6 Real Estate Legal Problems to Avoid as an Investor

Real estate presents one of the best investment opportunities around. Whether you are renting out income properties or buying, fixing and flipping homes for a faster profit, you can make great money. However, with great money comes greater legal and financial responsibilities. This is a business, and you have to be very smart about how you run your real estate investment business.

We consulted with our real estate attorneys to put together this list of the 6 top legal problems you will want to avoid as a real estate investor:

1. Licensing and Permitting Issues

This is especially important if you are building new homes or planning major renovations to any property you purchase. You will want to take all the necessary legal steps with the city planner to get construction plans approved. You will need to secure the necessary building permits, business licenses, and more. Trying to skirt these requirements could really come back to haunt you.

2. Improper Business Structure

Always remember this is a business, whether it’s one property you own on the side or a full-time career. You will want to have the proper legal business structure that makes the most sense. Establishing corporations or LLCs can provide important legal protection and valuable tax benefits. Consult with your attorney and/or tax advisor to set up the best structure for your real estate investment business.

3. Investor Disputes

Many real estate investors are getting funding from other private investors or investment groups. This is a good way to cover finances, but you have to be careful. Understand who you are working with, get detailed contractual agreements in place and cover yourself in case there are any disputes with an investor and the funding they are providing.

4. Poor Quality Work

Cutting corners during the construction or renovation phase will usually not work out well in the long run. Structural problems and other issues could be more costly to maintain and repair. You could have legal problems with tenants in a rental property or buyers of a house flip. Do the work right and you can avoid a lot of potential legal and financial headaches down the road.

5. Tax Problems

This can come back to the legal business structure, as well as how you manage your business. Keep detailed records of every expense and income related to your investment property. Pay your property taxes in full and on time. Understand what can and cannot be written off when it comes to your tax returns. Mishandling of finances or tax preparation can lead to audits, fines or even property seizures.

6. Business vs. Personal

The larger your real estate investments, the more separate you will want to keep them from your personal finances. It can get tricky in terms of bookkeeping and taxes when your personal and business finances are too intertwined. The proper legal structure will help, but there are a number of steps you will need to take to keep them separate. Don’t let a bad real estate investment ruin your life completely!

These are some of the most common and concerning legal issues you need to know about as a real estate investor. Do your best to conduct business legally and avoid these problems that can cost you a lot of wasted time and money.

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