Real estate trusts are a common way to transfer real property ownership. They are also known as “real estate limited partnerships” or “REPs”. The process of setting up a trust is relatively simple. However, there are several pitfalls that can cause problems if not handled properly.
If you are considering setting up a real estate trust, here are some things you should consider before proceeding.
1) What type of entity do I want?
There are three types of entities: general partnership, limited liability company, and corporation. Each has its own advantages and disadvantages. For example, LLCs have no double taxation on profits while corporations pay taxes twice – once at the corporate level and again when distributed to shareholders. Corporations may be more suitable for large projects such as commercial buildings because they allow investors to take advantage of tax benefits available only through corporations. General partners, however, must file personal income tax returns with their individual state taxing authorities. This means each partner will need his/her own accountant. Limited Liability Companies offer many of the same benefits as GP but without the hassle of filing separate federal and state tax forms. In addition, an LLC does not require any formalities like incorporation which makes it easier to set one up. A good rule of thumb is to choose whichever form best fits your needs. If you plan to hold title to multiple properties, then choosing a corporation might make sense since this allows you to keep track of all assets under one roof. On the other hand, if you just want to invest in one piece of property, then using a Partnership would probably work better.
2) How much money am I willing to put into my project?
The amount of capital required depends upon how big your project is going to be. You don’t necessarily need millions of dollars to start investing in real estate. It’s important to remember that most REITs are publicly traded companies so you’ll likely find them listed on major stock exchanges. These stocks trade based on market value rather than actual cash invested. So even though you’re putting $100 down on a house worth $500k, the price of the shares could still go up by 50% overnight. That said, if you’re looking to buy a single-family home, you won’t need anywhere near the initial investment needed to purchase a multi-unit apartment building. Most people who get involved in real estate tend to focus on buying larger pieces of land. Once you’ve got a few acres, you can build whatever you’d like.
3) Do I really know what I’m doing?
It’s easy to fall prey to the lure of quick riches. But unless you understand the basics of finance, accounting, and business law, you shouldn’t expect to become rich quickly. Before getting started, ask yourself these questions:
• Can I afford to lose everything?
• Am I prepared to deal with unforeseen circumstances?
• Will I be able to handle unexpected costs?
4) Who else will help me out?
You’ll need someone to manage the day-to-day operations of your new venture. There are two main options: hire a professional manager or use a managed service provider. An MSP provides services similar to those provided by traditional managers including hiring staff, managing finances, marketing, etc. Managers usually charge hourly rates ranging from $50-$150 per hour depending on experience. Some managers specialize in certain areas. Others provide full-service solutions where they do everything themselves. Either option requires finding a qualified person who understands the ins and outs of running a successful rental property.
5) What happens after I sign the contract?
Once you decide to proceed with the transaction, you’ll need to fill out paperwork and submit documents to various government agencies. Depending on the type of entity you select, you may need to register with local governments. Your attorney will advise you about the proper steps to follow.
6) Is this legal?
Setting up a real estate trust isn’t illegal, but it’s definitely against IRS regulations. To avoid trouble later, consult with a lawyer first. He/she can tell you whether your proposed structure complies with current laws and regulations.
7) Does anyone already own this property?
Before purchasing anything, check to see if another party owns the asset. Sometimes sellers try to hide information about previous owners. Even if the seller doesn’t disclose details, you can always contact public records offices to learn more.
8) Are there any hidden fees?
There are many different types of fees associated with owning an income-producing property. For example, when you rent out a unit for less than 30 days, you pay no vacancy fee. If you want to keep tenants longer than 30 days, then you have to pay a monthly rate called “vacancy” which covers the cost of replacing renters during their stay. Other expenses include taxes, insurance, utilities. In addition, you must maintain the property according to city codes. This includes keeping sidewalks clear, fixing broken windows, repairing leaky roofs, etc. Finally, you might incur additional charges related to repairs made necessary due to wear and tear over time. All of these factors add up to make sure you aren’t losing money every month!
9) How much does all this cost?
The total amount required depends on how long you plan to hold onto the property. You’ll probably spend anywhere between 5% – 10% of its value each year just to cover maintenance and other operating costs. That means you could end up spending tens of thousands of dollars within five years. It’s important to factor depreciation, interest payments, and inflation into your calculations.
10) Can I get financing through my REIT?
Yes, most lenders offer loans specifically designed for REITS. These funds come directly from investors rather than banks so they’re typically cheaper than conventional mortgages. But be aware that you won’t qualify for them unless you meet specific requirements set forth by law.
11) Do I really need a trustee?
A trustee manages the assets held in a trust. Without one, you’d have to handle all aspects of the business yourself. While trustees don’t necessarily require specialized training, they often work closely with attorneys and accountants. Most people choose to appoint multiple trustees because they prefer having more control over the operation of the company.
12) Who pays for what?
When you create trust, you designate who gets paid for what. Generally speaking, the owner will receive compensation based upon the percentage of equity owned. A typical arrangement would involve paying 50% of profits to the original investor while receiving 25% of losses.
13) What happens after I die?
When someone dies, his/her share of the trust goes back to the beneficiaries designated at death. If those beneficiaries were children, the shares go to their parents. If it was a spouse, the shares go to the surviving partner.
14) Is it safe to invest in a REIT?
It’s true that REITs tend to outperform traditional investments like stocks and bonds. Unfortunately, they also carry greater risk. Because REITs are publicly traded companies, they face increased competition from large corporations looking to expand operations. As a result, they may find themselves unable to compete against larger rivals.
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