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.

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.

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, naivete, 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.

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. 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?

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.  CL