2016 15.05

Buying and Owning an Investment Property

In today's real estate market, the demand for investment property is very high, especially in New York City. Prices have increased accordingly. The market is dominated by medium to large commercial owners, managers and real estate developers. The Real Estate Investment Trust (REIT) is effective at bringing together large numbers of investors to fund projects.

An REIT is a type of security that invests in real estate and often trades on major exchanges. REITs "must have at least 100 shareholders," and "no five ... can hold more than 50 percent of shares between them." Drawing upon economies of scale, an REIT can bring together large numbers of small investors who each put in money, thus infusing their projects with large sums of cash. Those investors seeking to diversify their portfolios with real estate investments might purchase shares.

It seems impossible for a small owner to gain a foothold, especially since the larger owners and companies are able to make high offers and close in all-cash deals. Small owners might consider using the Limited Liability Company (LLC) model to mimic the economies of scale pursued by the larger companies.

The LLC offers investors a hands-on experience. The Small Business Administration explains that an LLC can bring together a number of owners into one entity to start and manage a business. The members then operate the business together in "a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership."

Careful planning is required in forming and managing an LLC, especially for the purpose of buying and owning investment property. The members must follow the requirements set forth by their respective states. In New York, the Department of State lists the requirements they must fulfill. They file articles of organization and should have a written operating agreement "that establishes the rights, powers, duties, liabilities and obligations of the members between themselves and the LLC." Because "Articles of Organization have legal effect and Operating Agreements create legally enforceable rights and responsibilities," an attorney should be consulted.