Real Estate Investments That Make Sense

Our mission is to provide unbiased information and advice to residential real estate investors nationwide. Steve Setka, the owner and primary consultant at Nationwide, is available to provide you with information and insights that will position you to acquire income property investments with a high probability of yielding an exceptional return with a minimum amount of risk. Real estate investments are an essential componant to increasing level of wealth.

INVEST WITH OTHERS  

For some investors, joint ownership of one or more properties makes the most sense. Investing with others can provide many advantages and present unique risks. A group of one or more properties can be owned by any number of investors as individuals; other alternatives involve joint ownership within a corporation, partnership, or trust. There are four major advantages to joint ownership: the ability to easily diversify; acquiring an ownership interest in more prestigious/ expensive property or group of properties than your investment funds would allow you to purchase as an individual; having a management group who has knowledge and experience of the area and property type; and not having to be involved in the management. The three unique risks are the: inability to liquidate your investment before the end of the investment term; lack of control and influence on decision making; and possibility that management team will not derive the maximum potential from the investment.

Most investors hold their joint investments in a corporation or limited liability partnership. The main reason is to create a “wall against liability” between the assets of the investment and your personal assets. If there is a judgment against the owners (holding the asset as individuals) of the property in excess of the insurance coverage, they are personally jointly and severalty liable for any portion of the judgment that cannot be satisfied by liquidating the property, which means their homes and other investments are at risk. Additionally, you could be liable for more than your share of ownership if a recovery cannot be made from your fellow partners. The maximum liability of an investor, holding the asset within a partnership or corporation, is the loss of the funds they invested. Partnerships and sub-chapter S corporations file a tax return but do not pay income tax; the prorated share of income, expenses, and other deductions are transferred to the individual investor’s personal tax return.

One of the best ways to minimize risk is through diversification; it involves spreading your investment dollars into different investment classes and types. Most prudent investors have a portion of their portfolio in real estate investments. It’s wise to further diversify within an investment class; an example of this is buying stocks in different industries, countries, and/or segments of the economy. When investing in real estate, you can diversify by buying properties in different areas of the country (geographically) or by buying different types of properties, such as apartment, commercial, or industrial. Most people who want to invest in real estate don’t have the knowledge and experience necessary to select, evaluate, and manage various types of income producing property; also, local market knowledge can be a critical component in selecting the best property and negotiating a favorable price. Joint ownership allows you to easily diversify and gives you the opportunity to have an area expert and an experienced manager evaluate, select, and manage your investment. Some of the joint investment options will have “built in” diversified holding, such as four apartment buildings in different parts of the country or a commercial building and an industrial property in the same area. Another diversification option is to invest smaller amounts in a number of different real estate ventures, which can also minimize the management risk over a number of different firms or individuals.

As with anything that has benefits, joint ownership has unique risks, which are different than, and in addition to, the inherent risks associated with any type of real estate investment. Most joint real estate investments are not liquid; they are difficult or impossible to turn into cash prior to the end of the holding period, which is determined by the manager or general partner. Therefore, you should never invest funds that may be needed for expected or unexpected needs in real estate, particularly joint ownership investments. There are some real estate investments that may provide some level of marketability; they are called REITs (real estate investment trusts). These investments can only be purchased through a licensed investment broker, who may or may not know anything about real estate investments. You can form a small partnership or corporation with a group of people and create your own set of rules and provide for decisions to be made by the owners as a group. However, most partnerships and corporations managed by experienced professionals assign all decisions to the management team; you are essentially “along for the ride”. The benefit of not being involved in the management is a benefit and risk. At some point you may become dissatisfied with the management of the investment; unless there is outright fraud, you are stuck with the manager and have no control or power.