But of course, you’re concerned about the inherent risks of investing in an illiquid asset in such a shaky economic climate. Well, a good thing to do these days to lessen that risk is to go in with other partners – either through REIT’s , or in a more controlled environment, through partnering directly with family members, friends and/or business associates.
If you don’t want the hands on role of managing your own properties, you could invest in a Real Estate Investment Trust (REIT). These are usually publicly traded companies who buy, maintain and sell investment properties for the express purpose of throwing off returns for their investors to share. Some REIT’s invest only in commercial rental real estate (office buildings, retail malls, manufacturing space), while other REIT’s invest strictly in residential properties (apartment buildings, condos, co-ops, multi-family houses). And there are some larger REIT’s that will invest in both residential and commercial real estate concurrently.
However, if you’re looking for control over your investment property, then it’s best to do it yourself. And as mentioned above, if you partner with other like investors (especially those you know and feel comfortable with) then setting up your own real estate investing partnership would make sense for you. Especially if you’re the type who wants to exert control over most aspects of the buying, managing and selling process.
Legal form of your partnership…
From the outset, you’ll need to create a partnership agreement, detailing the legal form of ownership of your enterprise. Will it be a simple partnership or limited liability corporation? In a straight partnership agreement, the running of the company and division of labor amongst the partners is spelled out in absolute detail. Also, the extent of the partnership is laid out: will it apply to just one project, or multiple houses/units? In a standard partnership, each of the partners is equally liable for losses or liabilities the partnership incurs. However, if the partnership is set up as a limited liability corporation (LLC), as the name implies, each partner will not have full personal liability for the losses incurred by the company.
Other issues that will need to be addressed and put into the partnership agreement include answering the question, which one of the partners will be the managing agent? In addition, will one of the partners actually live in the house/act as building manager/pay rent to the partnership? How will the partnership pay its bills? And how will it divide its profits, and in what time interval? Clearly a good attorney and accountant will be needed to set up your partnership. But once set up, a partnership makes a great deal of sense in these volatile times.
photos courtesy of doc.state.nc.us, acuityrisk.com, misterpopo.com, inspiration-university.com