Creating a small REIT

[LPG]

Hi everybody,

A friend and I, who are both investment focused, were discussing banding together to form a small REIT last night. We'd both contribute money towards buying houses to rent out. Theoretically all of the houses would be local to one of us so that we could perform all of the landlord duties, but there's also a possibility of hiring a management company to take care of that for us. Eventually, it may grow large enough that one of us ends up acting as the property manager as a full time job. Basically, we have this idea and like the thought of working together, but don't know what we're doing. So, without further ado, questions!

• Have any of you ever done this sort of thing?
• Is there some fairly standard contracting/agreement that people use when setting up REITs, or creating a small property investment business like this?
• Do you have any thoughts on ways to value cash investment vs caretaker responsibilities?
• We'd also want to have a clearly defined plan for dissolving the business union. If we start fighting and it damages our friendship, we want a clear and easy path to break up the business and remain friends. Do you all have any thoughts about that?

Thanks for your 2c in advance.

[Proud Foot]

1. No I have never done anything like this.
2. Look at a standard partnership/llc agreement. Be aware a REIT has member requirements and distribution requirements which may not align with your goals for this venture.
3. Could you expand on this? Are you meaning one person will contribute cash while the other will handle the landlord/management duties? As far as payment for responsibilities performed you can spell that out in the agreement.
4. You definitely want this. I think the easiest would be to either sell all properties and split the cash or sell the business to someone else. You could split the properties between the two of you but that would entail appraisals and additional paperwork to transfer ownership.

You mention you both like the thought of working together, do you have any experience working together? With two of you it might be a good idea to find an impartial third party to be an adviser who can help settle disagreements between you two.

[MaaS]

I've never done it, but my friends that work in tax tell me REITs are really scrutinized by the IRS, i.e. high chance of audit.  The paperwork and regulations seem like quite a hassle for the goal here (assuming you're not trying to take on a bunch of investors).  I'd stick with a standard partnership.

Best of luck!