How to structure a Real Estate Investment Group operation?

Question

Hi guys! Looking to get some more insight on legally structuring and starting a real estate investment group business. A few partners and I are looking to put our money together and buy properties underneath a joint LLC and build a business.

Just wondering what the best practices would be to handle the ownership structure, handling finances, taxes, etc, and just simply any guidance on things to look out for and to do when getting started!

Appreciate you guys! Thanks!

Ned Carey · Answer

@Cole Susac you might want to check out some of the legal self help books from NOLO press like ones on how to create and run an LLC. I am not suggesting you neccesarily do it yourself but reading these books will give you some background so you can speaks with an attorney more inteligently.

If some of the investors will be passive (no controling authority) you need to understand securities laws and it gets much more complicated and expensive

If some of the investors will be passive (no controling authority) you need to understand securities laws and it gets much more complicated and expensive

Cole Susac · Answer

Perfect! Thank you for the advice

Chris Seveney · Answer

Great advice here. What I make sure to recommend to people is think of what happens if there is a divorce in the group. Not all businesses go well, and sometimes life happens and people need an out. What happens if someones wants out, what happens if you need to do a capital call and people cannot contribute. Think of everything that can go wrong and discuss it now while you are in honeymoon phase so if it does hit the fan, you have already had the plan and not creating a plan when emotions are high.

Rick A. · Answer

if you cannot find a RE attorney, an attorney working in business law should be able to help. The operating agreement, which will be drafted by the attorney,  will be very important. It should spell out how decisions in the business are made, ownership breakouts, members' roles and responsibilities, conflict resolutions process, buy-out provisions, process around distributions, ect.

A common setup is a multi-member entity with pass-through taxation but your investment plans could call for a different entity type and different tax treatment.

Scott Mac · Answer

Regarding setup, your LLC operating agreement (if you LLC) will control who gets what, who does what, etc...

Talk to a Real Estate attorney about getting this set up.

He/She will have a set of questions for your individual group to decide on, and should be able to draft an agreement for the company.

There are attorneys who are in this forum that may be able to help you set up an entity.

It is wise for all members to seek out the advice of a Real Estate focused Tax person to advise them on their unique situation regarding how to take earnings and losses, etc...(before meeting with the attorney who drafts the agreement).

Pre-Covid everyone could go meet in the attorney's office--now (???)

There are several real estate focused tax people who participate in this forum from time to time.

If you LLC, you will get a special company binder with tabs to hold this Operating Agreement (and any amendments you want to make to it, over the years).

Good Luck!

Scott Mac · Answer

Hi Cole,

Just a thought.

Since you say it's a group, you will need someplace to keep the records and paperwork vs in the glove box of Joe's truck, or who has that--we forget.

Picking up a used 4 drawer file cabinet (paid for by the company), would be a good move too. You can consolidate everything company in there, so everyone knows where things are at.

If you have more than 4 people, maybe consider a meeting table and a chair (they can be used vs new) for everyone somewhere you can have meetings (your garage, your basement, a spare bedroom).

That will give you a place to get together and focus when you believe you need to.

Or maybe your group is more informal and will meet at the (best) Pizza place (in town), or just on conference calls.

But still it seems like having one base of operations might be worth considering.

Something for you guys to think about.

Just my 2 cents.

How to structure a Real Estate Investment Group operation?

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