The truth about investing in real estate is that it involves risk. Without a crystal ball, you never know for sure how it will turn out. You could purchase a property and become a landlord, earning rental income at the same time your investment grows in value. But what if you have a series of bad tenants that don't pay rent and need to be evicted? Or, you could purchase a downtrodden property, improve it, and later sell the property at a higher value. But what if the market takes a downturn after you purchase your "flip" and you are unable to sell it quickly enough recoup your expenses?

In reality, most people think about investing in real estate but fear keeps them from actually dipping their toes in the water.

As a REALTOR^®, I wanted to be an investor as well as help others buy and sell real estate. But with a son on the way to college next year, my husband and I didn't want to gamble on his tuition money. So I approached two custom home builders with an idea...and what emerged from our discussions was the perfect fit for us.

Here's what we did approximately one year ago...my twist on investing in real estate:

First, we hired an attorney to form a Limited Liability Company with all of us as members. The Operating Agreement sets forth the relationship between the members and each of our responsibilities and capital contributions, and also outlines the compensation and distributions we agreed upon.

In our case, the percentage interest and capital contributions look like this:

• Member 1:       25% interest; $50.00 initial capital contribution (builder)
• Member 2:       25% interest; $50.00 initial capital contribution (builder)
• Member 3:       25% interest; $25,000.00 initial capital contribution (me)
• Member 4:       25% interest; $25,000.00 initial capital contribution (my husband)         

Members 1 and 2 are the co-managers of the Company (making Members 3 and 4 "silent" members, or simply capital contributors to the Company). The co-managers can use the money in any way they wish...they can invest in additional real estate, use it to build a spec home or combine it with other investors to increase their overall purchasing power in another area of the country. Banks are tightening their belts when it comes to loans for investment purchases, so this is simply another way for them to raise capital. As silent members, Members 3 & 4 have no say in how the money is spent.

So why would Members 3 & 4 want to pony up a combined total of $50,000.00 in cash and have no say in how that money is spent? Good question.

The Operating Agreement outlines how Members 3 & 4 will be compensated for this "loan" of money. Basically, it looks like this:

At the end of Year 1 of the Agreement, Members 1 and 2 will pay Members 3 & 4 a total of $12,500.00. This amount was paid to us earlier this year.

At the end of Year 2 of the Agreement, Members 1 and 2 will pay Members 3 & 4 another $12,500.00, together with the return of their initial capital contribution of $50,000.00.

Basically, for investing $50,000.00 for two years, Members 3 and 4 will receive $25,000.00 in income.

Once the final payment is made, Members 3 and 4 release their membership interest in the Company back to the Company.

In the event that Members 1 and 2 are unable to pay Members 3 and 4, Members 3 and 4 can require a transfer of a certain parcel of real estate used as collateral. I also have this parcel of property listed for sale currently at $250,000.00 so there is another section of the Agreement that covers what happens should this property sell, but I won't go into that in detail here. Members 1 and 2 also signed Personal Guarantees for the payments outlined, so Members 3 and 4 could also request them to dig into their own pockets to make payment. Please remember, these are builders that I have worked with for several years and continue to list and sell their properties, so I have a high level of comfort with them. 

Of course, with any investment, there are taxes to be paid on the income and since some of the initial capital contribution was taken out of equity in our current home, there is interest to be paid on that equity line of credit. We consulted with our mortgage professional as well as our tax professional before entering into this agreement and analyzed the numbers carefully. Something every investor should do.

Is it possible to make more money by investing in real estate outright? Absolutely! And now is a great time to purchase investment property. This option enables my husband and I to have a guaranteed rate of return...just in time for college...and that is what we were looking for. Perhaps it is an option for you...or for your clients as well.

Everyone who is considering buying a home, investment property or even tackling a remodeling project, should contact a REALTOR^® first. We are much more than people who help others buy or sell their home. We are also real estate advisors and investors in our own right...and can help others make an informed decision about how and when to invest in real estate. Sometimes with a twist!

Kelly Sibilsky provides a superior level of real estate services to home buyers and sellers in Lake Zurich and the Northwest Suburbs of Illinois. Please visit www.getmovingwithkelly.com to search for homes in Lake Zurich or anywhere throughout Northern Illinois.

Kelly Sibilsky, RE/MAX Unlimited Northwest, (847)909-2337, ks@getmovingwithkelly.com.