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In any business, pooling resources to increase purchasing power, leverage and knowledge has been around for ages. Not surprisingly, these issues are also valid in the Real Estate world. Deciding what form of business entity you want to be in requires, besides some knowledge, a careful analysis of the operational implications associated with both legal and tax aspects of the business.
If you are going to form a group to Invest in Real Estate you can choose from one of the known forms of partnerships, but before we get into that you should also look at who is investing with you. Evaluating their knowledge in the field, resources, credit worthiness and congeniality with the other members of the group is key. You should seriously examine all these factors, just as if you were choosing a wife. A partnership is just another form of marriage; I will not elaborate on what´s the only missing element, but it will feel just like it if things go wrong. Trusting your partners is an extremely important part of the equation. If your partners are family members or close friends, that does not necessarily mean they are trustworthy. Next you should do a hard analysis of the business itself and create a best and worst scenarios; this will help clarify what is going to be the partnership´s expectations, in which case you should make clear in which way, each and every member, intents to exit the business. Creating contingency plans and preparing for the worst while working for the best will help in the day to day operations. Ideally you will all be at the same level and no one´s income will depend on the business success. Other aspects to consider are tax ramifications, expected profits, how long will you keep the property or properties among other things. A detailed business plan, a procedures manual, distribution and contribution schedules, voting measures, reporting, as well as strategies should all be put in black and white. The more time you invest at this level of the conceptualization of the business, the less money you are going to end up spending in attorney´s fees later.
The best known types of Real Estate Investment partnerships are: a Tenant in Common project (TIC), a Real Estate Investment Trust (REIT), a limited liability Partnership (LLP), and a Limited Liability Corporation (LLC). Elaborating how the structure will function should be the first order of the meeting. Electing a Managing partner with a clear defined roll and term of service specifications will work in most partnerships. To draft the partnership agreement you will need the assistance of an attorney who then will become the partnership´s attorney. He will not be able to represent you individually in matters pertaining to the partnership anymore, since it would create a conflict of interests.
You and your partners must fully understand that not all Real Estate Investments make money3;Remember there are no guaranties in life. Thinking of all contingencies will require the assistance of a CPA also, since some of the operations will depend of the tax liabilities. As discussed before you should include, among the resolutions the following key issues: A mission statement, a contribution and distribution schedule, decide what business entity to go for, items pertaining rentals, deciding to elect and defining the roll, compensation, autonomy and term of the managing partner, strategy, initial capital investment per partner, criteria to select a property, partnership allocations, place of business, duty of loyalty of all members, loans to partners, schedule of meetings, notifications and reporting to partners, insurance of partners, sale of shares, accounting methods, banking, death or incompetence of a partner, taxes, wills, dispute resolution, mediation and legal remedies.
To be successful in a Real Estate Investment, as you may now realize, is not the product of improvised great ideas but the careful planning and implementation of just one single idea.
GBrey |
