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5 Common Legal Mistakes Of First Time Investors
It is impossible to completely eliminate the risks of being sued. Any unhappy party can take you to court for any reason you can think of. Just that those who have no case will be thrown out of court. You can however reduce your risks of facing litigation by following a few steps. First time investors are most prone to legal mistakes as they are doing it for the first time without experience. Old-timers are prone to legal mistakes usually because of a failure to acknowledge or understand that different laws govern different territories. Playing the “I don’t know” card seldom helps anybody. Here are some of the common ones to watch out for.
Important: You should consult with a professional lawyer whenever you are in doubt over legal issues.
Legal document templates. It is puzzling how first time investors are willing to shell out $1m for an investment property yet haggle over costs that are considered small change compared to $1m. Legal contracts are what protects you and your investment. It is an asset by itself. Would you buy travel insurance for 3 days if you are traveling for 5 days just to save some money?
The biggest source of legal document templates is from the internet. You might also find these templates in discount stores or from someone you know. Every property is different and the terms suitable for an investor does not apply to all investors. You won’t realize how important these contracts are until you run into a dispute with a devilish tenant. It is therefore wise to hire a proper lawyer to help you draft a contract that protects your interest. Fill up all details correctly and get it reviewed. Your property agent might also have a template to pass you. But remember that they are not lawyers.
Questionable discrimination. Although it is your right as a landlord to decide who to rent your property to, you should ethically avoid discrimination of any kind. This means you shouldn’t stereotype tenants by race, gender, age, occupation, nationality and appearance among other things. You cannot judge a book by it’s cover. You wouldn’t want tenants to discriminate you as a landlord as well. Get up to date with local law regarding discrimination. Different countries have different laws governing discrimination. Different states within the same country might also have different laws.
Non-disclosure of material information. It may not be your intention to leave out important information that can affect the decision of a buyer or tenant. But being new and being your first time renting out your property, you might not be aware of what exactly is material information. For example, you might think that the foul odour from the sewage is normal and fail to disclose this to the tenant. After signing up as your tenants, they discover that the odour comes from a permanent problem with your sewage. Fixing it now will require them to move out for 10 days. Ignoring the problem will mean that the tenants will have to live with the smell for a whole year. A tenacious tenant is going to have a huge dispute with you. And you really cannot fault them for being pissed off at you. It is best to disclose everything to a tenant before signing an agreement. If you need to hide information to get tenants, maybe you are in the wrong business.
Illegal fund raising. With crowd funding catching on, you might try your luck to get funds to kick start your property investment adventure. Calling up someone you know to chat about investing in your plans is one thing. Publicly advertising to the mass market for money is a totally different proposition. Different countries have different laws regarding solicitation of money. You have to check out what are the laws governing the land if you are considering this route of fund raising. Talk to a lawyer about the legality of what you want to do regarding public funding.
Tax issues. Having an investment property is often associated with tax advantages. You might have attended seminars conducted by property gurus championing how the tax game is played with depreciation and tax-free expenses. But remind yourself that many of these workshops, ebooks, video courses and webinars are based on information that applies to a foreign country or territory with very different tax laws from where you come from. The tax man is not someone you want to fool around with. If you are investing through a company, make sure your profit and loss statements and balance sheets are reviewed by a proper accountant familiar with the tax laws of the land.
A lot of investors and businessmen do not realize how much they are swimming outside the boundaries of the law until they get called up for an interview by the authorities. It might not be intentional on their part. But it is your responsibility to keep within the legal parameters if you get on the journey of real estate investment. Negligence is not an excuse in the game of real estate.