(Herald News) Some families intentionally pool their resources to make investments in real estate.
Others inherit properties and become partners, whether that was their plan or not.
Either way, owning real estate with family members can be a great way to benefit from family resources or be the straw that breaks the camel’s back with respect to family harmony.
Whether the real estate in question is a three family inherited from Mom or a collection of commercial properties, the essential issues to resolve surround the management of the properties, the division of cash flow and profits and the estate planning consequences of owning valuable illiquid properties.
The ownership of real estate is a business with active moving parts, not a passive investment, and must be dealt with accordingly.
Property management is the single most important element to create and maintain value in a real estate investment.
Properties must be cared for, kept in good order and have a system for collecting rents and paying the bills.
This sounds easy until you get the preverbal midnight call about leaky pipes or can’t find a sub-contractor to do a small repair to appease your tenant.
This job takes time and without a structure in place for the manager to get paid, discord will eventually permeate the family vibe.
The ideal partnership eliminates all entitlement feelings and gets right to the issue of the best management structure for the business. One would think that the sibling 2,000 miles away from the property would understand that the division of cash flow should include some form of compensation for the local family member running the properties, but that is not always the case.
Consider using an independent property manager to resolve this conflict. If that isn’t feasible, use that comparable cost for an independent property manager as the benchmark for what may be reasonable compensation for the managing family member.
On the other hand, the non-managing siblings now have the right to expect the property to be professionally maintained and performing well.
If you thought it was tough to run this family business, try dying without a solid estate plan and watch this collection of wonderful bricks and mortar turn into a house of cards that is easily shaken.
Owning illiquid assets such as real estate can be problematic upon death. Death taxes in states like MA can start after $1million in assets. Cash needs to be available within nine months to pay those taxes.
Beyond taxes, you should have written partnership agreements that specifically state what happens in the event of death or disability of an owner. This same agreement should also address what happens if capital is needed for the properties and not all partners can contribute their required share.
To make the estate settlement of your deceased partner easier, talk to a professional about using a trust to own your interests.
This makes a settlement for the decedent's heirs easier and for you, the surviving partner, your deceased partners share will not get bogged down in messy probate.
