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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I think it is a great idea but I think it will be challenging to go from scratch to 100 investors in one step.
I would start trying to raise a smaller fund and then (maybe) turn it into a REIT if you prove your management skills and reach the right size.
An example to study may be Larry at OC housing blog who started an equity fund for Las Vegas RE investments.
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I am curious here, but don't buy CA properties.
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drtor says
OK, I just wrote Larry about that.
KILLERJANE says
Why not? Even though the mid and high end is still grossly overpriced and could not possibly be profitable for landlords, there are some very good deals in the far east bay, central valley, etc. Meaning that rents could easily cover costs and provide investors a decent return.
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I think that it is a good idea and I would be interested in joining, depending of course how the details worked out.
drtor says
Yeah, I think that the first step would be to get at least 100 people to post on this thread expressing an interest in investing.
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Los Angeles, CA
I thought land lording and the 'rentier' class was immoral. lol
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OK, I'm the first who would be interested.
Let's say the minimum investment would have to be $10K. 100 investors @ $10K is $1M. Investing $1M in rental property does not sound all that hard.
I suspect the harder part would be getting all the legalities, accounting, and procedures worked out. So how to find a lawyer and an accountant who are interested and willing to work for equity at first?
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PockyClipsNow says
I do have a problem with living from the mere ownership of land, but actually constructing or maintaining rental buildings seems like perfectly moral work to me.
To separate the two, there should be a land tax exactly equal to the rental value of the unimproved land. I think landlords could still make a decent profit and not exploit anyone.
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OK its now official the RE market is AT BOTTOM NOW when Patrick himself is an eager beaver to buy up crappy houses to rent out to get a decent return on his money.
No doubt he is tired of 1% CD rates and the stock market is 'toppy' and 'a buncha crooks' anyway. See why the bottom is in people? Its basic asset allocation/yeild chasing saying 'buy RE now' - i know we are all being herded like sheep over a cliff by the politburo feds but what could go wrong?(other than large interest rate spike happening right after you load up on rentals, then the value of them falls and you are working ass off for 7% return when CD's pay 7% again.... -impossible right?-)
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Are those area's filled with crime and deadbeats that won't actually pay their rent?
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There are definitely places now where it makes financial sense to buy and rent out property.
I wouldn't say prices are done falling for sure. Nonetheless, it seems reaonably safe to buy property which has positive cash flow of 7% or more on your investment after expenses. At worst, you simply hold on to it and accept the monthly cash flow. The fall in asset value doesn't matter unless you sell.
Actually, at worst, rents plummet. Then we'd be screwed.
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wthrfrk80 says
Yes, I think that in general the better yields are in areas where it's harder to collect the rent. But Iwog, E-man, pkennedy all seem to be collecting their rents OK, so it's not impossible.
I wish I had crime stats by zip code, so I could add them to my city data pages (click any of the state abbrs at the top of any page). But so far I have not found such a data set.
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Patrick says
Based on what Iwog has said I don't think that his rentals are in very bad areas. Not the best schools or desired by the upper middle class, but a far cry from west or east Oakland.
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Patrick says
I guess if they don't pay you could always hire Apocalypsefuck to go after them...
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Yes!
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This should be funny, heres what I'm imagining:
(Patrick sees house for sale he wants to buy, calls # on sign)
Ring: Hi, this is Suzanne at C21 how can I help you buy or sell a home today?
Pat: Hi Suzanne, I hate you, the NAR, the CAR, the should-be-illegal MLS systems, and all brokers, salespeople and anyone else making money off the buying,selling, or renting out of any asset class tied to the land since we should be taxed based on Georgism and not the abusive system we have now which favors the rentier class and cements the 1% into a permanent aristocracy.
Suzanne: Excuse me?
Pat: Can you submit my offer to buy this home?
Suzzane: Of course.
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PockyClipsNow says
I have no objection to productive honest work and never did. Providing a clean, safe, and well-maintained building to live in is honest work.
But I do object to dishonest non-productive parasitism and always did:
* Buyers' agents have the opposite interest from their clients because of the commission system.
* The MLS is a non-regulated sales tool designed from the start with the interests of commission-based brokers in mind, not their clients.
* Owning and renting out land is not productive work, because no one created the land.
* Mortage debt subsidies harm everyone except bankers and elderly sellers by driving prices higher and getting buyers deeper into debt.
* We are tending toward a consolidation of all money and power in the hands of the 1%, which is a typical end-stage of a dying society and presages revolution.
So is there some contradiction you're objecting to?
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Patrick says
I agree and would like to expand on my 'Yes!' response.
I think we all agree the system is designed to screw the individual. In a trusted group, we have a chance.
Personally, I have been looking for someone to partner with on a 4 plex. (Nothing currently available that isn't a 200k investor flip, slum, damaged, etc., but we know this also? don't we?)
As for a condo, I'm not interested in the banks sloppy seconds from their balance sheet, pretty much waiting for the next earthquake there.
Please keep me posted.
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I would be interested, but I don't really know how REIT's work.
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Patrick says
So why do we want to invest in houses/buildings if the revolution is coming? Or will these buildings be fire-proof and have bullet-proof glass?
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I'd be on board to work with Patrick, considering he has one of the most in depth views on the market out there. $10k per person seems pretty reasonable.
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I'd give you all of Iwog's money to invest. :)
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RentingForHalfTheCost says
Thanks a lot.
I'll be happy to throw in $10k for a share. I was about to suggest Brentwood as a reasonable area to start, but unfortunately this just happened:
The year to do this was probably last year. That doesn't mean there aren't still good deals, but no one should expect the double digit returns of 2009-2011.
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Is it restricted to Bay Area or anywhere is fine?
I guess lots of other states will make more sense...especially Phoenix or South FL(where I live.
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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.