How to (or should I) form partnerships with family members?

Question

Firstly, I want to share that my family recently inherited a house in San Francisco that we are renovating of which my father is leading the project. This event acted as the impetus of my new-found enthusiasm for real estate. I am currently taking a home study real estate course for getting my salesperson license for future projects.

I want real estate to become the 'path' to success. However, my father and brother, who I wish to partner with, are a bit close-minded and do not respect the intricacies of business. For example, they would rather rely on 'street smarts' or doing '$10 an hour' tasks in a rehab instead of hiring it out. They have no respect for business plans and following tried-and-true theories and systems. They are basically short-term thinkers.

I would love for my family to get into the business, but if they remain as they are now it seems like they would become more of a hindrance than an asset. So therein lies my dilemma. How do I influence them to adopt the business mindset? Or should I just go about the business solo and maybe just utilize them as assistants or act as project managers? What would you do?

P.S. I have not presented my business plan to them, at the moment, as it is incomplete and I am still learning. I am hoping this will instill the entrepreneur spirit in them.

J Scott · Answer

There are several reasons my wife and I work well together:

- We have very complimentary skills.  I come from an business/analytical background and she comes from a branding and marketing background.  So, split of responsibilities is clear.

- We share our money.  Whether we do equal work, whether I do 90% of the work or whether she does 90% of the work, we'll never argue that either of us are getting the raw end of the deal,  since we pool the money in our household.

- We came into the business with enough capital that losing money on our deals wouldn't put a strain on our financials or our relationship.

- We didn't have any relationship "baggage."  In other words, there was nothing that could happen that would risk bringing up relationship subconscious issues from the past.

- We both had equal (no) real estate experience starting out -- and equal professional success -- so there was little risk of either of us being overly competitive and letting our professional ego get in the way.

I've worked with other family members, but always in an employer/employee relationship... While I would have liked to partner with them, it wouldn't have worked out because one or more of those issues above would likely have surfaced.

In general, I'm not a huge proponent of partnering with family or friends (unless the friends were a result of an initial business relationship that succeeded).

Akeem Ogle · Answer

One thing that I've learned as an entrepreneur is that you have to manage people for who they are and the skills they have. Maybe your brother and your father do not have 'owner' or 'upper management' aspirations or capabilities, but that's fine. Figure out what their strengths are and utilize them accordingly within your organization. You cannot instill an entrepreneur spirit inside of someone who doesn't have it. A lot of people prefer to just work 9-5 and come home to a couple of cold beers, but they can be some of the most important pieces to your business. You don't have to sell them on your dream, just sell them on theirs; then incorporate their dreams in order for your to fulfill yours.

Linda Weygant · Answer

I recently purchased two condos with my mother and sister.  We put each property into its own LLC.  Here's why:

1.  Titling is much easier.  It's all in ABC, LLC rather than Jane Doe xx% ownership, Janet Doe xx% ownership and Jennifer Doe xx% ownership.

2.  The LLC is a formal, legal document that spells out who owns how much.  My mom only put in a little bit of money to "try it out", my sister and I put in considerably more, but not equal shares.  The Operating Agreement spells out the math and who gets how much profit.

3.  One partner put in funds from their SDIRA.  Investing in an LLC was much easier all the way around with the custodian, added to the titling issues in point #1 above.

4.  Who is responsible.  The document spells out who the managing member is and what their duties are.  The document specifically spells out that the others are to be silent partners only with respect to tenant, banking and legal relationships.  The intent here is to stop any arguments before they get started.

5.  The Operating Agreement also spells out reserve requirements.  Some money won't be distributed because it needs to be saved back for reserves.  This keeps one member from demanding liquidation beyond a certain level.

6.  What happens in the future?  If somebody wants out of the LLC, the Operating Agreement specifies who gets right of first refusal, how long that person or people have to act on it and what happens if they can't, won't or don't.

7.  Easy taxes.  This one won't apply to most people. I'm a CPA, so preparing an LLC return is a no-brainer for me.  I also prepare my sister's tax return, but not my mother's.  It's much easier to just hand them each a K-1 rather than providing a full set of books to my mother's tax preparer and walking them through all of the building and land valuation (it has to be consistent between all members tax returns.  One preparer that opts to take 25% as land value rather than the 20% I usually take can mess up everybody's returns.

Basically, we did an LLC for OUR convenience, not for liability protection (although that is a benefit).  We're all smart enough to know that families get torn apart over misunderstandings, especially when money is involved and we wanted to avoid that to every possible extent.  Oddly enough, we are a family that gets along pretty well.  We wanted to preserve that, so a formal LLC was the right thing for us.

Your family sounds like it will not appreciate this level of detail or planning.  While I do applaud you for wanting to do the right thing by your family, I'm not sure that they will have any such applause or appreciation for you.  Your family dynamic sounds much different from mine.

Marwin Balibrea · Answer

Thank you for the awesome responses. I do disagree as well that working with family is disastrous as many investors disprove this notion. Some examples of these investors would be @J  Scottand his wife, @Jered Sturm and his brother, or even @Brandon Turner and his dad (who did not share the same mindset initially). Success in partnerships would come from similar ways of thinking rather than blood relations.

It is a bit saddening that the responses confirm my concerns. It almost feels as if I am leaving my family behind. Perhaps the only way for them to come around would be through results as @Daniel Chang mentioned.

Agreed with the suggestions of @Akeem Ogle. Most likely I will just utilize their strengths to help propel the business.

Daniel Chang · Answer

I think you should go at this yourself.  Once you've built success, based on your business plan, it may change the way they are thinking.  Right now, all your discussions with them is academic.  Meaning at this time, it's an untested theory/principle (to them).

I disagree that working with family members is disaster.  But the mindset, thinking, and business plan must be agreed on.  I wouldn't work with anyone that doesn't have a like mind, including family members.

Kevin Quang Nguyen · Answer

@Marwin Balibrea

I'm in the same situation as you.  Trying to work with my family (mother & father).  I bring up an idea about REI, and they completely loose it.  They hear the horror stories and rumors from other family members, so they don't even begin to try REI.  But from what I learned the information they received from different family members have NEVER INVESTED IN REAL ESTATE.  Doesn't make any sense right?  They have more of a middle-class mentality.  Go to school, graduate, and get a good job with great benefits.  Like everyone else.  There's nothing wrong with that, but I think you and the rest of BiggerPockets see more in life than just that.

If your family does not respect your goals, then just simply move on and learn it yourself.  Set goals and see where you are in 5 years, then look back at your father and brother and see where they are.

Stephanie Dobbs · Answer

Unfortunately I do not have a response for you as I don't know how it would work out for you and your brother. I can say from a woman's perspective, if your intuition is telling you that it will not work, then it's likely that it will not work. I work with my husband in this industry and we're both learning. We split up tasks and we recognize each other's strengths so I feel like we're a match made in heaven. I love how great @Jscott and his wife work together. It's always good to hold the money in a 50/50 manner in relationships, so no resentments or small issues begin to arise over nonsense. I hope the best of luck to you!

Regards,

Stephanie Dobbs

David Pazdernik · Answer

Working with family members is a sure path to disaster...

Randy E. · Answer

@Marwin Balibrea, I'm probably the wrong person to answer this.  I would never go into business with my family members.  The one family member I once considered collaborating with couldn't see the big picture -- well, he could, but he remained paralyzed by what he considered "big" numbers.  And this was not when I was an untested RE investor, but AFTER I'd been in the game for a few years.

My advice is to go it by yourself if at all possible.  Certainly complete this current deal with your family.  But after that, take you share of the profits and plan to invest it yourself.  Go ahead and present your business plan that includes their participation and see what they think.  If they are not enthusiastic about the idea, don't fret.  Be sure that while you are crafting the joint business plan that includes their participation, that you also craft a business plan that includes only you.

Good luck!

How to (or should I) form partnerships with family members?

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