Leaving a real estate legacy can offer your family financial stability and growth for generations. However, it’s not just about acquiring properties, it’s about careful planning and knowing the right steps to take to manage, grow, and protect your legacy. In this video, you’ll discover how to leave a stable, well-managed real estate legacy that will be a long-term blessing for your family.
- Knowing the most profitable property type to leave to your heirs.
- Choosing the best legacy entity to store your assets.
- Educating your heirs on the one thing they should never do!
The Importance of Legacy Planning
Before we dive into the specifics, it’s essential to understand what’s at stake and why legacy planning is so important. Suppose you bought a $1 million commercial property in Los Angeles, California, 30 years ago. With the average appreciation rate of 8.4%, that property is now worth $11 million. In a growing market like Charlotte, North Carolina, that same property is worth $16 million today. That’s a 9.7% appreciation rate! These staggering numbers illustrate both the power of commercial real estate investing and the importance of legacy planning. But what’s at stake goes beyond financial gains – it’s about the stability and long-term well-being of your family. Imagine the impact of passing down a well-managed commercial portfolio to your heirs.
Setting Up the Right Legal Structures
Proper legal structures ensure a smooth transfer of assets and minimizes complications and family disputes. Of course, whenever planning your estate, please consult an attorney to consider variables such as family dynamics, tax implications, and property-specific factors. Here are the four most popular types, each with its unique advantages:
1. Living Trust
A living trust allows you to transfer ownership of the property while avoiding probate, saving significant time (possibly years!) and money. Other advantages of a living trust are the tax savings and asset protection against lawsuits and creditors. There are two types: revocable and irrevocable living trusts.
2. Tenancy in Common (TIC)
This option allows unequal ownership among family members. TICs are flexible and allow heirs to easily pass on their shares.
3. Joint Tenancy with Right of Survivorship
Ownership passes automatically to the remaining heirs, avoiding probate. If one family member passes away, their share is distributed among the surviving members.
4. Charitable Remainder Trust
This allows you to donate a portion of your real estate portfolio to a favorite charity while retaining a lifetime stream of income. This option is ideal for those wanting to support a charity or if you don’t have any heirs.
Best Property Type to Leave to Your Family
When it comes to building a lasting legacy, not all property types are equal. Here are the best and worst choices:
Least Favorite: Single-Family Homes
While they might seem like an obvious choice, single-family homes often lead to family disputes and financial burdens when significant expenses arise. As a result, they’re more likely to be sold quickly, which can erode the legacy you intended to leave. Even if the home is paid for and mortgage free, there are still repairs, insurance, and taxes to pay. As soon as the cash flow is inconsistent and family members have to dig into their pockets to cover expenses, the property will be sold and your legacy will be gone.
Best Choice: Commercial Properties
The best legacy assets are commercial properties like multifamily, storage facilities, industrial warehouses, mobile home parks, office buildings, and retail spaces. These types of properties offer consistent cash flow and preserve the golden goose (which is the legacy). However, there are two keys to leaving a commercial legacy that is a blessing and not a burden:
- Good Property Management
- Asset Management Plan
Having an asset management plan is key to being successful in commercial real estate and is a fundamental teaching in our mentorship program. It ensures your properties continue to cashflow, the taxes and bills get paid, and the family gets money month after month. This leads to stability, not only financial stability, but also legacy stability. A stable, well managed asset will be a long-term blessing to your family, not a burden.
Educate Your Heirs
Proper education of your successors ensures they understand the significance the legacy you have left behind. One critical thing to instill in your heirs is to NEVER sell the property upon your passing. Selling the property would mean losing all the financial benefits and years of hard work you’ve invested into building the legacy. But why would they sell?
What Could Go Wrong?
I have been an executor for three families who have inherited a real estate legacy, so I am writing from experience! Here are some common pitfalls that I have witnessed as an executor:
- Management Disagreements: Family members argue over how to manage the property.
- Financial Burdens: Unexpected capital expenses may prompt heirs to sell.
- Lack of Expertise: Heirs generally lack real estate management know-how and have their own beliefs of how real estate should work. So, this lack of expertise turns into management disagreement and causes them to sell.
- Family Dynamics: Personal relationships can complicate property management.
How to Do It Right
To ensure a smooth transition to your heirs and maintain your legacy, use these steps:
- Set Up a Detailed Estate Plan: Outline how money is distributed, asset management protocols, and decision-making processes. How are decisions made? Is it by majority or did you leave one person in charge?
- Use Trusts: This is the who, what, when, how and why of your portfolio.
- Hire Professional Advisors: Hire real estate experts, attorneys, CPAs, and property managers who can help your family manage your legacy.
- Consider a Buy-Sell Agreement: Consider a buy-sell agreement. This agreement outlines how to buy out a family member who might want out of the arrangement. Although not essential, setting clear guidelines helps to ease family tensions.
Leaving a real estate legacy for your family can either be a blessing or a curse. With proper planning and guidance, you can turn it into a long-term blessing that will grow and benefit your family for generations.
Questions or Comments? Text PETER to 833-942-4516.
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