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Message
Question regarding dual ownership of rental property.
Posted on 9/16/16 at 8:55 pm
Posted on 9/16/16 at 8:55 pm
Hello everyone, a little background before I get to my question. My grandfather started a rental business in the 60's, over the years we have grown into a decent sized business (13 rental houses + 75 apartments).
For the past 30 years my father and uncle have both been working for my grandfather, when my grandparents passed away 5 years ago my father and uncle inherited the property.
I joined the business back in 2009 when I decided college wasn't for me. The last few years I have been transitioning into running the business as my dad(66) and uncle (68) cannot do as much as they could. My uncle only comes in about a week out of the month to pay the bills and write the paychecks while my dad still comes in everyday until 12.
Recently, my father purposed a 300$ a month raise for me since I am taking on more and more of the business. My uncle did not respond well to this purposeful and even threatened, "he was going to his lawyer and forcing a sell of the property".
My question to you all is, what are the chances of an investor only buying 50% of the property? We have about 10 apartments that need at least 10K in remodeling to be brought back into service.
Is this a legitimate concern or is he just blowing smoke hoping my father would back down on his stance on the raise?
Sorry for the long post, thank you for your time.
For the past 30 years my father and uncle have both been working for my grandfather, when my grandparents passed away 5 years ago my father and uncle inherited the property.
I joined the business back in 2009 when I decided college wasn't for me. The last few years I have been transitioning into running the business as my dad(66) and uncle (68) cannot do as much as they could. My uncle only comes in about a week out of the month to pay the bills and write the paychecks while my dad still comes in everyday until 12.
Recently, my father purposed a 300$ a month raise for me since I am taking on more and more of the business. My uncle did not respond well to this purposeful and even threatened, "he was going to his lawyer and forcing a sell of the property".
My question to you all is, what are the chances of an investor only buying 50% of the property? We have about 10 apartments that need at least 10K in remodeling to be brought back into service.
Is this a legitimate concern or is he just blowing smoke hoping my father would back down on his stance on the raise?
Sorry for the long post, thank you for your time.
5
Posted on 9/17/16 at 5:41 am to 420centraltime
Your uncle is threatening to force a sale of a 30 year family business over a $10/day raise while you lessen the load for the oversight 88 total units? Ask him his buyout number. If it's ludicrous, get on board with the sale of business. Sounds like he'd entertain a reasonable buyout just posturing at the moment.
Posted on 9/17/16 at 7:56 am to ItNeverRains
What does your dad think about the situation?
Maybe your uncle would owner finance his portion and you could pay monthly.
Guess it depends what his motivation is? Does he want to sell?
Maybe your uncle would owner finance his portion and you could pay monthly.
Guess it depends what his motivation is? Does he want to sell?
Posted on 9/17/16 at 8:14 am to ItzMe1972
Instead of selling 1/2 of 88 you could sell 44 right? Still though, the chances of selling property like that for market value of each is pretty bad. You are looking to sell to investors and investors are going to want a certain ROI, you'd be much better selling off individually over time IMO.
It's possible that the best course of action could be say buying your uncle out of say 1/2 of his ownership and have him sell his other 1/2. So you keep say 66 properties.
It's possible that the best course of action could be say buying your uncle out of say 1/2 of his ownership and have him sell his other 1/2. So you keep say 66 properties.
Posted on 9/17/16 at 8:24 am to 420centraltime
How much do you make now?
Posted on 9/17/16 at 12:00 pm to 420centraltime
First, the non-financial question I have: What is your uncle really upset about? Unless your uncle is a candidate for the funny farm or just the biggest a-hole ever, it seems highly doubtful to me that he would throw this much of a fit over giving his nephew an additional $3600 a year in compensation.
Methinks there is something else going on. Maybe him and your dad haven't been seeing eye to eye? Maybe your uncle doesn't approve of something you are doing? Maybe he's ready to cash out anyways and is just looking for an excuse?
Ok, now the financial questions:
1) How is owenrship structured? Are all the properties in a single LLC, corp, or partenrship? Multiple ones? All owned via undivided interests held personally?
2) Rental properties are often priced not just on FMV, but also a consideration of things like cap rates. How are these properties financially performing?
3) If your uncle wants out, does he want cash, will he take a note, or does he want half of the properties?
4) Who calls the shots? Even if they are 50-50 partners, someone has to have ultimate control. Or do they have to agree on all decisions?
5) In the valuation world, you have discounts for marketability (i.e. how many people would buy half-interest in properties or half-interest in private companies) and control (i.e. you are buying an illiquid investment that you can't call the shots on). Both of these serve to reduce the price an outside investor would pay for a 50% share of the properties.
Good luck with this man. I hope this is not the start or continuation of a family being torn apart due to the family business, but it happens all too often.
Methinks there is something else going on. Maybe him and your dad haven't been seeing eye to eye? Maybe your uncle doesn't approve of something you are doing? Maybe he's ready to cash out anyways and is just looking for an excuse?
Ok, now the financial questions:
1) How is owenrship structured? Are all the properties in a single LLC, corp, or partenrship? Multiple ones? All owned via undivided interests held personally?
2) Rental properties are often priced not just on FMV, but also a consideration of things like cap rates. How are these properties financially performing?
3) If your uncle wants out, does he want cash, will he take a note, or does he want half of the properties?
4) Who calls the shots? Even if they are 50-50 partners, someone has to have ultimate control. Or do they have to agree on all decisions?
5) In the valuation world, you have discounts for marketability (i.e. how many people would buy half-interest in properties or half-interest in private companies) and control (i.e. you are buying an illiquid investment that you can't call the shots on). Both of these serve to reduce the price an outside investor would pay for a 50% share of the properties.
Good luck with this man. I hope this is not the start or continuation of a family being torn apart due to the family business, but it happens all too often.
Posted on 9/17/16 at 1:55 pm to LSUFanHouston
I'm not really sure why he is upset that the person working to pay his salary would like a small price of the pie as business is going well.
My uncle has really never been all in the business. He made some bad life choices and had to come back and live with my grandparents in his 40s.He most likely wants to cash out. He's making 60k tax free a year, so I'm not really sure why he would
cash out yet.
We just recently formed an LLC a few months ago and it is structured 50/50 with each party having a vote.
I would imagine he want cash.
I would imagine it would take quite a while to sell. All the property is in a old neighborhood, so most of the tenants are lower middle class.
thanks for the replies everyone.
My uncle has really never been all in the business. He made some bad life choices and had to come back and live with my grandparents in his 40s.He most likely wants to cash out. He's making 60k tax free a year, so I'm not really sure why he would
cash out yet.
We just recently formed an LLC a few months ago and it is structured 50/50 with each party having a vote.
I would imagine he want cash.
I would imagine it would take quite a while to sell. All the property is in a old neighborhood, so most of the tenants are lower middle class.
thanks for the replies everyone.
Posted on 9/17/16 at 1:57 pm to 420centraltime
Buying him out isn't an option?
Posted on 9/17/16 at 2:00 pm to 420centraltime
Sounds like your uncle has deeper issues than just an additional $300/month going to you. But we don't know him as you do, so it's impossible for any of us to say if he's blowing smoke or not. Does he have kids that he wants involved in the management as well? In other words, does he perceive you to be nosing one of his pups out of the feed bowl?
Anyway, some of the most pertinent questions are those posed by LSUFanHouston. Personally, I have very little patience when things or people get silly or emotional. So I would call his bluff, once I'd formulated a feasible plan, and buy him out - and I would do it before making any meaningful (value added) improvements to the properties. But without knowing the answers to LSUFanHouston's questions, there's no way to know how that plan could/should be formulated.
ETA: Looks like you posted as I was typing. Personally, I'd start interviewing appraisers and talking to banks - and not tell him a thing about it until my ducks were lined up.
Anyway, some of the most pertinent questions are those posed by LSUFanHouston. Personally, I have very little patience when things or people get silly or emotional. So I would call his bluff, once I'd formulated a feasible plan, and buy him out - and I would do it before making any meaningful (value added) improvements to the properties. But without knowing the answers to LSUFanHouston's questions, there's no way to know how that plan could/should be formulated.
ETA: Looks like you posted as I was typing. Personally, I'd start interviewing appraisers and talking to banks - and not tell him a thing about it until my ducks were lined up.
This post was edited on 9/17/16 at 2:05 pm
Posted on 9/18/16 at 12:36 pm to Jag_Warrior
Sounds like there is nothing contractual holding this partnership together other than the estate of the grandfather. I'm also guessing that none of these properties have mortgages?
Some solid advice already given. I think finding a partner might not be too difficult. You may be able to find someone on here willing to buy him out and create a LLC.
Where are these properties?
Some solid advice already given. I think finding a partner might not be too difficult. You may be able to find someone on here willing to buy him out and create a LLC.
Where are these properties?
Posted on 9/18/16 at 2:33 pm to Jp1LSU
quote:
Sounds like there is nothing contractual holding this partnership together other than the estate of the grandfather. I'm also guessing that none of these properties have mortgages?
Some solid advice already given. I think finding a partner might not be too difficult. You may be able to find someone on here willing to buy him out and create a LLC.
Where are these properties?
We just recently changed all the deeds over and formed an LLC. I'm not entirely sure on what is in the LLC as far as selling the property. Worst case scenario we would buy his half out. We do have about 8 years left on one mortgage.
Posted on 9/18/16 at 3:27 pm to 420centraltime
Is there an operating agreement for the LLC that was formed? If so, then any provisions in the agreement would govern your uncle's ability to sell his ownership interest. If your uncle tries to sell his interest the market value of a 50% interest in an LLC would reflect the following:
Lack of control - makes the ownership interest less valuable since no decision making authority.
Lack of marketability - makes the ownership interest less valuable as resale is difficult since there is no ready market.
Lack of liquidity - makes ownership interest less valuable since ownership interest cannot be converted to cash without difficulty.
Bottom line is that your father is the buyer likely to pay the best price since he would gain control.
Lack of control - makes the ownership interest less valuable since no decision making authority.
Lack of marketability - makes the ownership interest less valuable as resale is difficult since there is no ready market.
Lack of liquidity - makes ownership interest less valuable since ownership interest cannot be converted to cash without difficulty.
Bottom line is that your father is the buyer likely to pay the best price since he would gain control.
Posted on 9/19/16 at 4:23 pm to 420centraltime
Are you or your father (or other members of the family) in a position to borrow money / cash in investments in order to buy out your uncle? Or do you know of someone who may want in on the action?
If so... I would call your uncle's bluff. I would tell him that the LLC will hire a firm to value a sale of the 50% ownership interest in the LLC. Your uncle will be charged the full cost of this valuation. The valuation will reflect the discounts I briefly mentioned at that Poodle went into more detail on. Once that comes back, you will entertain buying him out for the value in the report.
If so... I would call your uncle's bluff. I would tell him that the LLC will hire a firm to value a sale of the 50% ownership interest in the LLC. Your uncle will be charged the full cost of this valuation. The valuation will reflect the discounts I briefly mentioned at that Poodle went into more detail on. Once that comes back, you will entertain buying him out for the value in the report.
Posted on 9/20/16 at 1:02 am to LSUFanHouston
Take my advice...do NOT get into rental business with family members it's a headache....
Posted on 9/20/16 at 3:39 pm to LSUFanHouston
quote:
Are you or your father (or other members of the family) in a position to borrow money / cash in investments in order to buy out your uncle? Or do you know of someone who may want in on the action?
If so... I would call your uncle's bluff. I would tell him that the LLC will hire a firm to value a sale of the 50% ownership interest in the LLC. Your uncle will be charged the full cost of this valuation. The valuation will reflect the discounts I briefly mentioned at that Poodle went into more detail on. Once that comes back, you will entertain buying him out for the value in the report.
The total property is assessed at 1,150,000.00. About 10 units need major remodeling. What would be your offer?
Posted on 9/20/16 at 4:26 pm to 420centraltime
quote:
The total property is assessed at 1,150,000.00. About 10 units need major remodeling. What would be your offer?
You are not buying the properties. You are buying an interest in the LLC, a business. It's a different valuation model.
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