Tax considerations
One of the main reasons to invest in real estate is for the tax benefits in your given situation. Certain types of investments are going to be more attractive than others from a tax perspective. Be very cautious about salespeople or financial advisors who attempt to convince you to buy a tax shelter for tax reasons alone. That area is ripe with pitfalls and risk. You want to buy because the property appears to be inherently viable from an investment viewpoint first, with tax benefits then taken into account second–not the reverse.
Contribution
Determine what contribution is expected of you in terms of money, time, expertise, management, personal guarantee and contingency back-up capital, and make sure you feel comfortable with the expectations of others.
Management
How is the group investment going to be managed? Is it going to be managed by a professional management company, a group of investors, one investor, or the original promoter? How confident do you feel about the issue of management? What fees are being charged for management, and are they reasonable given the circumstances?
Profits and losses
Determine how these aspects are to be dealt with. For example, what about excess revenue from the income property? Is that kept as a contingency fund, or is a portion of it paid out to the investors? What about decisions such as selling the shares of the corporation holding the property, or the property itself? How are those decisions made? Remember, these decisions have tax implications that have an impact on you. What about losses? Is the shortfall to be covered by a bank loan, or remortgaging of property, or by the group of investors? In practical terms, how is that to be done?
Getting out or buying others out
One of the important considerations is getting out. What if you want out? Is there a formula? What penalty do you pay? How is it calculated? How long will it take to get your money? Conversely, what if you want to buy the other investors out? Can you do it? And if so, how, and at what cost?
Now that some of the key factors have been discussed, you can see why it is important to be selective before going into a group investment. It is essential that you obtain the objective advice of a real estate lawyer and professional tax accountant who are skilled in these types of investment issues.
