Extended family investment or pay debt and save

Question

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.

Answer 1

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.

Answer 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.

Answer 3

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.