Wanting to Employ Family - what do you think?

Question

My son just graduated college with a degree in Music. He is a super talented guy, but like a lot of college students today he's not able to make a living with that major. Let me lay out my situation here a little and get some feedback.

I currently own 2 multi-family properties that are doing quite well in terms of positive cash flow. I definitely am looking to expand my "empire" and I have about 120K in equity on these 2 properties as well as another 100K or so in cash I can invest to grow. I have started off as a buy and hold investor because I like the idea of passive income for retirement (I'm 55 and looking to retire in about 3 years). I am really interested in some flipping as well, but I have stayed away from that for now since I really don't have the time to oversee a project working full time.

Here's where I think my son may be able to play. I trust him. He has a good head on his shoulders and a great work ethic. I really think that at his age after learning something about the business he could start getting some of his own deals. With that in mind I'm thinking about picking up a distressed 4 family with a livable unit. I could put him in there rent free and have him oversee the rehab of the other 3 units for me. I would also pay him as a 1099 employee. At the end of the rehab, I would either sell the property for profit or keep it and continue to expand my passive income portfolio.

So a few of questions:

1.) I could pay him by the hour, I could pay him a flat monthly income (I'm thinking around 3,000 with free rent) or I could pay him a percentage of the flip for the work. Have any of you done something similar and has it worked out for you?

2.) If I don't flip the property, it is going to begin to limit how I can keep him employed longer than 6 months or so. Remember I do have some cushion with a couple hundred thousand but maybe I can work some type of deal where I give him part ownership and after a few properties I can let the income from the properties start to supplement what I'm paying him. Have any of you done deals like this?

3.) If I go down the flip path, I'm going to need to find a decent mentor here in STL that can help me find the right GC and can walk the potential properties with me to help me get a realistic feel for what I can get out of the flip. Anyone interested in mentoring (meaning really having coffee once a week so I can bounce questions and ideas off of you?

Thanks!

JD Martin · Answer

It is hard to do business with friends or family because personal feelings cannot be ignored. Let's say he was to do a very poor job of managing the rehab, or worse, squandering the money elsewhere. If it was a stranger, you send them packing, maybe with a lawsuit to boot. With your son, you get mad, suck it up or confront him, end up with hurt feelings all the way around, and a relationship that may or may not be repairable. That said, family businesses work all the time. They work *better* if there are clear lines of delineation between responsibilities and authority. If your relationship with your son was always clean and clear, it might be a simple transition; if you were a "touchy-feely" guy, more of a friend and confidante than parent, it might be really messy. If it were me I would go for a trial basis and see how it works out. Keep expectations and cash flow low, and ramp it up if/when it proves itself.

Matthew King · Answer

I've tried doing partnership work with my brother many times in the past, always ending in failure. If you must proceed it might be best to pay him by the hour of work done, that way if no work is done no pay gets done. Either way you may face the situation where it will come down to money or relationship and that's not one I would want to face with my son.

Stone Teran · Answer

It can work great or it can fail miserably. I think it all depends on your plans and his work ethic and his plans.I had a partnership with my mom. I know she works hard, has money and has time but I know she is short-tempered and has no business skill.The partnership worked fine for 2 years but in the end the challenges of the various projects made her tempers flare daily and she didn't understand the long-term business strategy so we amicably put together an exit strategy for her.You know your relative so evaluate them objectively. If your son is a lazy SOB, don't extend a charitable job offer masked as a legitimate business plan.

Mike Wood · Answer

@Mackal Smith I think this depends on what you think your son is capable of. You mention having him oversee the rehab, but what do you expect him to really do? Is he capable of rolling up the sleeves and working on this unit, ie painting, cleaning, demo, etc. You would obviously be using subs for the big stuff, but the simple stuff would make him worth your money. Does he understand enough about houses and construction to allow you to not have to oversee the project so closely. I guess my question is could he act as your general contractor so you could be less involved?If yes, than you have someone you trust that will absolutely have your best interest in mind. That comes with peace of mind. But if not, they you might as well just give him the same money and avoid the headache. I personally have had too much issues with family and money to do this, but I understand your desire. Best of luck.

Mackal Smith · Answer

I think it is indeed a desire to help my son, but I know I want to grow my business. My thought was that it could be a way to accelerate the flipping part of my business (which I definitely want to get into in 3 years when I retire) and help him. *BUT*... I definitely want to keep an open mind. I appreciate the feedback about keeping my business and desire to help him separate.Much thanks for the feedback so far. Other inputs?

Corey Dutton · Answer

I've always seen problems with family members doing investment properties together, but I have seen a mother/son team do flips together, and it seems to be doing quite well. Maybe since its your son, it may play out differently than if it were a brother or cousin, etc.

Larry Turowski · Answer

@Mackal Smith This all seems to be driven by a need to employ your son rather than a business strategy. That would make me nervous about the whole thing. This could go really bad.Why not have him get a job--any job--and pursue your business with smart business decisions and be ready to just give him some money if you are committed to that?