As the economy picks up and interest rates remain low, many people are considering investing in real estate. Often, small groups get together to be “partners” in a real estate investment. Before you get involved, be sure you know what you are getting into.
There are many tax considerations. Get the advice of a tax specialist. You probably do not want to be a “dealer” and it is important to distinguish between real estate held for investment and real estate held for sale as part of your business. Ask questions about your specific deal:
- What is the business plan – improve and hold for investment? Or, get permits and sell?
- What is the zoning? What does it allow?
- What permits are needed?
- How long does all this take?
- How much does all this cost?
- What is each “partner” expected to do?
Be careful about the entity that you choose. Most real estate is now held in an LLC (limited liability company). However, an LLC takes many forms. Be sure to ask questions:
- Who is responsible to pay the debt?
- What happens if the company needs money?
- What happens if one of the investors wants to withdraw, gets divorced, goes into bankruptcy?
- What happens if one of the investors dies?
- How do you allocate profits and losses?
Be sure you understand who in the company has authority to make decisions. Are there some decisions that must be made by the group or does the “manager” have all the power?
Be sure you understand how the company deals with transitions in its owners.
In all cases you should have a way out. How does one owner buy out another owner? Or how does a minority owner insure that the majority does not take advantage of him or her?
Now is a good time for real estate investment, but be careful to understand what you are signing. At Welts, White & Fontaine, P.C. our lawyers have experience. We can help develop strategies for a successful real estate business.