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|Friday, August 22, 2014|
BY CLIFF HOCKLEY | OB GUEST CONTRIBUTOR
A wealthy grandmother dies leaving a $3 million commercial building to her heirs without a plan; five family partners share interest in a $5 million apartment building, and one of the partners goes through a divorce while another gets into a terrible car accident. Situations like these can affect any group of investors, but when business intersects with family, a host of situations can arise. Without a clear vision and careful planning, hard-earned investments can become stressful burdens.
The foundation of a strong financial plan lies in understanding how the assets in question can benefit the stakeholders according to their specific financial goals. For real estate investments, owners typically derive value in four ways:
The personal financial situation of each investor determines the extent to which they can derive value, which can make real estate a smart move, even when return rates seem low compared to other types of investments. For instance, consider a choice between a commercial building with a 6.5% cap rate and a well-managed hedge fund earning an average of 10% (assuming similar risk). While the immediate cash flow of the stocks exceeds that of the real estate, factoring in appreciation and depreciation can boost the actual return considerably, depending on the profile of the investor.
A strategic plan is necessary and should address a number of critical questions, including:
These questions can only be answered when the family agrees on the goals of the investment. Each owner should use an understanding of his/her own financial position to frame his/her goals in terms of the potential benefits of a real estate investment. Important factors to consider include:
Just like in any business, a clear set of goals implemented by an effective strategic plan will maximize the long-term earning potential of the group. No matter the goals of the investment, however, families should remember to treat the business as a business. When personal agendas cloud the judgment of those in charge, investments and relationships both suffer. By understanding the benefits of real estate investments, families can agree upon goals that will make their investments work for them.
Cliff Hockley is president of Bluestone & Hockley Real Estate Services
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