Exercise prudence, take long view in entering real estate partnership
Real estate has often been called ''the king of tax shelters.'' But people who want to find a place in the king's court through real estate partnerships need to be careful to avoid a financial pratfall as they enter the castle.
Investors in real estate partnerships can invest as little as $2,000 -- more often from $5,000 to $10,000 - and have a ''piece'' of a hotel, shopping center, warehouse, or small industrial plant. These ''limited partners,'' whose liability is limited to their investment, have become a prime target for real estate brokers and developers, some of whom are more competent and more honest than others.
If you are thinking about a real estate partnership as a way to make some money and shelter your profits from taxes, there are several things to consider before you write your check:
* View it as a long-term investment. Most partnerships do not make any money before four years at the earliest. You should only invest money you won't be needing for at least that long.
* Watch for claims of big returns and extraordinary tax savings. Some partnerships do have substantial returns and can save a lot in taxes, but be careful if the investment managers seem too aggressive in their claims of tax savings.
* Be suspicious if you get an unsolicited phone call inviting you to an introductory luncheon or dinner ''to discuss real estate investments.'' Often these gatherings will include some high-powered sales people, a media show, and pressure to sign a contract over dessert. While some of these may be legitimate, do not sign anything there. There are too many other things to check out first.
* Look for established firms with a proven track record of real estate investments. This is especially true if you are a first-time investor. The firm should have a broad background in all aspects of the financial services industry , including an awareness of current lending practices and mortgage financing programs.
* If you deal with an investment firm you don't know (either by reputation or because you haven't heard of it before), you should check its standing with an area office of the National Association of Securities Dealers, the federal Securities and Exchange Commission, or the agency that regulates the securities industry in your state.
* The firm should have a good legal and accounting staff, or have a close working relationship with outside legal and accounting firms.
* The firm should also have a clear understanding of the investment's objectives. Can the managers explain them to you? If you still aren't clear what kind of return to expect even after asking questions, move on to something else.
* If the partnership is a public offering, that is, made available to the general public instead of a few privately selected investors, ask if a ''due diligence'' report has been done. This report, required in all public offerings, gives the results of an investigation into all possible disadvantages as well as advantages to the deal. It also looks into the backgrounds of the managers to check their experience, performance in this kind of venture, and any possible violations of securities laws.
Some firms do this report themselves; but it is better if an independent, outside investigation is done. You should be able to see a copy of the report.
* You should also get a copy of the offering report or property statement. This document is like the prospectus for the deal, containing all relevant facts about land development, the proposed sale, and projected returns. Read it carefully. If you don't understand everything in it, take it to an independent broker, lawyer, or knowledgeable friend who can examine it for you.
* Visit the property. Check its location, condition, and suitability for this particular use. If the developers are planning a shopping center, for instance, what stores are planned? Is it in an easily accessible location? What are the zoning laws in the area?
* Diversify. If you are investing $30,000 or more, you may want to invest in three or four different programs from different sponsors.