Finance

Top 5 Legal Considerations For Real Estate Investors

Real Estate Investors

Published on November 8th, 2023

While it’s certainly true that real estate investment can be a lucrative venture for many people, it’s also one that brings with it a number of distinct challenges.

The host of legal complexities that investors must be able to navigate is at the top of that list.

This is true whether you’re talking about a traditional real estate transaction, wholesale real estate, or something else entirely.

Thankfully, the process isn’t as difficult to handle as some may fear.

There are a few key legal considerations in particular that every real estate investor should keep in mind to enjoy this process’s financial benefits with as few potential downsides as possible.

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Property Due Diligence

Before you even consider purchasing a particular property, it is always imperative that you conduct thorough due diligence.

This refers to the level of “care, prudence, and activity” you would go through to gain “objective and reliable information” about the property in question.

In other words, don’t enter into a situation where you’re putting an offer down on a home because “it seems like a good idea.”

You need to turn over every stone, look in every nook and cranny, to attempt to uncover potential issues that may be present.

This can include but is not limited to things like liens, zoning restrictions, or even environmental concerns.

Does the property have a lien on it that the seller isn’t telling you about? Will that lien become your responsibility when the transaction goes through?

Are they even allowed to legally sell the property in the first place? Will any zoning restrictions get in the way of plans that you have for the property?

These are the types of questions you need to answer before determining whether an investment is a good idea or if it just “seems like one.”

Contracts And Agreements

Another crucial legal consideration that real estate investors must make involves the transaction’s contracts and agreements.

You need to make sure that all contracts, including purchase agreements, lease agreements, and more, are legally sound.

If a contract is unenforceable because it includes clauses or language violating local and state laws, it isn’t worth the paper it is printed on.

Likewise, you’ll want to make sure that contracts and agreements actually do what they’re supposed to – protect your interests. Always consult with an experienced real estate attorney to review and draft these documents.

If you’re drafting an agreement, explain to them what you need it to do and, more importantly, why.

If you’re having them review a document, explain what you might be concerned about so that they know exactly what to watch out for.

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Tax Implications

Another thing you must do from a legal perspective has to do with making sure you understand the tax implications of any real estate investments you make.

What seems like a great idea on paper may not be quite as attractive once you’ve taken into account what it means for your tax liability.

Factors you’ll want to go over include property taxes, capital gains, and even depreciation benefits.

This type of tax planning can significantly impact your bottom line, oftentimes in unexpected ways if you’re not making a review of taxes a normal part of your investment process.

If you wait to figure it out at the end of the year, you’re almost always setting yourself up for a nasty (not to mention expensive) surprise.

Property Management Laws

Not everyone buys a piece of property for the purpose of immediately flipping it or living there themselves.

Many people find success with renting out both single and multifamily properties to create a somewhat passive secondary income stream for themselves.

If this interests you, you need to be well-informed about landlord/tenant laws in your area. They can vary wildly depending on which part of the country you’re talking about.

If someone stopped paying their rent and you had to evict them, do you have any idea how long that would take? What channels would you have to go through to start the process?

When someone moves out, what happens to their security deposit? If you don’t give it back to them by a certain amount of time, what penalty will you have to pay, if any?

Do you know how fair housing laws impact who you can rent to?

These are just a few examples of the types of questions that a deep understanding of property management laws will help you answer.

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Entity Structure

Finally, it’s important to make sure that you’re always choosing the right legal entity at the outset of your investment journey. Options include but are not limited to an LLC, S-corp, and others.

A big part of the reason you do this is to limit your liability should something go wrong over your investing career. It will also help protect your personal assets as well.

Should an unfortunate situation happen and you get sued, that person or entity would go after the assets of your business, not your own personal ones. But that’s only possible if you’ve selected the right entity in the first place.

Real Estate Investing Is A Learning Experience

If all this seems like it’s a lot to take in, that’s largely because it is. But as you continue to participate in more successful real estate transactions, it will slowly start to become second nature.

If nothing else, navigating these and other legal considerations with diligence and expert guidance can help real estate investors mitigate risk as much as possible.

While making mistakes in terms of entity structure or running afoul of property management laws may not be the “end of the world” from a legal point of view, it can still be time-consuming, frustrating, and, most importantly, expensive.

Therefore, understanding these legal considerations and keeping them in mind every time you begin a new transaction can help maximize your returns in a consistently dynamic market moving forward.

Feature Image Source: Avi Waxman