Author Topic: Would you invest? If not, what terms would you change to do so  (Read 3153 times)

jousicastillo

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Hi Mustachians!

This is my first post, so go easy on me.

I am an avid reader of the blog, so I decided to post the following question, to get your advice.

I have the opportunity to invest 150k in a joint real estate venture.

Land is owned by my family, through a holding company, and my investment would go to finance 50% of a commercial warehouse.

I would not own the land (or any piece of the land), but would have a 40 year long contract, to receive 50% of the income the warehouse lease generates. After 40 years, the contract would end, and my 150k investment would not be returned.

My yearly return for the 150k, in a worst case scenario, would be 10%. At a rental occupancy rate of 88%, this would be around 13k per year. Also, leases are adjusted yearly for inflation (at around 4%).

I live in a South American country, with few industrial factories, so we have a very import oriented type of economy, where warehouse space is very valuable (and will continue to be in the future).

I am 32 years old, making around 200k after taxes, and own 4 rental properties in the housing and retail space. Owning something in the commercial warehouse space, would be a nice addition to my real estate portfolio.

Would you take the investment? If not, what terms would you change to do so. Let's say you can change the principal invested, the term of the contract and the % of split income. Yearly 10% return is the only fixed variable
« Last Edit: March 06, 2018, 06:29:08 PM by jousicastillo »

chasesfish

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Its difficult for me to give an exact answer, since I'm here in the US and not familiar with real estate laws in an unnamed South American country.

However, given your income level, the fact you already own four rental properties, I'm tempted to say its a good investment.  We have similar opportunities in the US when someone builds a structure for rent on top of a ground lease, at the end of the ground lease the investor looses ownership.   The numbers are what they are and you know the market/demand better than others.

SnackDog

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It is a good investment if you understand all the risks.  40 years is long time. What if the warehouse burns down? Is it insured? What about competition?  Mafioso?  Govt regime change?

jousicastillo

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There are definitely risks involved. Among those (somewhat in order):

1. State of the economy. The country is Paraguay, and while we have had a booming economy for the last 9 years (averaging ~5% compound GDP growth and <4% inflation in local currency), things can go south, much quickly than in developed countries.

2. Family dynamics. Land is owned by family through a holding company. And as said, 40 years is a long time, and fights over money and generational management changes, could ensue.


All other risks can be mitigated through insurance and contract clauses. Luckily, my family (and current management) is nice enough to let me draw up the contract with my lawyers, so that is a plus.

So, with those stated risks, would you make the investment?

150k investment, for a 40 year contract (where you loose your principal at the end) that paid monthly 1.100 usd (adjusted yearly by around 4%)?
« Last Edit: March 06, 2018, 05:00:57 AM by jousicastillo »

CoffeeR

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I have the opportunity to invest 150k in a joint real estate venture.

Land is owned by my family, through a holding company, and my investment would go to finance 50% of a commercial warehouse.
Family and money seldom mix. Keep them separate. Too many things can go wrong.

The worse case scenario is not that you loose money or even loose it all, it is that you are tied to investment/partnership you cannot get out of even if you want to which in turn ends up restricting you future choices.

So here is my answer, under no circumstance do this unless there is a guaranteed way you can get out of this (loss is OK in that case). Make sure that if need be you can completely cut the cord and be done with this. By the way, "guaranteed" does not mean assurances by family members. It means something in writing that a lawyer reviewed. The ability to dump this investment and walk away has to be completely 100% in you own hands.

Rocketman

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It sounds like a good deal, but... 50% of Income, gross rent or net income?
Is there management fees included? Can they be raised without your approval? Are you sure you will hit those income numbers? If inflation rises, does the rent rise more than the 4%?

None of us can tell you what to do. I think it is a good idea to invest with family business.

Good luck with whatever decision you make

SnackDog

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Given the political risks, I would expect a return of say 6-7 year payback or 25,000 per year.  You say 15,000/yr is your lowest case, what is your expected case and high case?

maizeman

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Who makes management decisions about the warehouse (who to rent to, what rent to charge, when to make upgrades, etc)?

When you say leases are adjusted upward for inflation, is that adjustment a fixed 4%, or is it tied to some inflation metric (for example the equivalent of the CPI here in the USA)?

As others have said, making sure the contract specifies details of insurance against fire/riots/assorted local natural disasters (will tie be carried, who is responsible for paying the premiums, is someone liable for your investment if the warehouse burns down and it turns out the insurance lapsed, etc).

At the end of 40 years, does the warehouse revert back to your family's holding company? And will any fraction of that holding company be yours one day, or are these an extended branch of your family rather than people in your direct line of descent?

BTDretire

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Others have stated possible problems, I'll just add there are other investments that may be less trouble.
First, you have a high wage, the interest you recieve will be taxed at a high rate. (?)
So every year you pay tax on the money received and then you reinvest it.
If you just place the $150,000 in an index fund and don't touch it for thirty years,
their won't be yearly taxes on the growth.
Also, you don't get your $150,000 back, so subtract $3,750 each year from what you
get in interest. 40 x $3,750 = $150,000 (yes, I know time value of money)
You could set up a couple of big math problems and compare, warehouse to stockmarket,
with applicable taxes. Then compare the earnings difference and see if the risks with the property
are worth it.
 Just had a thought, are you being put in this situation because you are the family member with
investable assets? If so run!

jousicastillo

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Hi guys, amazing insight into everyones questions. I tought I was the only one thinking and obsessing about all of the things that might go wrong when investing, but I guess I am not alone! I will try to answer everyones questions, so here it goes:

CoffeeR
Quote
"Make sure that if need be you can completely cut the cord and be done with this"
I definitely have included a rescission clause, where for whatever reason, if either party wants to get out or contract ends before 40 years, the principal must be returned accordingly. For example: 10 years have gone by, and I want to get out, 3/4 of the principal must be returned to me. No penalties or losses are incurred in this. I managed to get this in writing because of the following...


BTDretire
Quote
"Just had a thought, are you being put in this situation because you are the family member with
Investable assets? If so run!"
A bit of the opposite actually. The family business that owns the land has assets upwards of 10 million dollars, making +2 million in net yearly income. I guess family is trying to spread the wealth by letting me invest in this real estate venture. I am just making sure I am not missing anything, financially and legally, before actually investing.


Rocketman
Quote
"It sounds like a good deal, but... 50% of Income, gross rent or net income?
Is there management fees included? Can they be raised without your approval?
Are you sure you will hit those income numbers? If inflation rises, does the rent rise more than the 4%?”
Net Income would be shared 50%. No management fees, since an employee of mine (I have one that deals with everything related to my current properties), will be managing the day to day dealings of the lease.
I am fairly sure I will hit those numbers as a minimum. Investing in the warehouse commercial space is composed of land and the actual building, at a 30/70 cost distribution, and even though I am not paying for 30% of the land, I do get to benefit from its value, and its appreciation over the years, being this offset somewhat by losing my principal eventually.
Price rises should ideally as a minimum accompany inflation, however, price changes are more related to supply and demand.
For the warehouse market, demand looks strong and steady for the next 5-10 years, so I am also confident I will be able to at least raise prices at inflation levels.


SnackDog
Quote
"Given the political risks, I would expect a return of say 6-7 year payback or 25,000 per year.  You say 15,000/yr is your lowest case,
what is your expected case and high case?"
Expected gross is around 14% of principal, and principal would actually be 112.000 usd (not 150k). In my experience with real estate construction, however, numbers tend to end up being higher than proyected.
I have basically 10.000 square feet of warehouse space, at a construction cost of 22.5 usd per feet, renting it out monthly at .27 usd per feet (rent prices can currently go up to .45 usd per square feet, depending on location).

So expected gross:
10.000 x 22.5 = 225.000 usd (I would invest half of this)
(10.000X.27x12) / 225.000 usd = turns to be around 14.4% gross 
 
High case:
10.000 x 22.5 = 225.000 usd  (again invest, half)
(10.000X.45x12) / 225.000 usd = around 24% gross  (very unlikely)


Maizeman
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"Who makes management decisions about the warehouse (who to rent to, what rent to charge, when to make upgrades, etc)? "
I do

Quote
"When you say leases are adjusted upward for inflation, is that adjustment a fixed 4%, or is it tied to some inflation metric (for example the equivalent of the CPI here in the USA)? "
Leases are adjusted based on CPI as well (we have the same US metric).

Quote
"As others have said, making sure the contract specifies details of insurance against fire/riots/assorted local natural disasters (will tie be carried, who is responsible for paying the premiums, is someone liable for your investment if the warehouse burns down and it turns out the insurance lapsed, etc)."
This is a great question, I had not thought about lapsed insurance. I will add a clause that if any loss occurs (not covered by insurance) losses are to be distributed 50%/50%. So let’s say at year 5 warehouse burns down and is not covered by insurance. According to rescission clause I would be entitled for 35/40 of principal, out of which, I would pay 50% of the incurred accounting costs (depreciation considered) of the lost warehouse space .


Quote
"At the end of 40 years, does the warehouse revert back to your family's holding company? And will any fraction of that holding company be yours one day, or are these an extended branch of your family rather than people in your direct line of descent?"
Yes, warehouse investment would be the company's asset at the end of 40 years. I would own 16.6% of the holding company eventually, since I am a direct line descendant. I also currently serve as a board member at the holding company (were none of my other siblings do, since they are all involved in different personal businesses), so I guess that is a plus as well.


Quote
"Others have stated possible problems, I'll just add there are other investments that may be less trouble."
I have actually used net present value, to compare this investment to other options. Index funds would be a good choice, risk wise, but they are projected to pay relatively little compared to past historic values, for the upcoming decade. So at least on paper, the warehouse option (although riskier) appears to have the most return.



Again, thanks for the great insights! This is a very valuable validation tool, and has already brought improvements to the contract I will draw up if I go ahed with the investment (which I think I will).
« Last Edit: March 06, 2018, 05:25:41 AM by jousicastillo »

Mighty-Dollar

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40 years is a long time! And I agree with the previous poster, don't mix family or friends with money. Also it sounds like you are way over-allocated into the real estate asset class. That's a no no. Most people own stocks and bonds, with only about 5% in real estate. Buy a total stock market index fund and a total bond market index fund. No headaches.

jousicastillo

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Again, great insights!

L.A.S.
Quote
1.) Why can't you just straight up loan the money to the business entity.
Family holding company does not actually need the money I am investing. Besides helping me out by letting me invest in an area I understand, I believe management is not all that interested in dealing with commercial tennants nor is the return atractive for them, compared to their core business (their net profit margins are above 30%, yearly).

There are 20.000 square feet of warehouse space proyected to be built. 10.000 of those will be used by the company itself (that is why they got into this in the first place), and the excess 10.000 would be managed by me, through this joint investment they are offering.

So, I do not think they would go for the loan.


Quote
But it might be good to include that your contract rights are assignable.
Excellent advice. I will make sure I include this as well


Mighty-Dollar
Quote
40 years is a long time!
Yep, that is why if I go ahead with this, I want to make sure I am not missing anything. Also, only reason I am even considering the 40 year deal is because of my age and the social dynamics involved, where I will eventually own part of both companies involved in the agreement ( I already own 100% of the business making the investment, and will eventually own 16.6% of the business receiving the investment).

Quote
And I agree with the previous poster, don't mix family or friends with money.
I do agree with this. And it is probably the main reason of why I am not completely
convinced to go ahead with this.

Quote
Also it sounds like you are way over-allocated into the real estate asset class.
You are right. 35% of net worth is invested in real estate, rest of it is invested in a business, cash, stocks and bonds.

The reason I heavily invested in real estate is simply because of a booming real estate market. I am getting net +10% returns in every property, and am basically just ridding the booming real estate wave.
When things settle down, I will definitely sell some assets and look for other investment vehicles. For the moment however, real estate is extremely atractive here.

You guys have to remember I am not exactly operating in a mature market like the US. I am dealing more with conjunctural opportunities in a ever evolving and growing country (which my entrepreneurial spirit loves).

I leave you guys with a Forbes article about Paraguay, so you can have a better idea of the market I am operating in (and who knows, maybe you would like to invest some day). I think it does a great job at explaining local realities and its outlook!

http://www.custom.forbes.com/2018/03/01/paraguay/
« Last Edit: March 06, 2018, 05:06:20 AM by jousicastillo »

maizeman

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Also it sounds like you are way over-allocated into the real estate asset class. That's a no no. Most people own stocks and bonds, with only about 5% in real estate. Buy a total stock market index fund and a total bond market index fund. No headaches.

It's worth noting that some recent research suggests that most of us may be under allocated to real estate relative to what the ideal asset allocation would be for our individual risk tolerances. See this recent thread started by @SeattleCPA  https://forum.mrmoneymustache.com/real-estate-and-landlording/rate-of-return-on-everything-a-150-year-history/

Essentially the take away from looking at ~150 years of stock, bond, and real estate returns in a number of countries was that real estate gives similar long term returns to equities, but the returns aren't well correlated with equities, meaning that a portfolio which contains significant amounts of both equities and real estate can have substantially less volatility than either one alone.

That said, I'm still struggling with whether I want to adjust my own investment strategy based on this study, and so far I hadn't done anything to up my real estate allocation as a result of it. So... *shrug*

GOFU

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I have lived in South America for over 10 years. I took a few chances on some small businesses. I would never do it again. The people, in general, cannot be trusted. Sorry, but it's true. The courts are little to no help, especially if your opponent has money to pay off the judge. Sorry, but it's true. There are reasons that this culture, decade after decade, remains an "emerging" market. It is because of the corrupt nature of the culture from top to bottom. Sorry, but it's true.

On your $150k investment you are talking about a 10% return, with no return of principal, if all of a thousand things go perfectly right for 40 years.

And why are these millionaires being so generous with you? Why would they not keep the opportunity for themselves? People don't just give money away like that. If they are too busy they could hire a manager instead of giving away the investment.

This thing sounds complicated and extremely risky, and frankly based on what I have read here it smells like a rip off.

jousicastillo

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I have lived in South America for over 10 years. I took a few chances on some small businesses. I would never do it again. The people, in general, cannot be trusted. Sorry, but it's true. The courts are little to no help, especially if your opponent has money to pay off the judge. Sorry, but it's true. There are reasons that this culture, decade after decade, remains an "emerging" market. It is because of the corrupt nature of the culture from top to bottom. Sorry, but it's true.

On your $150k investment you are talking about a 10% return, with no return of principal, if all of a thousand things go perfectly right for 40 years.

And why are these millionaires being so generous with you? Why would they not keep the opportunity for themselves? People don't just give money away like that. If they are too busy they could hire a manager instead of giving away the investment.

This thing sounds complicated and extremely risky, and frankly based on what I have read here it smells like a rip off.

Gofu, i do appreciate the scepticism, it usually makes you ask the right and hard questions.

Nevertheless, I think you are letting past experience with South American dealings, cloud the analisis of what could possibly be an interesting investment.


To make things really, really simple, the situation is the following:

1.) My immediate family (father and aunt) have a very prosperous business, and I have a very good relationship with both of them.

2.) They are offering me to invest in a real estate opportunity (it's entirely up to me). If I say no, they will
do it themselves, and everything will be fine. There is no coercion. It is a simple friendly offering to help out a younger generation in their investments (they know I invest heavily in real estate).

3.) They are letting me dictate the terms, and handle the whole operation.


So forget about the 40 years for a moment, what conditions would you ask, to make this investment? How would you make this investment work in 10 years, for instance?

Let's say you can dictate absolutely everything: principal invested, timeframe, if principal (and how much) gets returned or not, how much the lease gets split, all of it.

The only requirement is for both parties to profit in the proposed situation. For instance: me investing 30k, getting 70% of income, and getting all my principal in 3 years, would obviously not work.

Given all the info in this post, your valuable real life experience, and knowing the leases generate between 10-14% yearly, what conditions would you ask to make this investment?


« Last Edit: March 06, 2018, 05:49:39 PM by jousicastillo »

2Birds1Stone

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Re: Would you invest? If not, what terms would you change to do so
« Reply #15 on: March 06, 2018, 08:34:29 PM »
Seven: this rule is so underrated
Keep your family and business completely separated
Money and blood don't mix like two d!*s and no b!%&h
Find yourself in serious sh!t

GOFU

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Re: Would you invest? If not, what terms would you change to do so
« Reply #16 on: March 07, 2018, 08:15:14 AM »
Gofu, i do appreciate the scepticism, it usually makes you ask the right and hard questions.

Nevertheless, I think you are letting past experience with South American dealings, cloud the analisis of what could possibly be an interesting investment.


To make things really, really simple, the situation is the following:

1.) My immediate family (father and aunt) have a very prosperous business, and I have a very good relationship with both of them.

2.) They are offering me to invest in a real estate opportunity (it's entirely up to me). If I say no, they will
do it themselves, and everything will be fine. There is no coercion. It is a simple friendly offering to help out a younger generation in their investments (they know I invest heavily in real estate).

3.) They are letting me dictate the terms, and handle the whole operation.


So forget about the 40 years for a moment, what conditions would you ask, to make this investment? How would you make this investment work in 10 years, for instance?

Let's say you can dictate absolutely everything: principal invested, timeframe, if principal (and how much) gets returned or not, how much the lease gets split, all of it.

The only requirement is for both parties to profit in the proposed situation. For instance: me investing 30k, getting 70% of income, and getting all my principal in 3 years, would obviously not work.

Given all the info in this post, your valuable real life experience, and knowing the leases generate between 10-14% yearly, what conditions would you ask to make this investment?

As to specific investment terms like amounts, splits and percentages I can't offer an opinion that would be more informed than yours. Only you know what your investment opportunities are, how this one ranks among them, and what you can negotiate to improve the terms. The more fundamental risk I see is non-performance by the other parties. ¿What leverage, guarantees or remedies do you have if the other parties fail or refuse to perform? Contract clauses with an expectation or hope of judicial enforcement are not sufficient. Unless you have some other practical guarantee you are basically naked.

Just by way of example, a business loan or personal consumer loan here is often guaranteed with real estate by delivering to the lender the actual physical title (along with documentation for ready transfer of title in the event of non-performance), to be held in the lender's physical possession for the life of the loan. This seems drastic and draconian by US standards, but it is standard practice here because without the very real threat of losing their house (or something else of comparably significant value) people regularly don't pay their debts or perform their contractual duties. They will give a hundred reasons why they can't (grandma got sick, baby got sick, I lost my job, my city or neighborhood got flooded, the global Brazil nut market tanked this year, etc., etc., etc.) But unless threatened with something drastic, like losing the only thing of value that they own, people will try to find a way to not pay and not show the least compunction about it. Sorry, it's true, and it is practically in the air they breathe.

Contract terms and courts, in the end, don't mean shit in terms of enforcing performance. So, when I read that you are going to put this and that and the other term in the contract to make sure this or that risk is covered I just shake my head because the documents only merit as much faith as the people who sign them. And in my experience, not much. Sorry, but it's true.

Maybe this is not your issue. Given the family situation, your position within the holding companies, relative sophistication of the parties, etc., maybe this is not a concern for you. If not, then I hope you negotiate the best deal possible and I wish you and all other parties the best of success with the venture.

waltworks

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Re: Would you invest? If not, what terms would you change to do so
« Reply #17 on: March 07, 2018, 09:17:02 AM »
I'll go a different direction on this. Here's what I see:
-You have a very lucrative job and a lot of assets (we don't know exactly how much, but you've implied that the $150k you'd put into this deal is no big thing, you have other rental properties, and you make $200k a year after taxes so... you're probably pretty much FI right now).
-You stand to inherit a significant portion of the family business (no idea when, right?) which sounds like it is very valuable/lucrative.

I have a hard time, in your shoes, wanting to make a potentially complex investment involving other members of your family when you don't actually need the money for anything. Why take the risk of harming those relationships?

Now, maybe I'm all wrong here and you just started with all this stuff and you have negligible NW. Even in that case, it's hard to imagine that 5 years at your current job wouldn't make you FI (not even counting on the inheritance) just investing in boring/safe stuff that doesn't involve your family.

TL;DR - you won (I think) the game already. Stop playing, especially with your own family.

-W

yachi

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I have lived in South America for over 10 years. I took a few chances on some small businesses. I would never do it again. The people, in general, cannot be trusted. Sorry, but it's true. The courts are little to no help, especially if your opponent has money to pay off the judge. Sorry, but it's true. There are reasons that this culture, decade after decade, remains an "emerging" market. It is because of the corrupt nature of the culture from top to bottom. Sorry, but it's true.

On your $150k investment you are talking about a 10% return, with no return of principal, if all of a thousand things go perfectly right for 40 years.

And why are these millionaires being so generous with you? Why would they not keep the opportunity for themselves? People don't just give money away like that. If they are too busy they could hire a manager instead of giving away the investment.

This thing sounds complicated and extremely risky, and frankly based on what I have read here it smells like a rip off.

Gofu, i do appreciate the scepticism, it usually makes you ask the right and hard questions.

Nevertheless, I think you are letting past experience with South American dealings, cloud the analisis of what could possibly be an interesting investment.


To make things really, really simple, the situation is the following:

1.) My immediate family (father and aunt) have a very prosperous business, and I have a very good relationship with both of them.

2.) They are offering me to invest in a real estate opportunity (it's entirely up to me). If I say no, they will
do it themselves, and everything will be fine. There is no coercion. It is a simple friendly offering to help out a younger generation in their investments (they know I invest heavily in real estate).

3.) They are letting me dictate the terms, and handle the whole operation.


So forget about the 40 years for a moment, what conditions would you ask, to make this investment? How would you make this investment work in 10 years, for instance?

Let's say you can dictate absolutely everything: principal invested, timeframe, if principal (and how much) gets returned or not, how much the lease gets split, all of it.

The only requirement is for both parties to profit in the proposed situation. For instance: me investing 30k, getting 70% of income, and getting all my principal in 3 years, would obviously not work.

Given all the info in this post, your valuable real life experience, and knowing the leases generate between 10-14% yearly, what conditions would you ask to make this investment?

I would rather see a 40-year duration loan with a 10 to 18% (fixed or variable) interest rate, recorded in a deed against the land property itself. (This would be entirely repaid in 40 years by the $1,274 to $2,252 monthly payment).  The benefit of this, is it becomes a note that you can sell to someone else should you ever need the money, and it solidifies your repayment terms.  You don't share in the benefits or downsides of the business other than being repaid for your loan.

If not that, then an agreement where the operation is valued at $500,000 (independent accountant verified), and your 150K buys a 30% stake in the entire thing.  No expiration - they would have to buy your percentage out at whatever the company is valued at in 40 years.

I'm seeing a typical lending rate of 18% for Paraguay in 2016.  Is this still close?  A typical lending rate in the USA is 3.5% to 4%, so your 10% sounds good, but if the typical lending rate is 18% and you're getting 10%, it sounds really bad.

jousicastillo

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Re: Would you invest? If not, what terms would you change to do so
« Reply #19 on: March 07, 2018, 12:41:13 PM »
Again, great insights!

Seven: this rule is so underrated
Keep your family and business completely separated
Money and blood don't mix like two d!*s and no b!%&h
Find yourself in serious sh!t

True, I would not want to risk family relationships for 150k or any amount. At the end of the day, life really is about the people around you and your relationships and memories.




As to specific investment terms like amounts, splits and percentages I can't offer an opinion that would be more informed than yours. Only you know what your investment opportunities are, how this one ranks among them, and what you can negotiate to improve the terms. The more fundamental risk I see is non-performance by the other parties. ¿What leverage, guarantees or remedies do you have if the other parties fail or refuse to perform? Contract clauses with an expectation or hope of judicial enforcement are not sufficient. Unless you have some other practical guarantee you are basically naked.

Just by way of example, a business loan or personal consumer loan here is often guaranteed with real estate by delivering to the lender the actual physical title (along with documentation for ready transfer of title in the event of non-performance), to be held in the lender's physical possession for the life of the loan. This seems drastic and draconian by US standards, but it is standard practice here because without the very real threat of losing their house (or something else of comparably significant value) people regularly don't pay their debts or perform their contractual duties. They will give a hundred reasons why they can't (grandma got sick, baby got sick, I lost my job, my city or neighborhood got flooded, the global Brazil nut market tanked this year, etc., etc., etc.) But unless threatened with something drastic, like losing the only thing of value that they own, people will try to find a way to not pay and not show the least compunction about it. Sorry, it's true, and it is practically in the air they breathe.

Contract terms and courts, in the end, don't mean shit in terms of enforcing performance. So, when I read that you are going to put this and that and the other term in the contract to make sure this or that risk is covered I just shake my head because the documents only merit as much faith as the people who sign them. And in my experience, not much. Sorry, but it's true.

Maybe this is not your issue. Given the family situation, your position within the holding companies, relative sophistication of the parties, etc., maybe this is not a concern for you. If not, then I hope you negotiate the best deal possible and I wish you and all other parties the best of success with the venture.

Most of my family (as do I) have degrees from the US or abroad (so are probably not your typical South American). Non compliance of a contract is something I would not expect from them (not saying it could not happen, especially when any management transition occurs). 

As far as real guarantees, you make an excellent point. Since I am the one managing the entire thing however (i get the tenant, I collect and I then pay the 50% to the family company), it is me who would actually have the mayority of operational tasks, to then possibly not comply.
 
Family business's main commitment, would be to pay out principal if contract breaks before time.

In regards to this I am already leasing 2 retail locations that the family company owns (where I operate two IT retail stores), so a real guarantee would be to stop paying those montly leases (around 2.750 usd total) in exchange for the value owed if or when contract breaks and they do not reimburse the partial principal for some reason.

Finally, I do very much appreciate your success wishes. I also wish you and everyone contributing here, the same.

I'll go a different direction on this. Here's what I see:
-You have a very lucrative job and a lot of assets (we don't know exactly how much, but you've implied that the $150k you'd put into this deal is no big thing, you have other rental properties, and you make $200k a year after taxes so... you're probably pretty much FI right now).
-You stand to inherit a significant portion of the family business (no idea when, right?) which sounds like it is very valuable/lucrative.

I have a hard time, in your shoes, wanting to make a potentially complex investment involving other members of your family when you don't actually need the money for anything. Why take the risk of harming those relationships?

Now, maybe I'm all wrong here and you just started with all this stuff and you have negligible NW. Even in that case, it's hard to imagine that 5 years at your current job wouldn't make you FI (not even counting on the inheritance) just investing in boring/safe stuff that doesn't involve your family.

TL;DR - you won (I think) the game already. Stop playing, especially with your own family.

-W

I love your take on this, because it actually dwells into the question of what really drives us.

I started my first company at 23, right after college, and then another company at 26 (which I sold for a sound profit). I have done well over the past 9 years with a current NW of around 3million  with no inheritance received yet. (1.2m in current company, 1m in real estate, .8m in cash, bonds, etc)

However, my personal incentive isn't really to hit a certain money target and be done with it, I actually like the game and very much enjoy starting or buying things and selling them for a profit after adding value.

I also have fun looking for atypical investment oportunities through creativity (I do this a lot in my retail stores), while also being frugal and sound with my expenses (with yearly expenses around 30k, where I am a bit compulsive with tracking everything).

So I guess I am analizing the investment option, because it is what I like to do. I especially like the fact that in this instance, I have the
opportunity to dictate the terms and find a way for it to be profitable for both parties, while trying to safeguard my investment. That to me, is actually very fun! On the contrary, the thought of walking away from this and buying a bond, is not really all that exciting.

I guess if my NW were 5 or 10 times higher, I would be doing the same things I do now (money, work, and leisure wise).

On the family thing, I will actually follow up with another message (this one is getting rather long) in a minute...




I would rather see a 40-year duration loan with a 10 to 18% (fixed or variable) interest rate, recorded in a deed against the land property itself. (This would be entirely repaid in 40 years by the $1,274 to $2,252 monthly payment).  The benefit of this, is it becomes a note that you can sell to someone else should you ever need the money, and it solidifies your repayment terms.  You don't share in the benefits or downsides of the business other than being repaid for your loan.

If not that, then an agreement where the operation is valued at $500,000 (independent accountant verified), and your 150K buys a 30% stake in the entire thing.  No expiration - they would have to buy your percentage out at whatever the company is valued at in 40 years.

I'm seeing a typical lending rate of 18% for Paraguay in 2016.  Is this still close?  A typical lending rate in the USA is 3.5% to 4%, so your 10% sounds good, but if the typical lending rate is 18% and you're getting 10%, it sounds really bad.

Banks here are very rudimentary, their business is basically making money through the spread between the cost for them to get capital (through CDs, bonds or stocks they issue) and the price at which they borrow this capital.

Yearly averages in Guaranies (local currency), are:
** 9% for deposits (for 5 years, it goes up to about 13%, fixed with no inflation adjustment. So if inflation spikes to 15% for some reason at year 4, you would actually loose principal value in that period)
**up to 30% for borrowing (greatly depends on the borrower, the amount, any colaterals, etc)

Yearly averages in US Dollars , are:
**5% for deposits (for 5 years, it goes up to about 7.5%)
**up to 18% for borrowing (again, depends on borrower)

On the land deed of buying a stake, I am actually thinking about simplyfing the whole thing and try to make it work in 10 years. I will think a little about it, crunch some numbers, and will post it to see what you guys think (taking everyone's advice into consideration).
« Last Edit: March 07, 2018, 01:21:54 PM by jousicastillo »

waltworks

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Re: Would you invest? If not, what terms would you change to do so
« Reply #20 on: March 07, 2018, 01:23:57 PM »
If you just like playing the money game, then I'd say decide purely based on family considerations. You don't need the money, so if you think the fun of doing the investment is worth the risk of family strife of some sort, do it.

I think there are quite a few people here who enjoy making/investing money more than spending it (or than spending free time) though most won't admit it.

Given your obvious talent at this and lack of material desires, you might look at creating some philanthropic goals.

-W

jousicastillo

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Re: Would you invest? If not, what terms would you change to do so
« Reply #21 on: March 07, 2018, 01:43:40 PM »
If you just like playing the money game, then I'd say decide purely based on family considerations. You don't need the money, so if you think the fun of doing the investment is worth the risk of family strife of some sort, do it.

I think there are quite a few people here who enjoy making/investing money more than spending it (or than spending free time) though most won't admit it.

Given your obvious talent at this and lack of material desires, you might look at creating some philanthropic goals.

-W


I agree.

I am however, a bit surprised about everyones definite stand on money and family.

I guess it is a cultural thing, and I have actually given some serious thought to it, and have concluded the following:

1.) In developing countries were the financial system is not as pervasive, efficient and inclusive as in developed nations, it becomes
almost neccesary for families to help out each other financially (basically taking the role the banking system has, in more developed nations). This has certainly been the case for me, getting a 200k loan from my family at 23 to start my business, where no local bank would ever grant me that amount.

2.) The justice system, as GOFU said, is broken in most developing countries. So I guess doing business with family, becomes a sort of a "Known devil is better then unknown angel" type of situation.


I am just trying to give you guys a sense (and also analyze it myself) of why it is rather common for families to do business in Paraguay, as opposed to the United States.

waltworks

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Re: Would you invest? If not, what terms would you change to do so
« Reply #22 on: March 07, 2018, 01:48:38 PM »
Yeah, if your whole financial life is already entangled with that of your family, and has been for decades... you're fine.

-W

jousicastillo

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Re: Would you invest? If not, what terms would you change to do so
« Reply #23 on: March 07, 2018, 02:08:33 PM »
Yeah, if your whole financial life is already entangled with that of your family, and has been for decades... you're fine.

-W

Thank goodness it is not the whole thing. Personal properties, cash, bonds, stocks, etc are completely separate. (luckily)

I also managed to pay back the whole loan a while back now. So I currently do not owe anything, to any family member or family business.

The only thing mixed with family, are the leases of 2 out of 3 retail location I own (where I pay market price. But I guess I could always move out, if some fall out occurs). Even my own company is owned 100% by myself, with no other family member involved.

If I go ahead with this, I would entangle whatever principal I invest with family, and maybe complicate my rather simple current situation.

The difference between before (at 23) and now (at 32) is that I do have choices now, where as before, I pretty much had to take whatever was available (even at the prospect of risking family relationships).

maizeman

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Re: Would you invest? If not, what terms would you change to do so
« Reply #24 on: March 07, 2018, 02:46:57 PM »
I am however, a bit surprised about everyones definite stand on money and family.

I guess it is a cultural thing, and I have actually given some serious thought to it, and have concluded the following:

1.) In developing countries were the financial system is not as pervasive, efficient and inclusive as in developed nations, it becomes
almost neccesary for families to help out each other financially (basically taking the role the banking system has, in more developed nations). This has certainly been the case for me, getting a 200k loan from my family at 23 to start my business, where no local bank would ever grant me that amount.

2.) The justice system, as GOFU said, is broken in most developing countries. So I guess doing business with family, becomes a sort of a "Known devil is better then unknown angel" type of situation.


I am just trying to give you guys a sense (and also analyze it myself) of why it is rather common for families to do business in Paraguay, as opposed to the United States.

FWIW, I see the same disconnect any time I travel (or do business) outside the the USA/Canada and parts of Western Europe.

I think part of it is much simpler that differences in developmental stage, and has to do with the relationship between the individual and the family. In many non-USA/Western European cultures it is taken for granted that children will support their parents in old age, and parents will continue to invest in their children essentially throughout life and leave their assets to their children when they die. You're also much more likely to see adult children living with their parents prior to (or sometimes even after) marriage without any social stigma.

Compare that to the many threads on MMM about 1) People desperately wanting to move out from their parents house despite it being a financial stress, or seeking validation that it is "okay" to move back in with their parents temporarily in times of financial hardship. 2) Inheritance drama, and not wanting to leave their children so much money it will damage their own work ethics.

Given those big differences in worldview, I think it makes lots of sense both why a lot of posters' default advice here is "never mix money and friends/family" and why people from lots of countries outside of US/Canada/Western Europe don't have any equivalent reflexive avoidance of doing business with family members.

jousicastillo

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Re: Would you invest? If not, what terms would you change to do so
« Reply #25 on: March 07, 2018, 04:00:07 PM »

FWIW, I see the same disconnect any time I travel (or do business) outside the the USA/Canada and parts of Western Europe.

I think part of it is much simpler that differences in developmental stage, and has to do with the relationship between the individual and the family. In many non-USA/Western European cultures it is taken for granted that children will support their parents in old age, and parents will continue to invest in their children essentially throughout life and leave their assets to their children when they die. You're also much more likely to see adult children living with their parents prior to (or sometimes even after) marriage without any social stigma.

Compare that to the many threads on MMM about 1) People desperately wanting to move out from their parents house despite it being a financial stress, or seeking validation that it is "okay" to move back in with their parents temporarily in times of financial hardship. 2) Inheritance drama, and not wanting to leave their children so much money it will damage their own work ethics.

Given those big differences in worldview, I think it makes lots of sense both why a lot of posters' default advice here is "never mix money and friends/family" and why people from lots of countries outside of US/Canada/Western Europe don't have any equivalent reflexive avoidance of doing business with family members.

Great insights, and I completely agree. So putting aside cultural family considerations and concentrating on the deal itself, how about this:


1.) Draw up contract with rescission and transferability clause.

Also make sure to map out any worst case scenarios, like warehouse burning and not being insured.

Include (real guarantee) clause to swap the leases I pay to family company (If I still have them at that time), against principal, if for some reason contract ends and family company does not partially return it. 

As originally posted, I would handle the whole operation: Looking for tenant, deciding what to charge and how much to raise leases, if or not to extend contracts, etc. Family company would collect it's share each month.



2.) Investment details:

Invest 40% of total warehouse construction cost, and put a cap at 90.000 (could be less, not more).

Get 40% of gross lease income, of the 10.000 square feet available.

Get an additional 10% of gross income, given the managerial and operational handling (local real estate management companies,
actually charge this %).

Make contract last 10 years, at the end of which, no amount of principal would be returned.

At the end of year 10, I estimate to collect around 180k total (realistic/kind of bad case scenario). (which turns to be a yearly 6% compound type of investment).

If I manage to secure high paying tenants, and warehouse space demand increases, I could end up collecting 220k or more, in the aforementioned 10 year period.

What do you guys think?

bwall

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Re: Would you invest? If not, what terms would you change to do so
« Reply #26 on: March 08, 2018, 03:13:40 PM »
I am however, a bit surprised about everyones definite stand on money and family.

I guess it is a cultural thing, and I have actually given some serious thought to it, and have concluded the following:

1.) In developing countries were the financial system is not as pervasive, efficient and inclusive as in developed nations, it becomes
almost neccesary for families to help out each other financially (basically taking the role the banking system has, in more developed nations). This has certainly been the case for me, getting a 200k loan from my family at 23 to start my business, where no local bank would ever grant me that amount.

2.) The justice system, as GOFU said, is broken in most developing countries. So I guess doing business with family, becomes a sort of a "Known devil is better then unknown angel" type of situation.

I am just trying to give you guys a sense (and also analyze it myself) of why it is rather common for families to do business in Paraguay, as opposed to the United States.

I've done business in the USA, Western Europe and Latin America.

I agree with your assessment in the above points. In many ways, b/c the systems in place (banks, courts, law enforcement, etc) in emerging markets are not fully developed, your family is all you've got. For this reason, family considerations are much different than in the USA or W. Europe.

My questions/observations: where did you learn such great English? Amazing skills. You must have worked hard, or been given wonderful opportunities. Either way, you've done well learning a foreign language. Congrats.

Table scraps; It's not readily apparent at first, but they're throwing you the scraps. They need a warehouse and you can be partners. That's why they're letting you set the terms to your liking. I think you'll be ok, if you can get the fine-print right. Others can give better feedback on that than I can.

My first concern was 'what if it sits empty for 20 years', but it seems like you have a good read on that situation and it is not very likely to happen.

Thanks for posting the link on Paraguay. I'd just recently learned about the disaster visited upon Paraguay in the 'Triple Alliance War'. It must have been horrific and, the ramifications are still felt today.

I view this opportunity as a step in the 'emergence' of your country toward development. Developed economies attained that status by attracting capital and entrepreneurs to invest in the economy. And this is exactly what you and your family is doing. By having a non-family tenant, you are also providing opportunity for other non-related businesses to thrive.