Do I need the blessing of the DRE,DOC,SEC or anyone?

Question

Quick background for the braintrust here.
I am a Texas Corporation that is in the residential income property development business.......I build mostly duplexes in Texas, Tennesse, and other states. I market "MY" properties mostly to California investors that want a hands off investment and 99.9% use my property management company for the day to day operations.

I want to add a new twist that my partners believe will necessate involving the DRE, DOC, SEC, or some other agency to complicate our lives.........I don't think we do but I need to look into it.......... I want to offer to our smaller investors a "Voluntary Rent Pool" This is for investors that don't feel comfortable assuming 100% of the risk that comes with having multiple vacancies. By being in a Rent Pool they will no doubt be lowering their positive cash flow but also seriously minimizing the chance that they will have to come out of pocket for expenses should one or both of their units be vacant at the same time......More of a security blanket I suppose......

So what do you think? Is this going to complicate my life :cry: or bring in more investor to buy my properties :D ?

Bill

Account Closed · Answer

Bill,

If you really want to create something that works for passive investors and is lower risk (and lower reward?) than direct investing how about forming an REIT?

Lots of things to consider when it comes to regulation but the rules are pretty well defined if you commit to go in that direction.

John Corey

N/A N/A · Answer

Thank you for your insight John;

We have managed to keep ourselve regulatory free thus far I guess I shouldn't worry to much about the small investor. Although I do. I am the poster child for buying real estate income streams. I cannot believe how far off the mark most people are when it comes to retirement planning. They just don't get it and probably won't until they are filling out the application to work at Walmart as the greeter....Very Sad....It didn't have to be that way if they had just planned a litte.

Well you have heard the saying that no good deed goes unpunished? Well that is what the partners think will happen to us if we purse this Rent Pool Idea.....Too bad as I think it's the answer in one form or another to those folks with low risk tolerance ie shallow pockets for feeding negatives.

Thanks again for your insight.

Bill

Account Closed · Answer

There are federal and state regulations for pooled investments. The way you described things I am not sure that the investors are pooling their investment funds in a way that will trip over the regulations. Note I am not a lawyer and even lawyers who are not securities specialists have trouble with the regulations.

There are reasons to think some will go for the idea. It is not a great model unless all the units are very much the same (same type, same location, same features, same condition, etc). Even if one is at the end of the street or in the middle can matter to how often it becomes vacant. One thing the model eliminates is mispricing by a specific landlord. You do spread the impact of a bad tenant across more people. If a tenant tears apart a place one investor gets hit with the repairs but all get hit with the extended vacancy.

An alternative is for the investors to assume X% vacant and then set aside x% every month to build up a buffer.

Brainstorming is something I recommend. Always improving your game. I am not sure there is a problem worth solving here.

If you are not careful it might be argued that what you have created is an insurance program and it needs to be licensed by the state insurance commissioner.

Tread carefully.

John Corey

N/A N/A · Answer

Well John the way I have it invisioned is this;
Lets say that 10 investors decide that rent pooling is the way to go. They sign the papers telling our management company that they are enrolling their duplexes in the program. That is 10 different investors with 10 duplexes or 20 actual doors with the abiliity to generate income. For this example we will assume $1,000 per month per door is the scheduled rent. When we collect the rents for the month we would "assign" 5% of the actual collected income to each door. The best case is that number would be $1,000. But lets say their is a 10% vacancy and the rents collected was $18,000 divided by 20 doors equals $900.00 per door in income..........That is where this pooling stops. In this case investor 1 through 10 recieved $1,800 in income per duplexes even if that month he had a vacant unit..The idea is simply to lessen the likelyhood that any individual investor will be required to feed a negative rental. Our duplexes typically generate $400-500 per month in cash flow when 100% occupied. Investors basically by joining the pool are saying I am willing to take "less" cash flow if I can avoid the possibility of feeding a negative property.........That's the way I see it......By the way we as the developer and management company would not make any additional money on this arrangement. I just need to know if I would be in violation of any state or fed regs by offering to manage such a pool. Remember it is always money collected and money dispursed....There is never a overlaping balance.

Account Closed · Answer

Bill,

Explain how the pool works. Will there be more than one investor commingling funds in the pool? Who will manage and otherwise control the pool?

John Corey

Do I need the blessing of the DRE,DOC,SEC or anyone?

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