Buying Real Estate with a Family Partner
Buying Real Estate with a Family Partner
Full Video Transcript Below
Partnering for Profit_ The Pros & Cons of Doing Real Estate with Loved Ones!
Good afternoon, real estate fans, Alice Lema here, broker John L, Scott in Southern Oregon. Here are the weekly podcast and one of my favorite, favorite topics, which is partnering for profit, creating wealth through real estate ownership with people you love. Pluses and minuses because there's both, it's a doable double-edged sword.
[00:00:30] So the reason it's one of my favorite topics is because I do this in my own life and I also help other people do it. And it can be used to extend your real estate holdings. Maybe you do have enough money and enough credit to buy more property, but if you bring in one or two partners that you love and trust, then you can actually own quite a bit more exponentially more.
[00:00:54] So one of the ways to do this, if you're by yourself, I mean, as an investor by yourself, you can be married in Oregon and buy and sell real estate without the consent or knowledge even of your partner. I don't know, people know that. We should probably do a podcast on that. But, but if you're an individual and you want to partner with somebody, I recommend just kind of looking around your life and you want to look for somebody who lives beneath their means.
[00:01:22] Who's really good about paying their bills on time. Who's not dramatic, not super emotional. And just somebody who could be a good long-term business partner. Even if it's a short term business deal, you still want to look at the partner person with that idea of what if this did end up being long-term.
[00:01:42] Is this somebody I could, I could stand to do business for years and years and years. I mean, I'm just yeah, trying to be funny. But, but you do want to look around and find those personality traits. And then do they have some money or what do they bring to the table? So part of what people can do in these scenarios, especially if you're a tenant, this would be a great scenario, is you find somebody to partner with in your life and you have some money.
[00:02:07] They have some money, but you're the one who's going to live there. So you can get the owner occupied rate. Interest rate, you can get the owner occupied, lower down payment and they can help provide a bigger down payment. You document the percentage of ownership. You do this with an attorney it's all written down.
[00:02:26] So a first-time home buyer. Might, end up being the owner occupied person and only owning 25% of the asset. The other 75% might come from their business partner, financial helper, and they decide that in three years, either the younger person or first time home buyer person is going to buy the other person out, or they just decide right from the get go they're going to sell it.
[00:02:54] And they're going to split the profit and go their merry way. It's really all what, what you want to do with each other. But a couple of things you want to document is the exit strategy. How long are we going to be in this. What happens to the asset. If one of us gets hurt or tragically passes away and you want to look at the heirs, because you could end up in business with them.
[00:03:18] So make sure that you're okay with that and that everybody has had the conversation. So before I go into these situations with somebody I do have these conversations. So I say to them, so if I want to do business with you and you tragically die or become incapacitated, who are your heirs? We have to write this down.
[00:03:38] Are they aware of this situation? Do they know you're doing business with me? How do they feel about that? What's going to happen if I pass away or I become incapacitated. So for, in my personal situation, I've had these conversations, my adult children, they don't always like all the pies I get involved in. But they understand it and they are prepared and it's all been legally documented.
[00:04:00] And the attorney knows to talk to them. In the event and that's, that's all you want to do. And the law, the other thing, if you're an individual doing this, make sure somebody has the decision making power about the decorating. My personal preference is there is no decorating. It's, it's neutral. There's no carpet.
[00:04:18] It's just floors. Nobody moves any walls, no pink, anything. That's it. If you want to have something different in your document, you can. But it's just, there is nothing worse than having a partner, six months down the road, get all fussy because they want to take a tree down and you don't. So just talk about it upfront.
[00:04:40] And especially if it's just a short term, like less than, than three, three years, I just recommend unless it's for health and safety, don't do anything. Because then there's nothing to talk about. Talk about it before, but put it in the document. Nothing's going to change. So you don't have to address it again.
[00:04:55] So what about if you want to do this with groups of people? So this is particularly fun and super common during the COVID shutdown, I got to be really, really popular, mostly with the, the multi-generational people we'd have three, four generations of adults purchasing something together. So the exit strategy for that, cause you still need one, right?
[00:05:15] So the exit strategy for that is more likely to be death. Or some kind of incapacitation. So, and again, not to be negative or you know, sad. It's just, we want to talk about, so if you're, if you're doing this, then the, the people who are gonna inherit probably already live there. So you want to document all of that and the percentage of ownership and what their role is in their contribution to the asset every single year.
[00:05:45] Like maybe somebody doesn't have a lot of money, coming in, but they can do the caretaking of the elder. Or maybe, they cannot do the caretaking cause they work all the time, but they can, they can plow, you know, the bottom 40, three times a year. So, so you can be fire safe. Yeah. I don't know. I'm just making this up.
[00:06:09] But you just want to sit down and have the conversation basically of who gets, what, why do they get it? What do they have to do or not do to maintain it? And interestingly enough, some of these families are putting in, drug and, substance abuse clauses. So if you're involved in one of these, I guess you'd call it a business model, right?
[00:06:32] It's still a business while you're involved in these group purchases. And somebody becomes addicted to something. Then there's a clause in there to deal with that. And you could lose all your rights, but again, it's what you negotiate. It's what you, what you write down with each other, but you don't want to end up living with someone who is suddenly in a substance abuse situation because that's not healthy or safe, for them or for you.
[00:06:59] And so you just want to talk about that ahead of time. So in the group situation where you're living together as a group, I think the, the top conversations are what happens when somebody dies, to that person's percentage.
[00:07:13] What are all the parties going to do to contribute to the maintenance of the property? Because usually these are much bigger properties and it's kind of a thing to mow the lawn. It could end up being an eight hour thing.
[00:07:25] So who's going to do that. Who's going to be on the hook for all the taxes. Who's going to be. I'm on the hook if somebody passes away unexpectedly, maybe a younger person, what happens in that situation? God forbid, of course. And then, substance abuse I think is becoming more popular clause. And also if any of the parties in these multi-generational are married or their life romantic partners.
[00:07:55] What happens if that partnership dissolves? So again, not to be negative, but you just want to talk about it, write it down, have the attorney make some suggestions and you know, these multi-generational, ownership models frequently are put into living trusts, revocable trusts, something like that. I'm not a lawyer.
[00:08:14] I don't know all the ins and outs of that. But I, what I do watch a lot of families put these assets into those kinds of structures, those legal structures. And it does seem to make it easier, for the title transference, if, and when somebody passes away, because everybody's already a part owner. So that's kind of the group conversation.
[00:08:35] And then there's, what about, you're going to do a investment for a commercial, so it'd be a group, but you're not related. You're not going to live there. Everybody is arms length. And you're buying apartment buildings or you're doing subdivisions or something like that. Again, you rely a lot on your legal team.
[00:08:56] Again, you document the percentage of ownership and that percentage of ownership should also come with a percentage of obligation. And I guess you would say that across all three scenarios that it's not just about the profit, it's about the pain. So, you know, you want to have some explanation in writing about the responsibility financially. And then, some people are contractors and their contribution is they can do the maintenance themselves, but you want to write it down.
[00:09:26] You want to say, okay, Four times a year, you're going to paint this, clean, that repair, that check that whatever. You know, just, just write it down and be specific. So the, the top, the top points to remember exit strategy, know what it is, understand what it is. Understand who the heirs are in case something happens and they become involved and you have to do the exit strategy with them, write it all down, have a great attorney team.
[00:09:56] And if you need some recommendations, I have lots of them here in Southern Oregon. We have some really amazing real estate attorneys. We also have some amazing landlord tenant attorneys. If you're going to be purchasing rentals with groups of people or another individual, you want to have somebody involved in the beginning so that they can point out other ideas and other topics to put in your document.
[00:10:20] So know who you're dealing with. Try to pick people who are good at taking care of their own finances. Even if they're not Warren Buffett, just make sure you pick somebody who pays their bills, who lives beneath their means. You don't want to pick somebody who just took their $5,000 bonus and bought a boat when they can't buy clothes for the kids.
[00:10:43] You know, that's not, that's not the recipe for wealth building and that's not the recipe for a stable business partner. So pick your partners carefully, have a lot of conversation. Reach out to me any time I can be of help. I'm happy to do that. And, enjoy your partnering for profit, and hopefully you will not have any pitfalls.
[00:11:04] You will just have a really, lovely experience and you can repeat it over and over again. And, that is, that is our best hope, in real estate ownership. So this is Alice Lema, broker John L. Scott, here in Southern Oregon. You can call me, you can text me I'm around all weekend. My number is (541) 301-7980
[00:11:24] bye now.