WatchWhat do you all think of organizing a Patrick.net Real Estate Investment Trust (REIT) to invest in rental property?
One advantage is that the profits on its income would not be taxed (though you'd owe income tax yourself on dividends from it).
I'd prefer an equity REIT, which has no mortgage debt. Much simpler and cleaner.
Also thinking that people who want to buy in but don't have the money can do work for equity: rehabbing houses, property management, etc. They'll get dividends on that equity.
Any lawyers or accountants out there know more of the details and willing to work for equity?
Here are the requirements to be a REIT in the US:
- Be structured as a corporation, trust, or association
- Be managed by a board of directors or trustees
- Have transferable shares or transferable certificates of interest
- Otherwise be taxable as a domestic corporation
- Not be a financial institution or an insurance company
- Be jointly owned by 100 persons or more
- Have 95 percent of its income derived from dividends, interest, and property income
- Pay dividends of at least 90% of the REIT's taxable income
- Have no more than 50% of the shares held by five or fewer individuals during the last half of each taxable year (5/50 rule)
- Have at least 75% of its total assets invested in real estate
- Derive at least 75% of its gross income from rents or mortgage interest
- Have no more than 20% of its assets invested in taxable REIT subsidiaries.
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Repubthug says
And is it restricted to only mulit-unit buildings? I'm already employing a manager for my property in Dallas. We could buy another unit there, right in the city by the entertainment district.
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Is it better to focus on one location first. How much ROI would the first property yield. That would be after all expenses entirely. Or the first 2?
Larry's plan is good and is Robertaribas. LV and PHOENIX are way undervalue. You cannot build property for what it is being sold for in these locals.
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FortWayne says
It's a pool of money invested in real estate. It has to pay out most of its profits as dividends each year and in exchange is tax-free. Though the dividends the individuals get out of it is taxable.
wthrfrk80 says
Something fun to do in the meantime.
Repubthug says
I was thinking national, but I'm not sure what the law is on that. Can a REIT cross state lines? We need a real estate lawyer.
David9 says
No, I say anything with a good profit margin is fair game.
Iwog, know any lawyers? :-)
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iwog says
Holly shit! doesn't look like the sold $/SqFt has moved much though.
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Obviously, I'm in on this. 10k sounds like a reasonable start point. I agree that LV and Pheonix are good start points, but I would also suggest something along the lines of San Bernadino, Ca , Fresno, Bakersfield, or Salinas since on average we are a more California oriented group and the greatest opportunity for additional sweat equity exists where we are driving distance from properties.
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The contradiction I am amused at is merely that no one likes the way things are 100% but we all participate anyway to get by.
And its not true that 'no one created the land' the cost of aquiring a country from the previous people occupying it is large and requires an army, police force, organization, taxation and government infrastructure to support this so someone cant just move into your house while your'e on vacation and lock you out - or the previous owners take it back in a war. Its pricey so we all pay taxes including property tax. The more land you own the more prop tax u pay (except for p13 but thats CA only).
Anyway good luck with the REIT, soon you might be outbidding wanna be owner occupiers at the courthouse and driving up prices of RE AND rents. If you cant beat em join em. Also consider a fix-and-flip business! Its really the same work.
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leoj707 says
2-3 month lag due to the time it takes to sell + escrow closing. The sold line will spike very soon.
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This is a good idea for Patrick, I would consider it, but the ROI must be 10% after all expenses. Otherwise shadow inventory will put pressure on success.
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Unless there is a lawyer on this forum,it will lot of questions and very less answers
Patrick/Iwog,
any lawyer who can chip in with answers for fun and experience on this forum
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Patrick says
Thanks, I need to send in the HOA to my manager for my condo, I"ll mention this is a work in progress.
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REiT is the absolutely wrong entity choice for a 1M equity business. The cost to set-up and maintain more than offsets whatever benefit derived. There is no such thing as a REIT with 1M in equity for obvious reasons.
The correct entity choice will be a limited partnership. Only the general partner will be personally liable. It is easier to set up without the limitation and cost of a REIT. Equity can be reinvested to build the business. There is no tax at the partnership level and given the deferred nature of real estate (cash is ahead of tax) , the tax consequence is pretty minimal anyway as long as the basis is rolled over via 1031 exchange. All it takes is a clear partnership agreement that spells out how partner capital are handled. It's the fasetest and simplest path to build a business that invest in real estate.
Having said that, the ideal GP will be expeirenced in this business with a license/association, connections with lenders, serviceman, etc. almost all business are built with debt.
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leoj707 says
My thoughts exactly. Just looks like some over zealous sellers with greed in their eyes.
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RentingForHalfTheCost says
Clearly the guys listing that high does not understand economics 101.
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iwog says
Huuuuhhhhhhppppppp. 1 mississippi, 2 mississippi, 3 mississippi, [open eye and check chart, crap still no spike], 4 mississippi, 5 mississippi, 6 mississippi [look again, still nothing, ugh], 7 mississippi 8 mississippi .... 101 mississippi 102 mississippi [tumble tumble crash]. Don't try this at home folks.
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iwog says
Keep the dream alive. :)
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For whatever it is worth, a friend who was once the girlfriend of a businessman/investor, not exclusively real estate as he is currently working on a shipping container deal, once put together a package of 79 houses for $12 million. There were gotchas, a condo in Phoenix that had a $20,000 assessment and 2 houses with foundation problems. He also knows company(s) that buy properties at the courthouse steps.
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Patrick says
If you are saying you would not want the REIT to use any leverage in buying properties...I'm not sure that's a great path to riches. I think some leverage would be prudent..if you are trying to make money, that is.
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iwog says
iwog, did Redfin ever fix their plotting error that produced a big upswing on the far right side of their plots? I don't really trust that.
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Generally I know how REIT’s work. With 10K a share for start is better to start with LLC. Many LLC’s currently buying SFH. Same tax advantage but less gov. regulation. I like the idea, works for others, can works for us.
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I think some leverage would be prudent..if you are trying to make money, that is.
That's my initial reaction as well. Then again, WSJ magazine did a nice piece last month on the founder of Patagonia, Yvon Chouinard, which, among other things, discussed the virtues of running a company debt-free.
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REIT usually has about 40%-50% in leverage. That can increase ROI (IRR) significantly with today’s interest rate and still make investment safe. Leverage is the biggest weapon real estate investment has, but equity makes easy start.
Patrick, I was thinking about this idea for a couple of last months; however I’m glad that you brought this to light.
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Ah, there's the Patrick i was hoping to see.
This is the type of thing i would want to stick some 401k money into. Can someone comment if that can be done?
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You guys interested in 200k properties that almost guarnateed willPatrick says
When you say 7%, is that the cap rate or the expected return after PITI, HOA, PM fees, sewer?
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I meant expected return after all expenses.
But now I've gotten some feedback from people who know, telling me that it costs something like $1M just to set up a REIT!
So either I have to think much bigger, or not actually try to make this a REIT.
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Patrick, this sounds like a great idea. $10k to start is a little steep, but if the returns were looking good, I'd be down for that much or more. Saving for my next home and the banks sure aren't helping my assets grow!
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I doubt this would be an option for 401K money, but if you have money that is not tax sheltered, this could be a good idea. There would be a lot to discuss.
1) Would this pay dividends? If so, as an LLC people would get a 1099 and the profit would be taxed as income. In CA, the yearly LLC tax is an additional $800 & some additional percentage if profits are over 100K or so.
2) If it did not pay dividends, the profits would presumably be rolled into down payments on new properties & the income target would be zero with some target growth rate.
3) Some equity target would need to be specified, 30%, 50%, 100%?
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Here is a question on rents for those interested in this idea.
Rents are tied pretty closely to local incomes. Obviously they can only go so high as a percentage of income. However, at the risk of reading to much into the mortgage payment / rent payment chart on the front page (http://patrick.net/forum/?p=1212203), it appears that the house bubble dragged rents up a bit. If you extrapolate the line from 1988 to 2000 out to 2012, you would get a rent of 600 on that plot. I don't think that incomes went up that much over the next 10 yrs, but the rent payments are about 700, about 16% higher than the extrapolated line.
The reason that this might be important is that on a 5:1 leveraged investment (20% down) a 16% drop in rent can drop profits from 10% down to 2.5%, which leaves little room for error.
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I say we buy the properties as joint tenants with right of survivorship. That way, when the cannibal anarchy comes, it's winner takes all.
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Patrick says
AHHH ! YOU HAVE SEEN THE LIGHT MY SON !
from your thread titled; "Revenue from Patrick.Net". Yes I am blowing my own horn.
I didn't put the bug in your ear, but I sure see the advantages over many other owners.
3 Sat, 11 Feb 2012 at 1:06 pm Mail Quote Permalink Like Dislike Edit
Patrick says
What would be fun?
Tmac54 responded.
If we can't beat em.....
I was saddened to hear Howard Jarvis ended up with nadda, as well as the guy who pointed out the trillions Madoff, Made off with. The ladies who saved us from further damage from Enron and Worldcom. We don't remember their names.
Firms do not profit by advising others "NOW is NOT the time to spend money".
I had once thought of joining a STOCK investment club.
What about investing in Real Estate for "Club Patrick" members ?
Patrick.net may have more "Real Property analytical investment information" than many investment companies. Could that info be scoured to guarantee a 12 % return ? Of course not. BUT, Could certain info be programmed to predict anticipated, safe, fair return ? Provide club members with an exit strategy, (limiting risk) take a percentage as Manager and you have a General Partnership that collectively knows the sector better than most.
The only change we will see in Real Property is how much the masses are willing to pay.
Read on. I followed up with participation by members. This would be limited to locals. A big advantage in owning property, is being able to drive by on a regular basis.
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You can get 12 % in Vegas and write off the checking in on property, write off the go go and throw itall away on sluts, correction slots. That would be fun.
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Bump. Any updates on this? I was in Honduras for 10 days.. Patrick???
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I'd be interested as well. Certainly more of a long-term investment plan than the lottery ticket group!
An LLC is a good structure, so long as the process for addition and removal of limited partners is clearly defined. I have less knowledge about a REIT.
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No leverage, all cash.... what makes patrick.net reit unique? that it runs biz w/o debt?
what type of return are we talking about here? ballpark, goal?
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Well, since it's definitely not practical as a real REIT because of the large setup costs, it would have to be a partnership without the tax advantage. That makes it slightly less attractive. Also, it's true that we're not all in one place, and being a real estate investment and management company depends a lot on local knowledge.
I'm trying to think of better business models that can take advantage of a spread out group of people with various areas of expertise.
Is there some way we can leverage the group's money and expertise to do something or get some kind of deal better than we could get individually?
Pure data services have the large advantage that you never have to fix a toilet, collect rent, or evict anyone. And subscriptions to data services have the potential for large ongoing income.
Imagine that we had pretty much every property in the US in a big database, with everything currently for sale marked as such, and all past history of sales, all rents, all county records of ownership, all notices of default, all local crime records, all local school scores.
I think at least 100,000 people (buyers, sellers, realtors) would pay $30/month for access to that. That's $3M/month in revenue.
So is it possible for us to group-source all that data in exchange for shares of ownership and ongoing dividends from the revenue?
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Patrick says
Just my thoughts
First, did Facebook start off as a huge corporation?
Second, Quickbooks has an app to start up a Property Management company and if the Federal Reserve is recommending banks and investment houses to do just that, is this a completely dead option? Also, is there a way to get in on managing the properties for the banks?
Third, related to second. Kinda sticky, I'm friends with the ex-girlfriend of an investor, not excusively Real Estate who once made a profit on a portfolio of properties valued at $12 million. I have an invite for a lunch to be set up (without her) but I do not have specific questions to ask at this time.
Fourth, it would be a lot of work to maintain that database accurately.
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David9 says
Well, that's what the group-sourcing thing is about.
What if people who contribute data to the database get paid when any customer accesses the data they entered -- unless the customer complains it's not accurate?
If the contributor want to get paid, then they'll keep their data up-to-date and accurate.
Yes, maybe that is a viable model. Why wouldn't it work? There are 3,143 counties in the US, and clerks in each of those offices could make extra money by posting tax, sales, and NOD data to the Patrick.net database. And if they just upload spreadsheets, it would take them very little effort.
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Patrick says
That's 3,143 opportunities for mistakes. Every clerk is going to jump on the band wagon?
I have worked with databases since 1993, they are never totally accurate. :-) People are always complaining about listings being out of date on Trulia for example.
Then there is the server and database size and cost, backups, programming, etc.
Maybe I am not getting the whole picture as to what this database will offer? 3,143 mini databases?
"Imagine that we had pretty much every property in the US in a big database, with everything currently for sale marked as such, and all past history of sales, all rents, all county records of ownership, all notices of default, all local crime records, all local school scores."
Above, that still seems like a lot of work to me. Granted, anything is possible. My first question is: Why has this not been done before? My first answer: 'They' don't want this information readily available. (Yes, that can be viewed as a plus)
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David9 says
If they can upload a spreadsheet and get paid repeatedly for that one bit of work, yes.
David9 says
So maybe when you complain, you get the opportunity to fix the data as well, and then you yourself get paid when the next person accesses your correction.
David9 says
That's the part I myself know how to do pretty well.
David9 says
Ultimately, ONE giant database with all that data in it.
David9 says
Yup, they don't want it readily available, but I definitely do want it to be available for a modest fee. Not so much to exclude anyone from easy access, but enough to motivate contributors to enter data and keep it all going.
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Patrick says
:-) I'm glad I wasn't too far off base from your response.
True, Facebook must have huge, giant, online databases that must be updated to the minute, challenging I'm sure.
Please keep me posted, Thanks.
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Patrick,
Looks like you want to start a rent-seeking business which you have repeatedly against. LOL!!! I guess if you can't beat them, join them???
Selling information is a great way to make money. Many companies out there are doing nothing but that. Imagine that you start up a business, get it running, then pay someone to update the information on a regular basis while you collect the dough. Isn't that kind of like rent-seeking or mooching off other people's hard work?
My point is that. It doesn't matter what you do. The ultimate goal is to be financially independent. Starting your own business is a good start. The goal is to set up a business, get it running, then hand it over to someone to manage it. It's the same with real estate investment or a REIT. Once you started one business successfully, you can rinse and repeat.
I told you this before. Realtors can be your enemy or your weapon. It depends on how you use them. Just saying all realtors are bad won't get you very far in this RE business.
You know how to get a hold of me if you need additional inputs. Maybe we can do Thai Food again. Next week would be good. I really like that place. :)