Nonprofit Real Estate Investment Company ?

Louisville, KY · Member since 2015 · 32 posts · 11 votes

What's up y'all. Shawn the Newbie here. Me and 3 of my friends have pooled money together and starting a real estate investing company. We spoke with one accountant who suggested we become a nonprofit as opposed to LLC or S-Corp. Based on our mission statement of wanting to give back. Thoughts on a profitable nonprofit?

Tya

Shawn the Newbie

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Rezhe Connelly

Real Estate Agent · Long Beach, CA · Member since 2019 · 10 posts · 9 votes

@Karen Margrave to add to what she said, a nonprofit 501c3 is only for tax purposes. A nonprofit can make unlimited money, the money goes back into the organization and not to one specific person. However, you all will be paid a salary. I ran a nonprofit housing development company with 300+ units. Funding is very difficult. Typically, it involves partnerships with equity firms. Keep in mind that they provide funding for certain neighborhoods, which adds to other services we provided. I would be more than happy to answer more of your questions via phone call.

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James G.
Investor · St Louis, MO · Member since 2017 · 250 posts · 181 votes
6y
@Shawn Dulan What did your accountant say the benefits of becoming a non profit would be?
1 Reply
Chris Coleman
Rental Property Investor · Washington, DC · Member since 2015 · 429 posts · 393 votes
6y
@Shawn Dulan you don’t have to be a non-profit to give back. There are a lot of very successful for-profit businesses that give back plenty...both as a formal part of their mission and informally behind the scenes.
If you want a great example of one who has formally made it a part of their business model, you should check out Lifebridge Capital with Whitney Sewel.
I will tell you that setting up and running a non-profit actually has more compliance requirements, more paperwork, and more associated expenses than just operating a LLC.
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Shawn DulanPro Member
OP
Louisville, KY · Member since 2015 · 32 posts · 11 votes
6y
@James Gleeson tax benefits and the ability to raise more capital. Which is what we are lacking...
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Shawn DulanPro Member
OP
Louisville, KY · Member since 2015 · 32 posts · 11 votes
6y
@Chris Coleman thank you for the info. I will check them out
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Josue Vargas
Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
6y
Interesting. Profitable non-profit. Isn't an INVESTMENT a profit? How could you do a non-profit company but invest at the same time? Is the dividends gained from "the investment" goes 100% to other organizations/entities/people that are receiving this contributions and not making profit from it?
1 Reply
Cliff H.Pro Member
Rental Property Investor · Nashua, NH · Member since 2014 · 610 posts · 486 votes
6y
@Shawn Dulan absent clarification on goals and pros/cons presented to you by your colleague you may want to look into a Benefit corp:
https://en.wikipedia.org/wiki/Benefit_corporation
That said, have not heard of any for-profit company with a good cause having much of an issue in raising capital given the right mission and brand.
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Shaun M.
Rental Property Investor · Gunnison, CO · Member since 2014 · 59 posts · 99 votes
6y
@Shawn Dulan, there are some great benefits to non-profits in the RE world (I sit on two separate non-profit housing boards).
For example, in some cases early access to HUD homes (must be around as a NP for 3 years before you can apply for this), access to government capital/low interest loans, and the ability to apply for grant money.
For all of these benefits you must be actively working as a NP though, not simply filed as one.
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Shawn DulanPro Member
OP
Louisville, KY · Member since 2015 · 32 posts · 11 votes
6y
@Josue Vargas I was intrigued by it as well. An accountant could explain it better than I could but if you think of Goodwill, they are a nonprofit organization too with millions in operating costs...
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Shawn DulanPro Member
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Louisville, KY · Member since 2015 · 32 posts · 11 votes
6y
@Shaun M. Thank you. Good to hear a different opinion on this
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Shawn DulanPro Member
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Louisville, KY · Member since 2015 · 32 posts · 11 votes
6y
@Cliff H. Seems like another conversation with my attorney and accountant. Wish they could just talk to each other...
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Karen MargraveBusiness Member
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Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
6y
@Shawn Dulan actually though Goodwill is a non profit, there's just a teeny tiny fraction of their profits that go towards helping people. They aren't the best example.
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Karen MargraveBusiness Member
Moderator
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
6y
@Shawn Dulan there are a lot of advantages to non profits, Grant's and loans that can be applied for, etc.
People misunderstand the term non profit thinking that those working for it aren't paid or allowed profit.Think American Red Cross and others, administrators are paid hundreds if thousands in salaries.
2 Reply
Rezhe Connelly
Real Estate Agent · Long Beach, CA · Member since 2019 · 10 posts · 9 votes
6y
@Karen Margrave to add to what she said, a nonprofit 501c3 is only for tax purposes. A nonprofit can make unlimited money, the money goes back into the organization and not to one specific person. However, you all will be paid a salary. I ran a nonprofit housing development company with 300+ units. Funding is very difficult. Typically, it involves partnerships with equity firms. Keep in mind that they provide funding for certain neighborhoods, which adds to other services we provided. I would be more than happy to answer more of your questions via phone call.
6 Reply
Syed H.
Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
6y
IMO, I would fire my accountant for suggesting this. This is plain stupid for a new investor.
It only makes sense for true non profits that build affordable housing and work with certain cities with private for profit partners. This is not for someone who just started.
3 Reply
Nick Rutkowski
Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Shawn Dulan
This is a first I’ve heard of this strategy. It make sense if you want grant money from the government. It will be interesting to see how you play this out.
1 Reply
Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y
@Shawn Dulan

This is a horrible idea.

There has to be a non-profit motive for setting an exempt organization.

You will likely not get the tax benefits you are looking for.
There are complex reporting requirements to upkeep your 501(c)(3) certificate.
Tax Returns will be costly as they are not widely specialized by accountants.

There are also unrelated business taxable income(UBTI) concerns.
Among many more issues.
[email protected]917-280-8544
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
6y
@Shawn Dulan
You can “give back” AFTER you’ve made some money. Real estate doesn’t lend itself easily into the “give back mission statement” business plan, as some consumer product companies do. Being a non profit will make it much more difficult to borrow money or raise equity. Btw, when dealing in real estate, if you are engaging attorneys or accountants, you need to engage those professionals who specialize in real estate. Otherwise, they’re quite worthless.
Private Mortgage Financing Partners, LLC
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Shawn DulanPro Member
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Louisville, KY · Member since 2015 · 32 posts · 11 votes
6y
@Karen Margrave thank you for that information.
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Shawn DulanPro Member
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Louisville, KY · Member since 2015 · 32 posts · 11 votes
6y
@Rezhe Connelly can I reach out to you on Monday?
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Shawn DulanPro Member
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Louisville, KY · Member since 2015 · 32 posts · 11 votes
6y
@Rezhe Connelly the 20th...
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Shawn DulanPro Member
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Louisville, KY · Member since 2015 · 32 posts · 11 votes
6y
@Syed H. So my thoughts on this was to actually look to provide affordable housing. Thought as a nonprofit I could raise more money. As opposed to be a regular real estate company and can only take money for accredited investors?
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Shawn DulanPro Member
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Louisville, KY · Member since 2015 · 32 posts · 11 votes
6y
@Basit Siddiqi the motive would be to provide affordable housing and to be able to raise money from more places. Not just grants but private money without it having to come from accredited investors
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y
@Shawn Dulan

Not-for profits normally receive money in the form of donations, grants, fundraisers.
In the general sense, they can not "raise money" from investors.

In addition, properties that will be owned will be owned in the name of the not-for-profit. They will not be owned by you.

Furthermore, there is the possibility of having to pay tax on unrelated business taxable income if the income you earned is ordinary and not exactly aligned with the not-for-profit's mission.
[email protected]917-280-8544
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Laura Janosko
Rental Property Investor · Cleveland, OH · Member since 2014 · 51 posts · 37 votes
6y
Hi Shawn! Congrats on getting started! The affordable housing space has more moving parts than a typical real estate development. Getting funding is typically competitive and an affordable housing development may need several funding sources to work. Because the funding is a competitive process, they typically get awarded to those with experience in the industry. My recommendation is to get started by partnering with an organization that can walk you through the process. After you’ve found your first deal to invest in, you can then decide how best to structure the entity, rather than trying to find a deal or partner that fits with your existing entity structure.
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Ryan LubyPro Member
Rental Property Investor · CT · Member since 2016 · 258 posts · 227 votes
6y
@Shawn Dulan It seems like your accountant may have misinterpreted your objective? But either way, especially when someone gives advice like that always hit them with follow up questions to try and uncover why they think that advice applies, and to further understand the process behind how to pursue their advice.
I for sure want to give back as well, and I always try to. And I could be wrong, but I feel in order for me to give back in the way that I can add the most value to peoples lives, I need to become comfortably financially free. This will allow me the freedom to pursue my mission without compromising other essential aspects of my life like my own well-being, providing for and being present in my family, and more..
Quick story to explain a point.. bare with me: I was reading a book one day when I was 18 and literally started crying as the author was explained his wish for the future, for healthcare, for medical treatment.. and it was because I finally felt validated that someone else thought like me about health. This led to more reading: Viktor Frankl's - Man's Search For Meaning (which I strongly recommend) and ultimately led to my belief that my purpose was to help others. I always wanted to do this but felt too stupid, but since I now understood my purpose I stopped pursing a degree in business management (which I only chose because I was confident I could excel in) and instead followed my passion to pursue becoming a primary-care physician practicing integrative medicine. A few years of undergraduate study and it was pretty clear no amount of passion would get me to pass Chemistry, Physics, or Math meaning medical school was out of the question, and even getting the degree I wanted was slipping away. I found BiggerPockets, always kept reading and eventually learned many more wise lessons. First, following your passion isn't the best path but that's a different lesson for a different day. More importantly, what kind of a purpose is "help people"?.. It was well-intentioned, but it was so vague I had no clue what I was doing.. so I starting pursuing a passion that I assumed would make me happy. I now barely understand the nuance of life a little better, and realize I want to help people to live a better quality life by showing them how to approach the mental, emotional, and physical aspects of health in a more fulfilling way.
My drawn out point being.. specificity matters. Accuracy is great, but that gets honed in over time. Get specific about your true objective, really refine your mission statement. This will help guide you through a lot of questions and resolve a lot of confusing paths.
I'm excited for you, I love where your heart is, but keep working on getting specific on how you will help people.
What do you have to offer?
How can you become rare and valuable so that your company has something rare and valuable to give back? (Even more than money)
Best,
Ryan
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