When it comes to Real Estate investment, most people only think of direct ownership. However, there are several ways an individual or investor may purchase and own real estate.
1. Direct Ownership
Most individuals have a direct ownership in their residential properties. The downside of direct ownership, is the owner is accountable for any negligent acts that result in injuries of others eg. accidents caused by falling items from window ledges.
On top of that, the borrowings on properties directly owned by buyer are usually secured on the properties. The bank could claim the property if the buyer fails to pay back the principle of the loan, or fail to service the interest costs on the loans.
A direct owner also has to handle rental collection, maintenance work, bills payment and other daily management; unless he outsource the tasks.
If the direct owner passes away, the ownership in that property will be transferred to the new owner(s) stated in his Will. In the event there is no Will, the property will be passed onto the next of kin.
2. General Partnership
A general partnership or joint venture, is an arrangement where two or more individuals participate together for common investment goals.
A general partner could be liable or jointly, for any debts or obligations incurred by the partnership. However, if a particular partner cannot pay his share of the obligations of the partnership, the other partners within the partnership are liable to take on his responsibility to the full extent of their financial capability.
In most cases, only one or a few partners are in charge of daily management of the property, not all the partners may be involved.
General partnership are generally terminated upon the death of a partner. However, certain provisions in the partnership agreement could be made which allows other partners to purchase the deceased partner’s interest.
3. Limited Partnership
Limited Partnership is one of the most common ways to own real estate properties.
In contrast to general partnership, it allows certain partners, known as limited partners, to have the benefits of limited liability. Usually, this type of partnership has only one or few partners to assume full obligations of the partnership.
Limited Partners are mostly passive investors who play a strategic role in property investment, but are not involved in the day-to-day management activities, which is done by the general partner.
An advantage of a Limited Partnership is that any death of partners are unlikely to result in the termination of the partnership. This is because the partnership agreement usually provides for the deceased partner’s heirs to take over his interest. However, the death of the general partner could dissolve the partnership, unless the partnership agreement provides for a successor.
4. Companies
When a property is owned by a company, the investor is not personally liable for any negligence caused by the company, or employee of the company.
If the company defaults on loan payments, the bank which extends the loan is only legally allowed to look to the company for recourse, but not the private assets of the investor. However, for tightly held companies, banks will usually obtain a personal guarantee from the individual shareholders before extending any loans. By doing so, in the event that the company be unable to fulfill its obligations, the bank can legally seek recourse from the shareholders.
The daily operations of a company owned property are usually run by a team led by a board of directors, which is appointed by the shareholders.
Because a company is a legal entity that can exist indefinitely, it can continue to operate, even upon the death of one or more of its owners. This continuity allows for important decisions to be carried out, without worries of the entity disappearing overnight.
5. Real Estate Investment Trusts (REITs)
A real estate investment trust, or REIT, is made up of a portfolio of real estate investments. With just a small sum of capital, the investor could have exposure to many different types of properties in different locations by simply investing through REITs.
The concept of REITs is, therefore, similar to a unit trust with the exception that REITs are solely portfolio of properties. In contrast, unit trusts are portfolios of assets comprising shares, bonds and cash.
Summary
The individual or investor may purchase and own real estate assets through several ways:
- Direct ownership
- General partnership or joint-venture
- Limited partnership
- Corporation
- Real Estate Investment Trusts (REITs)
Each method has it’s own benefits and disadvantages. It is recommended that you consult a real estate agent, as well as a financial advisor before you invest your money. A real estate agent can explain the intricacies of each method, while a financial advisor can help you plan your finances and build a long-term investment portfolio. Contact us for more information today!
