Real Estate Family Business - Advice

One topic that's never really brought up in this fourm is what to do if you parents already own Real Estate/are in the business. I'm not here to be called a "spoiled rich kid" -- by some chance of god I won the genetic lottery and I'm incredibly blessed. I'm here to get honest straightforward advice on how to best leverage my situation.

My father was fortunate enough to buy in LA before prices exploded.. as a result he owns a multifamily property worth around $15 million (no leverage.. he uses the income from the property to live on so he's unable to get any financing on the building.) We've talked about it and he has every intention of passing that building onto me. I haven't started FT work yet (Rising senior).. but what career path would best set me up for success? Working for a REIT? Res/CRE Broker?

Has anybody else ever been in this position? If so what career path did they take? I'm worried about about is size - the amount of real estate isn't all that much, especially considering we are unable to leverage it.

Comments (19)

Best Response
Aug 16, 2017

Honestly, I wouldn't even take that property into consideration as you plan next steps. I'm guessing your father is in his late 50s/early 60s given that you are a senior at university. Giving an average life expectancy of 80, that is another 20-25 years before you inherit that property (and that is assuming that he doesn't have a spouse that is still living that needs the income from the property before you receive it). That would put you in your mid-40s and hopefully already established in your career (and if you decide to go the whole married + kids route, probably with a 10 year old of your own). It doesn't make sense to plan your career around something that will occur in 20-25 years time.

My grandfathers owned small, but profitable commercial real estate portfolios that were leftover from the days of when they actually owned the businesses housed in those buildings (I have a typical Asian immigrant family story of grandparents that own laundries, grocery/convenience stores and restaurants). They both passed in their 70s, but my grandmothers lived on into their 90s, utilizing the income from those properties. When they passed away, my parents were in their 60s. Had my parents' generation waited to inherit those properties, they would have waited almost their entire working careers to do so. Instead they became successful in their own right and both grandmothers left those properties to their grandchildren to be used to jump start our lives (for my younger cousins that money is going for their educations, for us older grandchildren, that money is being used for houses, our own children, establishing businesses, etc.)

Notwithstanding the above, the best way I can see you leveraging the property while he was still alive is by using him as a backstop to take some risks with your career (if he is wiling to support it). 100% commission jobs (like brokerage or fee appraisal or consulting) are pretty much open to you if he is willing to help you out on the months where you might not make rent or if you wanted to start flipping/wholesaling houses and he was willing to front your some cash to do it, for example. Or to take it outside of business, if you have some hidden talent that you want to pursue (like writing, or music, or art) that he is willing to support for a couple of years while you get established. That is truly the power of having a parent with a little bit of money - opportunity.

Please don't take anything that I've written above as a lecture, or some sappy greeting card. I came from a similar place and have had this same conversation with a lot of my family and friends/classmates and we have pretty much all come to the same conclusion that social scientists have - it isn't about the money so much as it is about the opportunity/experience that the money can buy.

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Aug 16, 2017

I work with a lot of families like yours and it's an interesting situation. There is one family who I know which has $150 million worth of real estate all owned unleveraged. The family bought all the real estate in the 20s but today the company is run by idiots. They have absolutely no idea what they are doing and their properties are underperforming by as much as 50%. Don't screw up your families situation. I would say there are three major things that I would advise you to do in your situation:

1.Learn as much as you can as fast as you can about real estate more generally, outside the family business. a lot of things your family is doing could be inefficient. This should include some formal RE training if possible IE. MSRE or Certificate program.

  1. Learn and dive in depth into your market and start trying to see as many deals as possible. I would work in a brokerage that sells similar properties (size and asset class)to what your family owns.This will let you see your families portfolio as it compares to the market on a daily basis. It will also allow you to jump on a good deal which you could add to your families portfolio.

3.Diversify, owning properties unleveraged is risky. Although it may be counter intuitive, the more properties you own( even levered) the less risky the portfolio is as a whole. don't go crazy and take out modest low leveraged loans (keep in the 50% LTV range if you are extremely conservative) Cashout some of your properties and start putting money out in assets you and your family have experience in. This will be helped by steps one and two. Deals have to make sense to you. Your goal should be modest growth with generational wealth in mind. 15 million is a decent number for a small family assuming your making like a 6 Cap unleveled. if you can target 8% growth net via income and appreciation. your family could do very well long term.

@mrcheese321 I have seen so many people piss away massive opportunities because they didn't maximize their families businesses at its core.

Bottom Line for family real estate businesses: understand the business, maximize the business and expand

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Aug 16, 2017

While I totally agree that achieving an efficient frontier should be the goal of any business, it generally won't happen if the next generation doesn't really want to be there and are only tied to the business because of some sense of honor or duty to the family (which is what I'm guessing has happened to the companies that you have seen). IMHO, the better approach is to use the money that the business provides (either by hiring someone else to run it and keeping the cash flow, or selling it) and giving yourself best opportunity to be successful in a career that you actually want. Now, if you actually want to be in the same career as your family business, then great.

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Aug 16, 2017

Sell it and do what you want. Don't tie your future to a small, old apartment building in an industry that you may not be interested in.

Aug 16, 2017

What makes you say you are unable to leverage it?

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Aug 17, 2017

Brokerage maybe? Transactional experience is irreplaceable.

Aug 17, 2017

Find what you like to do first.

If you want to stay in RE, go and get a job in brokerage, investments etc in the asset class you like.

Try to make sure the property is not under performing, maybe get a few BOVs done and see what the brokers say and then try to apply some leverage. Even if the property is performing at like a 4% Cap/ Cash-on-cash it should be putting off like $600k NOI which is a pretty impressive number to spend on living expenses in LA.

I would try and apply some leverage, even 75/25 LTV would net your family like $450k a year which is fine in LA, and would allow you to place like 3.75mm into a new building.

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Aug 18, 2017

Your dad is likely leaving some serious cashflow on the table by not leveraging up. Refi at 50% LTV and buy another property with leverage.

Aug 17, 2017

That's what I'm saying, they could easily build a pretty serious CRE portfolio over the next 10-20 years using some fairly conservative leverage.

Aug 18, 2017