By Attorney Suzanne R. Sayward (December 2012)

The current depressed real estate market, coupled with historically low interest rates and continued volatility in the stock market, make the idea of purchasing investment real estate attractive to many would-be investors. If you are considering purchasing real estate with someone other than your spouse, you should discuss expectations and work out the details well in advance of signing the Purchase & Sale Agreement. Here are five issues to consider before venturing into a real estate partnership.

1. How to take title? Title refers to the legal ownership of the property and it can have significant consequences. For example, if you and your partner own property as ‘joint tenants,’ when one of you dies the other will be the 100 percent owner of the property. While this may be your intent if you and your spouse own the property, it may not be the same intent to a business partner. Choice of title can also have tax consequences, so consulting with an accountant in advance of your purchase is advisable.

2. What about liability? With property ownership comes risk. What if the third floor porch on your three-family building collapses while your tenants are having a party and people are hurt or worse, killed? What if there’s a fire? What about lead paint? As the owner of the property you may be liable for damages. Holding title to the property in a Limited Liability Company (LLC), Limited Partnership, or corporation can shield your personal assets from liability arising out of the investment property. Insurance options that will provide liability protection should also be explored.

3. Is your prospective partner in good financial standing? Anyone who has ever owned real property knows that there is always something that needs attention, and that usually means money. Does your business partner have the financial wherewithal to contribute his fair share of the cost to make repairs or improvements? If your property is without a paying tenant for some period of time, will your partner be able to pay for her share of the mortgage, taxes, insurance and other ongoing expenses? It is important to work out in advance how these situations will be addressed so that there are no surprises when they occur.

4. What if someone wants out? You should discuss an exit strategy before entering into the transaction. The importance of this has been made clear by the latest downturn in the real estate market. It is easy to address this in good times – one partner will buy the other out or the property will be sold. But what about in bad times when the remaining partner does not have the means to buy out the share of the retiring partner? What if the property is worth less than the outstanding mortgage? What if a partner dies or becomes incapacitated? There may be no ready solution to these issues, but the possibility that times may not always be rosy should be discussed between partners.

5. Who will be responsible for what? There are many tasks that need the time and attention of a landlord. Deciding in advance who will be responsible for which items will go a long way toward avoiding misunderstandings between partners. For example, who will be responsible for responding to tenant requests/complaints? Who will be responsible for collecting the rent and paying the bills? Who will be in charge of tax and insurance matters? Having a discussion about this with your prospective partner before purchasing property is a must.

There are many challenges to managing investment property and no one should embark on such a venture with the notion that it is an easy road to wealth. However, with patience, hard work, and a little luck, it can be a fruitful undertaking. Purchasing real estate with a partner can be an excellent arrangement as it allows each partner to contribute in the way he or she is best able. A discussion by prospective partners regarding each person’s expectations and responsibilities is vital to the success of the partnership. A written agreement memorializing that understanding is the best way to ensure those expectations and responsibilities are met.

Attorney Suzanne R. Sayward is certified as an Elder Law Attorney by the National Elder Law Foundation. She is a partner with the Dedham firm of Samuel, Sayward & Baler LLC. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit www.ssbllc.com or call 781/461-1020.

This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney.