A great deal of caution and planning is involved when investing in Real Estate. It’s essential to have solid understanding of your financials, objectives, and risk tolerance. Often you’re fine tuning those criteria and adjusting your strategy after matching your goals with the various opportunities available. But there is an extra layer of complication that exists when you’re planning on investing with family or friends.
The added benefit with a personal relationship is often the familiarity. However, this can also be the downfall if you forget that it’s a business relationship too. Though it may feel awkward, be sure to have these conversations and put it in writing before investing in real estate with friends and family. It’s better than having an even trickier conversation if things go south.
1. How’s your communication? This is one of the most important considerations as it will impact every aspect of your business relationship. Consider how you currently solve problems together. Have you worked through a difficult conversation before? Are there steps you can take to improve on that communication? As a more risk-averse person by nature, I always like to think of the worst-case scenario. You may find it useful to consider how the person handles conflict with their other relationships, both past and current. If you’re seeing some red flags, proceed with caution.
2. What are your roles? This is often a conversation about skill sets, available time, and balance between partners. If it’s a investment property that requires more of a hands-on approach, it’s imperative to define roles and responsibilities. Who’s the point person for communication when it comes to property management, maintenance, or tenant issues? If one person is really taking a lead role, do they deserve more compensation? With more of a hands-off investment, who will be checking in and how often to ensure things are running smoothly? If this is someone you already share a workload with (i.e., taking care of family), be mindful of the overall balance of labour or carrying over baggage.
3. How will you make big and small decisions together? Your business plan and goals will help to narrow direction. It’s also good to define how you’ll handle big and game-time decisions ahead of time if you’re not on the same page. Will you agree that if you aren’t both confident in a certain course of action, then an alternative needs to be found? For the smaller decisions it should be clearly defined who has authority to make solo calls and the protocol(s) surrounding that.
4. What are your goals and timeline? Make sure you’re on the same page with your investment goals both in the short-and long-term. Perhaps one partner is needing a cashflow positive investment (earning money month-to-month). Another may be looking for a longer-term gain and are comfortable with little or negative profit until the appreciation is realized. Consider how often you’ll be evaluating the progress of your investment and if there are opportunities to shift gears along the way.
5. Are there any big life changes expected in the next while, and what’s your exit strategy? While it’s 100% impossible to plan for all that life will throw at you, it’s important to at least try. Because it’s a closer relationship, there’s opportunity to discuss potential life changes or big expenses such as kids going to college, fertility treatments, etc. This piece can also help with communication by understanding someone’s life stressors in a given time period. If there is a big event (illness, death, etc.) that comes up without notice, what’s the early exit strategy? Hope for the best and plan for the worst.
While it may feel funny to have a business conversation with a personal relationship, you’ll be grateful that you did. These may begin as conversations but it’s essential that it all gets put in writing as well. Partnering with family and friends can be tricky, so having clearly documented expectations and a plan are the best way to ensure success. For more considerations on the purchase side, check out these tips when buying real estate.
