Group ownership of real estate is not for everyone. Most people do prefer to purchase their own home or investment property, if possible. However, some people prefer to start out by investing with a group, as it can provide mutual support, shared and therefore reduced risk, pooled skills and expertise, greater investment opportunities, and shared responsibility.
On the other hand, if the investment group fails to work towards the same objectives, the result could be a financial and emotional nightmare. The key is to know the benefits and limitations of the various group investment options and the pitfalls to avoid. Never go into a real estate purchase with others without obtaining prior objective advice from your real estate lawyer and professional tax accountant, and always make sure that you have a written agreement with partners in advance.
The statistical odds are high that any real estate group relationship in which you are involved will not necessarily end with harmony and goodwill in abundance, and investment objectives realized. There are a variety of reasons for this. By cautiously assessing the individuals that are potentially in your group, you can minimize the risk immensely. You may conclude that the risk is simply too great for your comfort zone, and therefore consider other options. Here are the key factors to consider:
Goals and objectives
Clearly define your goals and objectives in order to make sure they are consistent with those of the rest of the group. For example, some members may want a long-term investment (five years) with positive cash flow from rents, while others may want a medium-term investment (three years) and be prepared to subsidize the negative cash flow in exchange for expected property appreciation due to rezoning or subdivision potential, and still others may want to do a quick flip within a few months of purchase to take advantage of rapid increases in property values in a hot market.
Control
Certain types of investment groups allow more control than others. Control relates to the influence that you have on the management of the investment and related decision-making. Obviously smaller groups tend to allow more individual control than larger ones. In some instances you do not have any vote–you put your money in and hope for the best. If you are buying into a limited partnership or another form of investment, make sure you thoroughly check out the promoter’s previous history, experience and reputation.
Liquidity
Basically, liquidity refers to how easily and quickly you can get your money out of the investment. Your financial resources and needs will determine your liquidity needs. For example, if you need to get your investment capital back quickly, then you probably won’t want to be involved in a long-term investment. In addition, you should reconsider the investment if you would suffer if your money was tied up or at risk. You should not invest money you cannot afford to lose–be cautious about investing retirement money or contingency reserve funds. In practical terms, most investments are tied up for the duration of the deal. That relates back to the investment group’s goals and objectives. Also, consider having a buy-out clause in the investment group agreement, so that the group could buy you out within a fixed period of time. Usually, to create a disincentive for people who want out early, the buy-out is at a discount price.
Compatibility
Look at the other people in your investment group. Are there similarities in important aspects such as investment objectives and financial status? In general, people you know are safer than people you don’t. Ego, power, greed, ignorance, na’vete, arrogance and unrealistic expectations are common causes of group stress or disintegration. You can’t afford the risk, so be selective with your investment “marriage partners”.
Risk assessment
You have to objectively look at the potential risks: the nature of the investment, the potential for profit, the degree of personal liability, the type of legal structure, the nature and degree of control, the quality of management and the compatibility with other members.
