You’ve heard that you shouldn’t mix money and family. You’ve also heard names like Walton, Koch, and Mars—the wealthiest families in the United States and families that invest and conduct business together.
So, what’s the right answer: Is investing with family a genius idea for building wealth or a surefire mistake?
In the face of an unsteady economic climate, investing in alternative assets like real estate, startup businesses, and more has never been more critical to the health of your portfolio. However, the price tag on some of these alternative assets can make them difficult to attain by yourself.
To obtain that investment property or become an angel investor for a startup you know is a surefire hit, you may need to pool funds with a group. Who better to join with than the people you trust most, right? Or wrong?
This post will cover all the pros and cons of investing with family. In the end, we’ll share the verdict of whether pooling funds with family to invest is the investing solution you’ve been looking for.
Investing with Family: Trends and History
As we hinted above, investing with family isn’t a new idea—it’s something the wealthiest investors have been doing for centuries! Over the years, the rich have created generational wealth by inviting family members and friends to join in their investment opportunities, spreading their risk, and increasing their investable capital simultaneously.
To build real wealth, you will need to invest in alternative assets. What is an alternative asset? Any asset that is not a stock, bond, or cash. Alternative assets allow you to diversify your portfolio and achieve greater returns than you can investing in publicly-traded assets. The challenge, however, is that alternative investments can have a higher barrier to entry, both in terms of price and required experience.
When investing with a group, you can easily access higher-value assets. If you are interested in investing in property, this may be of particular interest to you. Rising property costs and an increase in property rental opportunities like Airbnb have made investing as a group more beneficial than ever.
But investing with family can’t be all sunshine and rainbows, can it? Let’s take a closer look at the pros and cons of investing with family.
Pros of Investing with Family
Investing with family comes with many benefits. First, as we teased in the above section, investing as a group lets you access assets, properties, or investments you wouldn’t be able to afford on your own. Instead of pouring all your money into a low-value property, you can pool capital with a trusted relative and buy a far more valuable property.
The benefits don’t stop at your budget, though. Investing with family also allows you to receive help with asset maintenance. This benefit is especially important in property investment. Instead of managing landlord duties, “flipping,” or other property-related responsibilities on your own, you can receive help from trusted loved ones, sharing the burden both in terms of finances and time.
Next, you can also invest with family to build generational wealth. Investing in an alternative asset like a beach house or a collection that can be passed down from one generation to the next can help build wealth for years to come. Additionally, investing with members of a younger generation can help teach valuable investment skills, helping them to further build upon that generational wealth as time goes on.
But the younger generation isn’t the only one who can benefit from family investing—all members of your family investing group can benefit from the shared knowledge of the group. Learn new asset classes and leverage the collective brain trust of your family to tackle investments like cryptocurrency, NFTs, or niche collectibles.
Lastly, investing with family helps you level up with the people who matter most to you. You will get to go on your investment journey side by side with a support network that truly cares about your wellbeing in addition to their own. You can celebrate successes together and pull together to rebound after less-than-successful investments. When done properly, investing with family can help you bond and grow closer to the people you care about.
Cons of Investing with Family
Investing with family comes with a few challenges, however. The first challenge you may encounter when investing with relatives is shared risk. When you invest as a group, you’re spreading the risk of your investment—in other words, if the investment goes south, you are only “on the hook” for part of the capital involved.
When you invest with family, however, the family unit still shares the risk as a whole. The easiest way to counter this challenge is to ensure upfront that every family member involved in the investment is comfortable investing the required capital. Additionally, ensure everyone is on the same page regarding an acceptable risk threshold for the investment.
Your next challenge will be the varying levels of experience within your group. Some group members may be seasoned investors, while others may have never even dipped a toe into the stock market. Though this may set the stage for some difficult conversations, this variety of experiences may be positive in the long run. Your family will be able to use the collective knowledge of the group as a whole to level up together, helping the newer investors gain vital skills they’ll need for future investment opportunities.
Lastly, the “biggie:” Relational challenges. This is the challenge everyone worries about most when considering investing with family. If the investment goes south… can your relationship survive? Additionally, you may have issues with egos. Parents may believe they have more deciding power than their adult children, for example.
These concerns are valid, but they are simple to overcome! The easiest way to avoid relational strife in your family investment group is to set clear expectations, rules, and processes from the beginning of your investment journey. The next section of this post will give you some vital tips for how to set these expectations successfully and invest together with your family without causing drama.
Tips for Investing with Family
To invest successfully with your family, you must follow five simple tips. Let’s discuss each tip to set you and your family up for success in your group investing journey!
- File an LLC:
The first rule of investing with your family is that your investment group is not a family but a business. For your investment group to run smoothly, you will need to treat it like a business. Formalize your investment group as a business entity by filing an LLC. Your LLC will enable you to open a business bank account, making it easy to pool funds without giving any one family member responsibility over all the capital.
- Set Up Rules and Expectations:
As hinted above, you will need to set up clear rules and expectations for your investment group. What is the investment budget? What is each member expected to contribute? Do you intend to continue investing together, or is this a one-deal group? What are the voting processes for your group? The answers to these questions are only the beginning. Set up a formal Operating Agreement and ensure all members agree before you begin to pursue any deals together.
- Maintain Open Lines of Communication:
The surest way to cause interrelational problems is to miscommunicate. Don’t let a miscommunication be the downfall of your family’s investment group! Maintain open lines of communication to ensure that your entire group stays aligned. When we say your entire group, we mean your entire group. That means no sidebar conversations.
- Use an Alignment Tool:
Using an alignment tool will help you with the first three steps of this process! Tribevest’s alignment tool helps you set up your rules, expectations, group mission, voting procedures, and more. Our chat function also lets you keep all communication transparent and in a centralized location. We can also help you file your LLC, if that’s something you’d like our help with! Check out our features and pricing to learn more.
- Set Up Succession Plans:
Succession planning is an important piece of the puzzle when working with group members across multiple generations. However, this tip doesn’t just refer to succession planning in the event of a group member’s passing: You also need to consider what happens when a family member wants to exit the opportunity. Alternately, what is the process if a new family member wants to join late in the game? Families change as members are born, married, divorced, and pass on. You need to set up your investment group rules to reflect this ever-changing dynamic.
Investing with Family: The Verdict
We’ve weighed the pros and the cons and discussed our top five tips. So, what is the verdict? Investing with family: Genius idea or surefire mistake? In our view, with proper planning, investing with family is a genius idea.
The only way this type of investment group is a mistake is if you skip the paperwork and fail to communicate and organize your efforts properly. The good news is, an alignment tool like Tribevest can help you avoid those pitfalls and ensure your investment group runs smoothly!
To invest with family with confidence, leveling up together and building generational wealth from the ground up, use Tribevest’s alignment tool. Get started today, and we’ll help you with every step of the process, from filing your LLC to pulling the trigger on your first group investment.