Investing with my Dad - Different Investing Time Lines

[Andy DeFruscio]

So my father and I currently own a couple Duplex's together and are looking to buy another investment property. We are at very different points in our lives and I am wondering if we should keep investing together. My dad is 54 years old, plans on retiring at 62 and lives in NY. I am 28, just getting my professional life as a Real Estate agent under way and living outside Charlotte NC. Speaking with my dad it seems like we are both looking for a good cashflow property but I am just curious what peoples opinions were on having the same investment strategy even though we are at such different points in life. I have been looking at cheaper houses that will cash flow good but I know these properties will probably not appreciate much. Does this sound like a good strategy for someone in their 20's as well as their 50's? 

[Kathryn M.]

Hi,

As someone near your Dad's age, I can give you some considerations (but no answers) from your Dad's perspective:

If I was your Dad, I would be looking to support all living expenses from my entire portfolio. The portfolio may include e.g. real estate and stocks/bonds. Personally, I have a mix of cashflow and appreciation (significant long term tax benefits for my estate) objectives from my real estate, and am ideally aiming to double the cashflow (living expenses) from my real estate portion before full retirement.

Differing exit timing is one of my biggest concerns with taking on a partner. I intend to buy and hold until death (and a bit past depending upon tax benefits). My intention is to only sell for strategic (after tax return increase) or catastrophic (unplanned) reasons. However, if you or your Dad intends to sell to fund e.g. future principal residence, long term care or vacation travel it would be good to know ahead of time and have a well defined and funded exit plan ahead of time. IMHO it certainly doesn't hurt to have the kind of conversation (and written agreement to avoid misunderstandings) about specific objectives and exit timing that you would have with any partner.

BTW: If you are lucky, your Dad has a plan for living expenses funded without selling and he hopes to pass the properties to you. That is my plan, but although they know our current net worth, I don't let my kids plan on this - I tell them my plan is to extract value from every dollar of our net worth, party to death and die with exactly zero net worth!

From the little you have described, it sounds like it could be a very complementary partnership as presumably your Dad does not want to be involved with the day to day running of the investment properties and you are in the industry and able to be more hands on. 

I would caution going too low looking for cheaper properties seeking higher cashflow. IMHO the possible risks that increase with cheaper properties are related to tenant management, operating expense ratio/rent and overall depreciation, which may lower your overall return. Some appreciation may be important to your overall return if your intention is to buy and hold until stepped up basis.

You don't say whether you are using leverage or not... this is something that I see different with you young whipper snappers - paying more for 30 year fixed is the way to go in this interest rate environment whereas the I prefer 15 year fixed - no leverage and maximum cashflow as soon as we stop earning W-2 $. Shorter terms certainly won't hurt you - lower interest rate, higher ROI on that specific property :-)

If you haven't already absorbed it - I recommend you fully embrace the 50% rule - plan like operating costs (excluding financing) are going to consume 50% of your rents. ie don't spend 100% of your cashflow on living and get caught by vacancy, economic downturn, rising interest rates, new roof etc :-)

My advice is to just keep talking specifics with your Dad about his investment objectives so you and he will understand each other and enjoy your great relationship.