Real Estate Holding Structure

[cdawson72]

This is my first time on these forums and in a short period of time realized the vast depth of knowledge amongst this network. I had a few questions regarding my situation and would greatly appreciate any advice or guidence.

I currently own two single family homes as rental properties (Kitchener/Waterloo) with my Dad. We will buy another property once we have 20% down payment. At this point we will continue to follow this slow and steady model. However, we may have access to capital from some outside investors in the near futures, maybe $200,000-$400,000. So here are the questions.

From anyones experience what is the best structure?

Do we form a corp and issue preferred shares?

Do we create an LP?

If we have investors that essential lend us money, will the bank view this as debt, or can we take $300,000 from outside investors and use it as a 20-25% down payment on $1,500,000 property?

Are we better buying several single family homes if the ROI is good or should we be buying larger multi-family units with higher cap rates?

Thanks,

Chad

 

[markl]

Welcome to the forum Chad,

You have a couple of different questions there.

LP`s are a little expensive to set up for the kind of money you are looking to invest.

Most people myself included do not set up a corporation with my partners. I invest in my rent to own properties through the use of joint ventures. A joint venture can be between 2 individuals or 2 corporations or an individual and a corporation. Why individual as opposed to corp or visa versa while that is a discussion for the ages.

Keep it simple JV the properties and each party would be responsible for their own entity for which they would like to invest.

As for what to invest in with the money that is for you to decide and for what your investor is comfortable with. Typically they are willing to give you the money though because you have a track record of success in one form of investing.

Regards,

 

[housingrental]

To add to Mark`s post above:

Do a search on this site for discussions on corporation vs personal / why to incorporate

On:
"are we better buying several single family homes if the ROI is good or should we be buying larger multi-family units with higher cap rates?"

in Waterloo multi-family student housing is the way to go for highest rent to purchase price - higher down payment will be needed though.

 

[Thomas Beyer]

QUOTE (cdawson72 @ Mar 17 2010, 12:06 PM)
.. maybe $200,000-$400,000. So here are the questions. From anyones experience what is the best structure? Do we form a corp and issue preferred shares? Do we create an LP?




I have done all .. and all have their pro's and con's.



An LP allows flow-through of gains and losses, whereas a corporation traps it.



An LP is slightly more complicated to set up, and confuses lenders and banks as they are quite rare. Do an LP only if your JV partner must have loss allocations, or if you envision to sell to dozens or hundreds of investors in a staggered fashion .. but then you usually enter the realm of security legislation and need to file with the security commissions and floow stringent rules.



To start, with one or 2 money partners, do a corporation. Easy to set up. Clean. Simple. Consider small share capital and large shareholder loans, with voting and non-voting shares as stated below.



Related posts:



50/50 in a JV ` is this fair ?


.. If we have investors that essential lend us money, will the bank view this as debt, or can we take $300,000 from outside investors and use it as a 20-25% down payment on $1,500,000 property?




the JV money can be debt (i.e. a loan) or equity (i.e. shares).



In a corporation, say 50/50, you may have 100 voting shares for $1, held by YOU.



Then you have say 800,000 class B non-voting shares, held 50% by you and 50% by JV partner, for 0.01 cent each, or $40 each for shareholder capital.



Then the investor (but not you) lends $400,000 to the corporation as a shareholder loan with 0% interest. This money gets paid in priority to distributions to you, say from cash-flow or from re-finance or from eventual sale. The rest is then paid as dividends 50/50 to class B shareholders. Since you own class A voting shares you are in control.



One party must be in control .. and it should be you ! You of course consult with your investor, but you determine purchase price, purchase details, mortgage details, management of property, exit, etc. ... with a decent shareholder agreement






QUOTE (cdawson72 @ Mar 17 2010, 12:06 PM)
..



Are we better buying several single family homes if the ROI is good or should we be buying larger multi-family units with higher cap rates?




both good candidates .. although with 200K you get maybe a 6 or 12 plex which is too small to hold efficiently long term .. but a great learning environment .. try a 24 plex next ! A 24 suiter is at least $1.2M or $2.0M n a bigger city .. with 25-30% down minimum even 400K gets you maybe a 15 to 20 plex at best.



Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html



Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:

http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html





Equity Gain not the only way to make money in RE: http://myreinspace.com/public_forums1/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html