Investing of any kind can have a share of risk, and real estate is no exception. For this reason, savvy investors know how to document and protect their real estate investments to ensure long-term ROI. From proof of ownership to tax documents, keeping vital details of your investment is critical to your success.
Because investing in real estate can be risky, it’s critical to do everything possible to protect yourself. You’ve already done your research and chosen the best investments for your goals and interests. Now, it’s time to make sure you’ve taken the proper steps to safeguard your legal, financial, and regulatory rights. Here are the six types of documentation you need to protect your real estate investments.
1. Proof of ownership
Proof of ownership is arguably the most important document in any real estate investment. It’s foundational in modifying, utilizing, or disposing of a property. Two documents solidify proof of ownership.
Title deeds
Title deeds serve as the most definitive proof of ownership. They cite the owner’s legal name and provide details about the property, including where it is located and what it is. In addition to a statement attesting to the property’s boundaries and size, easements are also listed on these. A title deed is registered officially at closing and sent directly to you afterward.
Purchase agreements
This document outlines the terms and conditions under which the property was purchased. If there is any misunderstanding with a seller regarding the terms of the sale, this document can verify the original conditions.
2. Legal documents
Proof of ownership documents are also legal documents, but these four types deserve their own category.
Contracts
Contracts are legal agreements made between vendors or service providers. They might include agreements with real estate agents or listing services, home warranties, utility providers, or any suppliers who provide goods to your property.
Leases
A handshake deal won’t cut it if you have tenants or otherwise lease a portion of your real estate. Some tenants have sued landlords and won based on inadequate leases that did not clearly spell out which party was responsible for what. A comprehensive lease protects both the tenant and investor.
Zoning/compliance
If inspections or use permits are required for your investment property, these documents can protect you against use restrictions, fines, and forced alterations. They lay out the permissions you need to use your property and ensure you meet local regulations.
Covenants and conditions of use
Covenants are typical in properties governed by a homeowners association (HOA). They are specific to that specific property (and thus not exactly the same as zoning, which is often applied across a broader area, like a town, city, or state). Keep a copy of any covenants related to your investment property.
3. Financial documents
Financial documents keep you on track and help you meet your financial obligations. Keeping these in order means you have a clear picture of your finances and can plan your next investment when the time is right.
Loan documents
It’s easy to shove that big closing packet in the back of a file cabinet and forget about it, but those loan documents have important information about your loan’s terms, rates, and payment schedule. These numbers are directly related to the value of your property and can be useful when it comes time to sell.
Escrow agreements
Earnest money is held in escrow when a property sale is in progress. The terms of this account may vary, so maintain a copy of your escrow agreement to keep track of your rights and responsibilities.
Insurance policies
Let’s be very clear: Insurance is not an optional expense. It’s required to some degree in every state in the U.S., and it’s just good practice to protect your investment. Review the terms and any rate increases when your policy renews every year to ensure you’re fully covered.
4. Tax documents
Careful investors can make a lot of money, much of which can evaporate when it comes time to sell if you don’t keep your tax documents.
Property tax receipt
Property tax is deductible for investment properties, a bonus that allows you to keep more of your rental income. Keeping a record of property tax payments makes it easier when tax time rolls around.
Rent receipts
Yes, rental income is considered income, so if you collect more than $600 in rent annually, you must be prepared to claim it on your taxes. Keep copies of checks or any form of digital rent payments you receive. This goes both ways — if you pay any rental fees related to any investment property, these are deductible.
Learn more: Landlord’s Guide to Tax Deductions
Capital gains-related documentation
Most property is subject to taxes based on capital gains (the amount of money you make on selling property after expenses that include the purchase price and any improvements you made). Some of this documentation may overlap with your maintenance and improvement receipts, but keep them handy to lower your overall tax burden.
5. Maintenance and improvements
Maintenance and improvements are often tax deductible. They also help prove a property’s increased value and may lower some types of insurance. Receipts for maintenance and improvements are required for insurance claims, so keep good track of any property-specific equipment you purchase, too.
6. Dispute resolution or litigation
If you find yourself in court, you must carefully document the proceedings, including court filings, payments, judgments, or orders. Other documents, such as your title deed and leases, can help protect your investment from fraudulent claims, boundary disputes, or other legal challenges.
Maintaining and storing your real estate documents
Keeping careful records and maintaining accurate documentation is critical when resolving legal disputes and protecting your financial interests in an investment property.
Keep documents organized
Every document related to a real estate transaction should have its own digital file. This should be saved in a location accessible across the internet. Cloud storage is good for this, and some real estate apps let you upload certain documents to secure storage. Additional paper copies can be kept in a fireproof safe or safe deposit box with your bank.
Update regularly
Update your documents with each property improvement, new tenant, and any change in a contract or lease. Add new annual insurance contracts and any legal changes to things like zoning and use permits.
Consult a professional
Seasoned real estate investors know that the advice of a professional is indispensable when it comes to maximizing profit. You may be tempted to rely on simple online DIY forms. Some of these can be very helpful, but consulting a professional is the best move when it comes to things like taxes and legal disputes. Even if you utilize a pre-made legal document, be sure to have a licensed attorney verify any changes you made and that the terms are in-line with your local regulations.