home with their siblings and had to sell it six months later because they couldn’t stop bickering about maintenance. Moral of the story: Don’t invest with family… right?
Wrong!
Tribevest’s roots are in investing in property with family! My brothers and I started our group investing journey by purchasing a vacation home together. The truth is, the issues you’ll find investing with family are the same issues you may encounter investing with anyone else: You just care about preserving the relationship more—as you should! So, how can you safely invest in property with your family without damaging your bond?
Investing with family can feel risky from a relational perspective, but it doesn’t have to be. We’ll explore four common problems with investing together as a family and how you can avoid them.
Investing in Property with Family: The Benefits
We know the title of this post is centered around the problems of investing in property with family, but what can we say: We like to see the bright side of things. So, before we dig into the challenges you’ll need to avoid when investing with family, let’s first answer one important question: Why would you want to invest in property with family in the first place?
Buying property with family provides several benefits, including:
- Higher-Value Properties: Investing with family allows you to pool capital to access more expensive properties than you could afford on your own.
- Teaching and Learning Opportunities: More senior family members can pass on their knowledge of investing to younger family members. Not only is this helpful to leveling up the investing skills of the younger generation, but it is a great way to bond with your family.
- Generational Wealth Building: When you invest in property together, you purchase assets that can be transferred to younger generations and help them build wealth long into the future. Additionally, you spread knowledge and investing experience to the younger members of your family.
- Spread Risk: Investing with a group spreads the investment risk, enabling you and the rest of your family to build wealth through diverse portfolios.
Tribevest was formed as a result of family property investing. I began this journey by investing in a vacation property with my brothers. We went in blind without much of a plan. Though our investment was successful in the end, when we were asked what we would do differently if we had the chance to do it all over again, we said, “Just about everything.”
Instead of muddling through on your first go-around, learn from our mistakes! Let’s discuss the five most common issues people run into when investing in property with family—and how to overcome them.
1. Unrealistic Expectations
The first problem you may encounter when investing in property with family is unrealistic expectations. Unrealistic expectations can be a challenge in any investment opportunity. Still, families who invest together run a higher risk of falling prey to them for a simple reason: Family members trust one another.
This trust is exactly what can make family members such incredible investment partners. However, that trust can turn problematic if an investment opportunity brought to the table by one of those trusted family members doesn’t pan out. In short, things can feel like they’re going swimmingly until you reach a fork in the road: Once those “what-ifs” and “then whats” start happening, you’re in trouble if you haven’t made a game plan in advance.
How to Mitigate This Problem
The easiest way to avoid this problem is through communication. By setting clear expectations in the form of a mission statement and operating agreement, you’ll ensure that every party involved in the investment is aware of the risks and requirements from the beginning of the opportunity. That way, no one will feel duped if things don’t go exactly as planned.
2. Unfair Division of Responsibility
Next, you’ll want to watch out for issues stemming from an unfair division of responsibilities. When families invest together, if one member feels they are contributing more time and effort to managing or renovating the property than other members of the group, they may feel upset or betrayed.
The close bonds of a family mean emotions like this can cut far deeper than they might if you had partnered with a stranger or a colleague for your property investment. On the flip side, it is much easier to inadvertently lean on other family members to pick up your slack than it would be to slack off with an outside partner.
Related Read: What is an Investment Group?: Top 5 Investing Group Structures
How to Mitigate This Problem
Avoid running into this problem by remembering that you are not just family: You are members of a business partnership. Establish property management responsibilities early on and set them in stone by including them in your operating agreement. Then, ensure all members of your group stick to that agreement.
3. Generational Differences
Another challenge you may face when investing in property with family is the challenge of generational differences. This challenge can take a few different forms.
One common difference is that many members of older generations are more risk-averse than people in younger generations. Members of different generations may have different investing goals. While older members are looking for safe ways to store their wealth (while beating inflation), younger members are likely more interested in growing their wealth with higher-risk, higher-reward investments.
On the other hand, younger family members may not want to (or be able to) contribute the same amount of capital as older, more established family members.
How to Mitigate This Problem
Unfortunately, this challenge is difficult to avoid entirely without screening out family members from different generations altogether. The best way to manage problems stemming from generational differences is by maintaining open lines of communication and setting a budget and a risk threshold upfront and sticking to it.
Also, if you’re investing on Tribevest’s group investing platform, it’s easy to set up cap tables that define each member's contribution and percentage of ownership in the deal. That way each member can contribute as much or as little as they feel comfortable with.
4. Emotional Decision-Making
Most of us have said something to a sibling or parent in anger that we would never say to someone outside of our household. Family members are close, which means they often operate without a filter.
The closeness of a family can mean that small disagreements can turn into squabbles that result in poor decisions for the group and relational distress outside of the investment. If your investment group spans several generations, you may also run into challenges where older family members try to claim seniority in the face of a decision, regardless of the results of a vote.
Related Read: Invest in Fine Wine and Spirits Collections with Friends and Family
How to Mitigate This Problem
You can help take some of the emotion out of your business partnership by working with a neutral third party or platform to standardize and formalize processes like voting and communication. A third-party platform like Tribevest will guide you through the best practices for investing as a group while providing accountability to all through transparency of records and shared decision-making.
5. Lack of Succession Planning
Lastly, when investing in property with family, you may run into the problem of succession planning. When you are investing across generations, it is important to consider what happens to a family member’s share should they pass away during the course of the investment, unpleasant as it may be to think of such things.
You’ll also want to make game plans for what to do if a family member simply wants out of the investment opportunity or, conversely, if additional family members want to buy in later on if the investment is a success.
How to Mitigate This Problem
Again, forethought and prior planning are the best medicine for this particular ailment. Set forth rules for buy-outs, buy-ins, and passing down shares in your operating agreement. By asking these questions up front, you can make level-headed decisions and plans of action rather than trying to scrape together a solution in an already emotional moment.
Investing in Property with Family The Right Way
From what you’ve read so far, it may sound like investing in property with family is a minefield of potential disasters, both financial and relational. However, if you go about things the right way, investing in property with family can be a financially rewarding and fun way to strengthen your familial bonds and build generational wealth.
What is the right way? We’re glad you asked.
We’ve spent over a decade figuring out the best way to invest in property (and anything else you want to invest in!) with family without damaging your relationships. The Tribevest platform offers you and your family alignment and communication tools, LLC filing services, banking connections, and more.
To see how Tribevest can make your dreams of investing in property with family a reality, get started today!
