Should I Partner Up With Family On A Rental?

Question

Hey Guys,I'm in a weird situation and could use some help.I have two brothers and we just inherited two free and clear townhouses.One brother wants to sell, and one brother wants to keep them and rent.My choices are:A)  Agree to sell both, cash out completely, and invest on my own.B)  Sell one to cash out my first brother, and split the other 50/50 with my second brother.I am leaning towards option B because I like the idea of rental income, and everyone gets what they want - but my husband is strongly opposed to the idea.He is the only one with experience renting out properties.  And he would prefer to cash out completely so we can invest on our own rather than remain 50/50 partners with my brother.He says if we're doing most of the work anyway we should have all of the control.  I guess I'm just worried about the amount of work and time it's going to take to find a new investment property, where as the property we have now is ready to rent right away.Do you have any advice for me?

Rick Pozos · Answer

I was in a similar situation a couple of years ago. I had two sisters and one wanted out, and one wanted to rent. I love my sisters and we get along great, I just did not want to be in business with them. I wanted to continue loving them, lol.

The cash out sister took a note for one property from me, she took a note from her sister for the other property. Results, I have a property with a small note, my sister has a property with a small note, 3rd sister has a nice little income, and we gave her a little cash up front. We worked out the details of value, down payments, interest rates for loans, balloon, etc. and then put it down on paper. Everybody was happy and we dont own anything together. I get to do what I want with my property and so does my sister.

Jesse Waters · Answer

In this situation I would suggest cash out and go on your own as Account Closed plainly stated.  The other thing to look at is this: are the properties good rental candidates?  ie how close does it come to meeting your standards if you were looking for a rental property.  If it wouldn't be a good rental property if you were to buy it today, you might want to consider that.

If it/they are good rental candidates, another option would to be for you to take one property, the brother that wants to use it as a rental to take the other & each of you re-fi your individual properties enough to cash out the third brother.  Plus' all around.  Cashed out one brother, not doing continued business with family, not getting a whole lot of debt (and the property will pay for it) and not having to start over by looking for a new property.

Just my thoughts.  Best of luck.

Account Closed · Answer

Only if you don't like your family!

RULE #1

Never Rent to Family and Friends

RULE #2

Never Invest in anything with family and friends.

Nancy Neville

Colleen F. · Answer

I like Rick Pozos   solution but not sure if it is possible today or if it would even work for you.

Chris Simmons · Answer

sell sell sell.  Go on your own.  You two buy separate properties that you each control on your own.  Share tips and techniques on managing, rehabbing etc.  Help each other with free labor if you want.  Just don't co-own anything for a while....except with your spouse. Once you both have done it for a while, have a good feel for things based on experience, then go ahead and invest together.  Don't do it yet.

Ryan Gauthier · Answer

Thanks for the advice.  It seems everyone wants details!The townhouses are worth about 300 each, and they are in good areas.Option A:Cashing out would bring in about 190k each after selling expenses.  If we cashed out, we would have enough money to buy another rental outright by ourselves, with money left over for emergencies.  It would also be enough to flip properties one at a time in cash (i.e. conservatively) if we decided to go that route.Option B:Part of the family dynamic is the second brother, who would like to keep, has mentioned that he can't afford to buy another rental if we all decide to cash out.  (Even though he should be able to)Keeping one house would entail selling the other.  Of the 300k proceeds from the sale of the first house, 200k would go to the first brother to cash him out of both houses. The remaining 100k in cash would be split evenly between my second brother and I, and we would split the second house 50/50.  In addition to the proceeds from the sale there is already a "contingency fund" set aside for repairs and emergencies.I estimate the second house would net us 700/mo after taxes, repair savings, and the 50/50 split.  As Ryan D alluded to it's probably not the best cash on cash return available, but there is a strong allure to the low stress nature of a property with no mortgage.  My husband is on board with having a rental and managing it.  His point is why partner up when we can do it on our own.I guess I was just looking for some outside perspectives.

Kendra Mattson · Answer

I would look at how much you could get for each property first. If you split the profit 3 ways (after all the fees involved with selling), would you have enough to buy a new place, make any necessary repairs, and have some money as a buffer to pay the mortgage in case you can't get a tenant right away or something big breaks? Or do you have enough to buy another place with cash?

Also, it's important to note that if the houses you have are already free and clear, you'd be making almost pure profit (minus repairs and taxes) off of rent, and if it stands vacant you don't have to worry about where you're going to find the money to cover the mortgage.

I've had good experience working with family, but there is the risk of damaging your relationship with your brother if it doesn't work out. If you do rent it out with your brother, write out an agreement beforehand outlining exactly who is responsible for doing what - who answers the tenants' calls about the broken toilet, who makes repairs or finds a repairman, who collects rent, etc. AND how you will divide income. If you are doing twice the work, it's fair that you would get 2/3 of the profit (which might also satisfy your husband's concern), but that's something to negotiate.

One last note - if this was left to you and your brothers, your husband would not get a cut of the profits. If you and your brother decide to divide the profits evenly, it's a 50/50 split, not a 33/33/33. Be fair, don't (even inadvertently) cheat your brother, and remember your relationship is more important than money matters.

Good luck!

Ryan Dossey · Answer

I don't personally like town houses for investments. What kind of HOA fees are you on the hook for? What kind of capital would you get "cashing out"? You can probably do more with that cash than with half of the cashflow you would get off of one town house - 50 % profit split- HOA fees.

Should I Partner Up With Family On A Rental?

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