You don’t feel any older…but who is that person in the mirror?

After fifty years of investing, you have grown a portfolio that nets over $25,000 a month and you feel good about what you have accomplished. You “retired” years ago when you hired a real estate property management company to handle the day to day upkeep of your investments and prior to that you made sure to build up significant reserve accounts for each of your properties, planning ahead for taxes, major capital expenses, vacancies that might require significant remodeling, and (in the case of commercial buildings) large leasing commissions. 

This allowed you the time to check off items on your bucket list while maintaining the income to finance each adventure. Whether you’re in a Paris hotel room or on a lounge chair at a beach resort, you still carefully review each monthly property report to keep apprised of your investments. Life is pretty good, but you know it can’t go on forever.

You are aging; you may have small memory lapses now and then or a lack of stamina to keep up with rapid change. You know that you need to get young blood involved in your investments. You don’t need to hire another service provider. You need to recruit another you. Everyone you talk to offers the same advice, “Do you have kids?” they ask, “Are they interested in taking over?” You know you should have asked yourself this question earlier but somehow the opportunity escaped you.

Even the closest families sometimes shy away from sharing financial details with each other.  Maybe your kids were free spirits in their younger years and you questioned their judgment, maybe they never seemed interested in real estate, or maybe they were focused on their own career path and you didn’t want to complicate their lives. Maybe you don’t have children but some capable nephews and nieces you never approached. In any case, you have no idea if these potential successors are interested in real estate or investing for that matter. 

You also need to understand that just because these people are related doesn’t mean your successor(s) have real estate in their DNA or the ability to collaborate well with each other. You need to identify people who are passionate about real estate investing, like you are. They will need the ability to work cooperatively in a way that will last into the future.  How do you gauge interest, compatibility and aptitude for a job they will assume after you are gone?   

Introducing the Next Generation to Real Estate

At this point, the best approach is a fairly direct one. Invite your potential successor(s) to visit you for a planning session on the future of your real estate investments. Give them some idea of the nature of your real estate holdings, your intentions of passing it on to the next generation, and explain why their involvement now will help make the transition a successful one.  Let them know to expect something more like a workshop and less like a family reunion and discourage them from bringing their spouses or children.

In preparation for the planning session, have your property manager prepare a briefing book for each property which includes the property histories, tenant information, condition of the property, latest capital improvements, individual balance sheets and income statements on a year over year basis, and then schedule him or her to take your group on a tour of your properties. 

After your tour, break down the business details to your successor(s). Explain the LLC structure of your investments, the trust structure of your estate, and what that would mean to them.  Review the potential estate taxes that might arise as a result of your passing and how you propose they manage that burden.

If you have a number of successors, you will need to designate one to work with the property manager on day to day decisions. It is important, however, to train all successors so they can create a process of decision making. Major decisions over $10,000 and those involving strategy and refinancing, purchasing and sales of properties will involve all of your successors as a group, so they must have a strategy to reach consensus. (You will also need to plan for what happens if one of your successors dies, or is incapacitated, or just wants out of the partnership.  If you start planning early, you can gauge interest level and compatibility to prevent this last scenario.)   

Devise a Training Program

Devise a training program to give your successor(s) the knowledge to make the best decisions possible and, in the case of multiple successors, to establish as a group who has the skills and interest to be the leader.  Make sure this training program includes the following: 

  • Pay for your successor(s) to take basic real estate courses, either online, or at a college/community college near them. They will need to pass with a B or better.
  • Put together an orientation so your successor(s) understands the current condition of the properties, how and why you bought them and put five-year plans in place for each property. In this way they will also be setting long term and short term goals for asset growth and repositioning of the portfolio.
  • Teach them real estate mathematics, how to underwrite real estate deals, how the financials work, what pro formas are and how to evaluate property financing so they can make informed purchase, sale and refinance decisions.  Evaluate the purchase of potential properties together.
  • Review and role play how to make decisions regarding leasing commercial space and how to handle commercial leases, commercial brokers and their commissions and how to evaluate tenant improvement expenses and lease rates.
  • After all of this training, allow them to take a key role in decision making for your portfolio. (Remember to modify the LLCs to take their involvement into consideration!)  

All this may overwhelm your successor(s) at first, especially if they had no previous exposure to your investments. Allow them to air their concerns and coach them best you can.  If you plan carefully, you will have the added bonus of more quality time spent with your loved ones.  You will be able to connect with them as adults, and enable them to prepare for their retirement as well as the future of other family members down the line. With the right planning and training, everyone wins.   

Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company..  He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM).  Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM).