Busting the myths - Part 3: Can you really leave a legacy?
Updated: Apr 10, 2020
If you’ve been in or around property groups, whether it be online Facebook groups, or meetings with other property investors and speakers, or formal ‘education’ (I use the term loosely!) courses and seminars, you will no doubt have heard people saying that they are investing in property to leave a legacy for their loved ones.
On the one hand I commend them for thinking about others and wanting to give their family and children a ‘leg up’ when they are departed. However, when you dig a little deeper into their business plans or the strategies that they are promoting, then you begin to unravel that it’s not as straightforward as they may think. Whilst I am by no means dismissing the whole concept of leaving a legacy behind for future generations, which is also one of my motivations for building a business, it is not, and will never be, my number 1 driver.
Why am I somewhat cynical about the idea of leaving a property business or portfolio as a legacy?
1. If you don’t work for something, you don’t value it
Yes, this is a sweeping generalisation, but on the whole it is true. Think about if/when you get a free ticket to a concert or sporting event - if you don’t feel well or simply don’t fancy going out that night, then you will happily stay at home and the ticket will go to waste. You won’t feel bad that somebody may have worked their socks off to pay for the ticket, or woke up at 5am in order to secure the ticket when it went on sale at 5.30am. The same principle can quite easily apply to a beneficiary who has inherited a property business or portfolio. They may not appreciate the lengths that you went to to build the business, and the fact that you may have put your heart and soul, and considerable financial resources, in order to make that happen. If your loved ones are simply handed a business on a plate, then they may not nurture or value it in the same way that you obviously have.
2. Leaving a business or investment portfolio to your loved ones may lead to family feuds
Again, this is the reality of life. If you plan to hand your business to a number of children, in reality, they may want different things and be at different stages of their lives. That’s exactly why properties are sold following probate – children inherit them but they don’t all want to keep them. Why do people assume that handing a property business or portfolio as a legacy would be any different? If one of your children wants to keep the portfolio running as a going concern, but another child wants to liquidate the assets in order to use the money for their other interests, then you could easily end up with disagreements within the family.
3. Running a business or property portfolio is a huge responsibility
If you’ve been in any business for any reasonable period of time, you will know how difficult it is – managing people and clients, juggling numerous tasks, dealing with problem situations, complying with all your legal regulations and filing your taxes on time, all whilst ensuring you are operating profitably. Running a property portfolio or property business is no different. There are so many things that you need to be on top of, and the goalposts are always moving – whether they be tax changes, rent/deposit controls and regulations, or landlord and tenancy laws. It is foolish to think you can simply pass on a portfolio or business to a loved one if they have never worked in the business, or have no experience, knowledge or training in the business. Yes, you can outsource the management of the property portfolio to letting agents, but you will still need to ‘manage the manager’ to ensure that they are doing things properly and to make sure that you, as the landlord, are legally compliant.
4. A leveraged property portfolio may not be capable of being passed onto loved ones
Finally, one of the biggest issues that will be faced by many property portfolio owners who operate as sole traders, and who have buy to let mortgages in their individual names, is that if they pass away without making plans or contingencies about their mortgages, then their mortgages will be called in. As we all should know, banks show no mercy when it comes to demanding their money back, and it’s not a simple case of transferring the mortgages into the names of the sons or daughters or other heirs. In many cases, the beneficiaries of the estate who may be the successors to the property business or portfolio may not even qualify for buy to let mortgages if (a) they do not meet the lender’s critieria, (b) they have no experience in running a buy to let portfolio, or (c) their paperwork and credit history is not clean. Nowadays, getting buy to let mortgages if you are a portfolio landlord (i.e. if you own more than 4 properties) is an arduous task and most untrained, inexperienced heirs will not pass the stringent requirements of buy to let lenders.
For the above reasons, I would urge people to think carefully about leaving a property portfolio as a legacy. In some cases your children may have no interest in taking over the business, and in other cases they may have the best intentions but not have the right experience or knowledge, and finally there are also major hurdles when it comes to lenders and mortgages.
My advice would be to speak to your children about your business from a young age so that they are aware of the benefits and pitfalls, and they can make their own views known. If they are keen on taking on the baton in the future, then you should provide them with all the tools needed (in terms of formal and informal education) and integrate them into the running of the business. Only then will you leave the legacy for them to succeed and thrive.