5

I'm 25 and my wife is 24. My extended family is about to start a new investment fund, where every member basically contributes an amount between $50-$100 (amount per person) monthly. The purpose is to create a fund that will be able to purchase real estate and then build off of that. There would be a total of 15 people contributing to the fund, with re-evaluations of financial possibilities every 2 years, or whenever good investments come available. My mom, and the administrator of the fund and his mother, are very good with real estate and have demonstrated to make good financial decisions. In addition, once the fund has made some initial investments, it will have the possibility to provide credit (of up to 30% of the active amount of the fund) to its members, which is another advantage to it.

Here are the facts on our financial situation. We're both engineers and I'm pursuing a Ph.D. Our incomes are $26000 and $65000, plus some 401K she has after one year of work, but we don't even consider it since that is untouchable to us. We owe:

  • Home mortgage $119,000 at a 4.125% interest rate
  • Student loans: about $35,000 at an average of 5% interest rate
  • Car loan: $5200 at a 2.4% interest rate

My question is: should we be a part of the investment fund? I would just like an outsider's stance on this situation. Thank you in advance.

  • Is this fund going to be officially incorporated (or whatever you do to make it "official")? Is this something administered by a broker, is a lawyer setting up contracts and terms and whatnot? Or is this more something you're just doing amongst family, sort of casually. – Joe Jan 15 '16 at 21:15
  • There will be a legal framework to it, and the contract we're signing to join in sets up one of the members as the administrator. The contract does specify the kind of property and priorities that the fund will be seeing. – E. Chase Jan 15 '16 at 21:16
  • One of your family members will be the administrator (and presumably, compensated for such)? Or is there a board? Is this a trust fund, or just investment? How easy is it to get out - can you withdraw your investment at any time, and/or stop contributing at any time, or are you prevented from doing so? – Joe Jan 15 '16 at 21:18
  • My sister's husband will be the administrator (yes, compensated) to keep all properties well maintained, but for purchases and credit approvals, he will be subject to the decisions of a board. I'm unsure about the difference between a trust fund, or an investment. Yes, you can cash out at any time and stop contributing. – E. Chase Jan 15 '16 at 21:20
  • 2
    "There is a vague property strategy" - from your comment below. I'd really want clarification on that. Say you get to a $20,000 fund, and go to buy a house. Will each of you be co-signers on the note? This can impact your own credit worthiness, at a time when you might wish to buy your own home. I have no gut feel either way, except to say "it's all in the details" and (no offense) you don't seem to have any. – JoeTaxpayer Jan 16 '16 at 14:16
5

I would suggest, both as an investor and as someone who has some experience with a family-run trust (not my own), that this is probably not something you should get involved with, unless the money is money you're not worried about - money that otherwise would turn into trips to the movies or something like that. If you're willing to treat it as such, then I'd say go for it.

First off, this is not a short or medium term investment. This sort of thing will not be profitable right away, and it will take quite a few years to become profitable to the point that you could take money out of it - if ever. Your money will be effectively, if not actually, locked up for years, and be nearly entirely illiquid.

Second, it's not necessarily a good investment even considering that. Real estate is something people tend to feel like it should be an amazing investment that just makes you money, and is better than risky things like the stock market; except it's really not. It's quite risky, vulnerable to things like the 2008 crash, but also to things like a local market being a bit down, or having several months with no renter.

The amount your fund will have in it (at most $100x15/month) won't be enough to buy even one property for years ($1500/month means you're looking at what, 100-150 months before you have enough?), and as such won't have enough to buy multiple properties for even longer, which is where you reach some stability. Having a washing machine break down or a roof leak is a big deal when you only have one property to manage; having five or six properties spreads out the risk significantly.

You won't get tax breaks from this, of course, and that's where the real issue is for you. You would be far better off putting your money in a Roth IRA (or a regular IRA, but based on your career choice and current income, I'd strongly consider a Roth). You'll get tax free growth, less risky than this fund AND probably faster growing - but regardless of both of those, tax free. That 15-25% that Uncle Sam is giving you back is a huge, huge deal, greater than any return a fund is going to give you (and if they promise that high, run far and fast).

Finally, as someone who's watched a family trust work at managing itself - it's a huge, huge headache, and not something I'd recommend at least (unless it comes with money, in which case it's of course a different story). You won't agree on investments, inevitably, and you'll end up spending huge amounts of time trying to convince each other to go with your idea - and it will likely end up being fairly stagnant and conservative, because that's what everyone will be able to at least not object to. It might be something you all enjoy doing, in which case good luck - but definitely not my cup of tea.

  • 1
    "won't be enough to buy even one property for years" - that was going to be the basis of my answer. That issue would be enough to keep me out. – JoeTaxpayer Jan 16 '16 at 14:12
  • Thanks for the insightful feedback. I think I'm gonna base my decision of off what you're pointing out. – E. Chase Jan 19 '16 at 18:04
2

Here's a little different perspective. I'm not going to talk about the quality of the investment, the expected return, or any of the other things you normally talk about when evaluating investments. This is about family, and the most important thing here is the relationships.

What you need to do here is look at the different possible scenarios and figure out how each of these would make you feel. Only you can evaluate this. For example, here are some questions to ask yourself:

  • If I do not participate, how will that make my family feel?
  • If I lose everything I invest, will that ruin me financially? How would that make me feel toward my family?
  • If I do not participate, and the fund does extremely well and everyone else in my family gets rich, how would that make me feel?
  • Are there any scenarios that would make family gatherings more uncomfortable than other scenarios would?

I know how I would answer these questions, but that wouldn't help you any. But the advice I would give you is, assuming you have this money to lose, and are also investing elsewhere, evaluate this solely on the basis of the effect on your family relationships.

The only other piece of advice I would give you is to knock out that student loan and car loan debt as fast as you possibly can. Minimize your investments until that debt is gone, so you can get rid of it even faster.

  • Great! Many of those are not concerns in our family, since we're pretty close; and for us, business is business, family is family. – E. Chase Jan 19 '16 at 18:05
0

It's a matter of opinion. As a general rule, my advice is to take charge of your own investments. Sending money to someone else to have them invest it, though it is a common practice, seems unwise to me. This particular fund seems especially risky to me, because there is no known portfolio. Normally, real estate investment trusts (REITs) have a specific portfolio of known properties, or at least a property strategy that you know going in. Simply handing money over to someone else with no known properties, or specific strategy is buying a pig in a poke.

  • Thank you for your feedback, Tyler. There is a vague property strategy, but there will be a board overseeing what is bought, and when. Of course we are starting very small, but with the 20 year outlook, the properties might become much more significant. – E. Chase Jan 15 '16 at 21:18
  • @E.Chase If you really understand and agree with the strategy and are willing to closely monitor and attend to the investment, it may be worth considering. At the end of the day ask need to yourself, what kind of investment would I be most interested in studying and tending to? An investment is like a garden. – Five Bagger Jan 15 '16 at 21:34

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.