Rookie Reply: Is Investing with Family Members a Mistake?

Ashley Kehr:
This is Real Estate Rookie episode 154.
My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.

Tony Robinson:
Welcome to the Real Estate Rookie podcast, which also has a Real Estate Rookie Facebook group, which if you’re not a part of it, it is the most active, the most engaged real estate investment Facebook group that there is. But if this is your first time joining us on the podcast, every week, twice a week, we bring you the stories, the inspiration, the motivation, the education that you need to get started as a real estate investor, or continue to scale if you’ve already started. So Ashley, another beautiful day. We’re here, we’re on the podcast, things are feeling good. What’s going on, on your side?

Ashley Kehr:
Go ahead. Tell me the temperature. What is it there?

Tony Robinson:
It’s actually beautiful. If I could say like perfect weather, I think that’s what today would be. It’s like 76, just enough clouds so that it’s not hot, but the sun’s shining through. So this is winter in Southern California.

Ashley Kehr:
Tomorrow it’s supposed to be like five degrees out, I think. 19 right now.

Tony Robinson:
Like when you look up the weather on your iPhone app, it just says, stay inside. It says, don’t bother.

Ashley Kehr:
Yeah, we actually do have a winter storm watch right now. At 4:00 PM, it’s supposed to start snowing.

Tony Robinson:
There you go. Sounds like a good time. I sympathize-

Ashley Kehr:
[inaudible 00:01:21] five degrees tomorrow, two degrees tomorrow.

Tony Robinson:
Okay. Even better, right? I sympathize for you because I feel like every time you go somewhere, whenever you try and go back to Buffalo, you always get stuck in some other state because the weather’s so bad trying to get back home. So you were in Atlanta last week, you were stuck somewhere else the last time you went out.

Ashley Kehr:
First it was Detroit, coming back from Denver and then it was in Atlanta coming back from Tennessee. So, yeah, luckily when I just went to Seattle, I did not get delayed or canceled. I made it back on time.

Tony Robinson:
We just need to have you and the whole fam just pick up and move to California. I told you, there’s actually, where I live, this whole town used to be filled with dairy farms. So you guys will fit right in if you come to SoCal where I’m at.

Ashley Kehr:
I feel like New York and California are pretty similar except for the weather.

Tony Robinson:
There you go. There you go.

Ashley Kehr:
Yeah. So Tony, anything new before we jump into today’s reply, today’s questions?

Tony Robinson:
Yeah, there’s always so much that’s happened right now. We’ve got a flip that we’re about to start. We have a few new cabins that we got under contract and we actually just got two new short-term rentals under contract in a new market. First time moving into this new market. Those house should be done, hopefully, sometime this summer. I’m not going to quite share what that market is just yet, because I’m afraid that I might end up creating more competition than what we need, but excited that we’re finding another place outside of Joshua Tree, outside of the Smoky Mountains to start kind of sinking our teeth into.
As we look to meet our aggressive growth goals, we realized that we couldn’t do with just those two markets. We’re probably, by the end of this year, are going to be in a lot more cities than the two that we’re in right now.

Ashley Kehr:
Shreveport, Louisiana.

Tony Robinson:
Yeah. Actually, the best place to invest is Shreveport, Louisiana. And if there is ever a property that you see that’s for sale in Shreveport, you should snatch it up immediately because that is the best return that you’ll get for your money.

Ashley Kehr:
Well, that’s awesome. Congratulations. I didn’t know that you had found a new market. I think that I know what it is, but I will confirm with you after the show that I can go ahead and jump in and become your competitor.

Tony Robinson:
I’ll give you a pass. I’ll give you a pass. For everybody else, I’ve got to keep it under wraps, at least for a while.

Ashley Kehr:
So I’ve been working out-of-state flip. I got my first out-of-state investment poverty. I’m doing a joint venture agreement. So that’s something I’m the most excited about right now because it’s moving the fastest, I’d say. I feel like I still have a million properties under contract. One, found out there’s a $13,000 lien against a property or a judgment against the property owner. Another one, there’s a right of first refusal on the property and the person has taken the owners to litigation. So who knows how long until that is done.
Another one, there was an issue with the survey, whether we could have a survey or not. The sellers tried to give us a survey from 1998, I think it was. That’s like too long ago for me. I will accept it a survey, but not that old. Just different things keep coming up for each property, but I feel like it’s just going to be like, “Okay, you’re closing on everything.”

Tony Robinson:
I was going to say, they’re all going to hit at the same exact time.

Ashley Kehr:
I know, I know.

Tony Robinson:
You’re just going to wither away from the stress of having all these big deals closing all at the same time. That’s always how it goes.

Ashley Kehr:
One thing I am looking for though, if anybody wants to find me a deal, I will for sure pay a referral fee, that is in Rushford Lake, New York or Lime Lake, New York. Those two lakes, I’m looking for a lake house. So if anyone gets a good lead on that. Budget is around through 300,000 to 350,000 or less. Less is always fine.

Tony Robinson:
There you go. You’ve got to anchor low with those kind of things, Ashley.

Ashley Kehr:
Yeah, yeah, yeah, yeah, yeah.

Tony Robinson:
What she meant to say was 150,000. That’s the number she meant to drop.

Ashley Kehr:
Yeah. Okay. So Tony, we are going back to your DMs. Or this was actually a question you had.

Tony Robinson:
Yeah, I posted a question on my story, had a bunch of responses come in. So this is one of those questions that popped in that I didn’t get a chance to answer on my actual profile. So this question comes from mini_vannnn, and mini_vannnn’s question is, “Is partnering with family members a good idea?” So I’ve worked with family in some capacity before, but I’m curious, Ash, what are your take and I’ll share my thoughts.

Ashley Kehr:
So I have a property with my sister right now and a property with my brother, just one property each. The mistake I made with my sister is we didn’t put enough stuff in writing and we didn’t treat it like a business. It’s actually her primary residence. She’s house hacking it. And it was [inaudible 00:06:04]. We knew what was happening when we bought the property, but we never set expectations or putting in writing what happens when she moves out of the property, or even if we sell it, what’s the exact breakdown, and do I get my percentage back that I put for the down payment, and then we split the profit? We didn’t break that down. Or even when she moves out, do we split the rent payment then, the rent income from that?
So I think just my recommendation would be to treat it like a partnership. Family member, no matter who it is, treat it like a partnership. Put in writing as to create an operating agreement. Even if you’re not doing an LLC and you’re doing it in both of your personal names, then I would still put together a contract or even a joint venture agreement that states what’s happening now, what’s going to happen in the future, what are the exit strategies, what are the expectations of the property.
And then for my brother, I actually gifted him a percentage of the property. I don’t even know if he knows the address of the property. He just asks me for his [inaudible 00:07:07] every year. So he’s a pretty easy partner. So I [inaudible 00:07:12] there.

Tony Robinson:
You make a really good point actually about treating the partnership with family the same way that you would partnership with anybody else. I’ve worked with family in different capacities. Most recently, my mom actually acted as a private money lender for one of our flips. She had gotten some additional money from retirement and she wasn’t sure what to do with it. So I said, “Hey mom, we’re lending money from other people. I’d rather give you the return than someone else.” Like you said, I set her up the same way that I set up all of our other private money lenders, right. I got a notarized deed of trust. I signed the promissory note. Her name’s on everything. So the same way that all of our other lenders are listed as the lenders on that property, so is my mom. So it’s very much the same way that we do with everyone else.
Then my wife’s cousin, Omid, he’s our third partner for Alpha Geek Capital. So all of our short-term rentals, it’s a big family affair. I think the thing that’s important, and you touched on this a little bit, is that when you partnered with your sister, there were parts of the partnership that neither of you even thought to think of on the beginning of that relationship. I think that’s normal because you don’t know what you don’t know until you get into it. But I think the important thing to do is that once you guys identify, and I’m speaking from personal experience, because the same thing happened with us, is that once you identify that there is a part of your agreement that’s missing, try and handle that as soon as you can and come to an agreement on what it should be.
For us in Alpha Geek Capital, we had a meeting right before the end of last year where we said, “Hey, the business has changed a lot, and how we structure things in the beginning, doesn’t really represent how we think it should be structured moving forward.” And we restructured what our partnership agreement was to reflect what we felt made the most sense in today’s environment.
So I think when you enter into a partnership, there should be a level of understanding that things may change and adjust as that partnership starts to grow. And if at any point you feel like the current structure isn’t conducive to the long-term health of that partnership, you have almost an obligation to speak that concern to your partner.

Ashley Kehr:
Yeah. And I think one major thing to note too, especially if you’re having a family member come on as just the money partner, maybe they’ve never invested in real estate before, they don’t know anything about real estate investing, is to make sure that they know they could lose all their money. Make sure that they know that real estate investing is still a risk, because I think it’s very easy for people to watch your success and say, “Hey, I want a piece of that.” And that can be a really hard thing to do is to lose your family members’ money.

Tony Robinson:
That’s a really good point, Ashley and I can’t remember who said this, but some real estate investor that I follow said that if he ever invests with family, that it has to be a deal that’s so good that he would take his grandma’s last dollar. If I wouldn’t take my grandma’s last dollar to do this deal, that I’m not going to do it. And that’s how he kind of filters the deals to make sure that it’s a good thing.
But yeah, there’s obviously always risk and you want to be transparent with that. But with family, I think even more so, it helps if the deal is just a smoking good one. That way Christmas dinners don’t get too awkward.

Ashley Kehr:
So if you guys want to invest in Tony, look for the deals his mom’s investing into, because you’ll know-

Tony Robinson:
You’ll know those are the best ones.

Ashley Kehr:
Become friends with her and be like, “Hey, are you going in on this deal with Tony?” “Oh, no, my son’s got another one for me.” [inaudible 00:10:40].

Tony Robinson:
She’s the gatekeeper for all the good deals, for sure.

Ashley Kehr:
Okay. Well, partnerships are definitely a tricky thing and there’s no right or wrong way to structure, and Tony and I could talk forever on partnerships. Just do what works for you and your partner and make sure you’re both adding value, your strengths and weaknesses compliment each other. I don’t want you guys to be in the position where you’re just partnering with somebody to do them a favor. You want to make sure that they know exactly what they’re getting into and that they want be a part of it.

Tony Robinson:
One last thing on that, Ashley, I’m glad you said that. We’ve mentioned this before, but whenever you present a deal to a family member or to anyone, really, if you believe in the deal, they’re not doing you a favor. You are presenting them with an opportunity to get a good, solid return on their investment and not so you have to frame it in your own mind.

Ashley Kehr:
Actually, not too long ago, my mom had told me, “I have some money. I want to invest it.” So I called her and said, “How much money do you have? I can use some for a deal or whatever.” And she’s like, “Well, we just put in our new kitchen, blah, blah, blah,” and stuff. She’s like, “This is how much we have.” And I was like, “Okay, well you want to keep that. It’s fine. You don’t have to.” She’s like, “Well, if you need it, I’ll give it to you.” I’m like, “No, I don’t need it. I was just giving you the chance to make some money.” I had already told her I’d pay her this percentage, but she had this mindset that she was doing me a favor. And it was actually that I wanted to provide her with an opportunity to make some money off of what she had.
If your family member thinks that they’re doing you a favor and they’re risking the money they have, and they don’t really want to part with it, definitely don’t force their hand into it, especially if the deal does go wrong. Make sure they understand that this money that could be lost and it’s not their very last dollar under their mattress.

Tony Robinson:
Cool. Well, thanks for sliding into my DMs. I appreciate it. I love answering questions from Instagram because I feel like those ones are sometimes a little bit more fun. Actually, one of the other questions that came in, I got quite a few. One of them was, “Tony, can you bench-press more than Scott Trench?” I thought that was a good one. Another one said, “How do you stay so sexy?” That one was actually from my wife though. So I think it’s okay.

Ashley Kehr:
I would say that question to her.

Tony Robinson:
So I’ve got some funny-

Ashley Kehr:
Tony, what’s the answer? Can you bench-press Scott Trench?

Tony Robinson:
You know what? Scott’s actually pretty fit. So it might be a good competition between the two of us to see who could do more. Maybe we’ll do that at BPCON 2022.

Ashley Kehr:
Oh. Were they asking who could bench-press more or could you actually bench-press Scott Trench?

Tony Robinson:
That’s I think they were asking who can bench-press more, but yours is way more funny. So maybe next time Scott and I are together, I’ll see if I can actually bench-press him physically.

Ashley Kehr:
There’s a YouTube video.

Tony Robinson:
There is a YouTube video.

Ashley Kehr:
Well, thank you guys so much for joining us for this rookie reply. My name is Ashley at Welcome Rentals and he’s Tony @tonyjrobinson on Instagram. Check out the Real Estate Rookie Facebook page, and we will be back on Wednesday with another guest. Thank you guys so much for listening and stay tuned for this tip from BiggerPockets.