Category Archive: ‘Real Estate Investing’

Crowdfunding for Real Estate

From the pyramids to the Empire State Building, the world’s largest structures have typically been financed by the superrich. New York-based Prodigy Network, best known for marketing the Trump SoHo hotel condominium, is now trying a different model: It’s bringing crowdfunding to real estate, soliciting thousands of investors to buy slices of a skyscraper in exchange for a share of rents and property appreciation. “The big difference from traditional real estate is that instead of buying into a fund with a pool of assets, people invest in a single asset,” says Rodrigo Niño, Prodigy’s founder and chief executive officer. “It lets them control the risk.”

Prodigy has wanted to try crowdfunding almost since its founding seven years ago but didn’t get a chance until it stumbled on the derecho fiducario, a little-known financial instrument in Niño’s native Colombia that allows individual investment in isolated real estate projects. In Colombia, Prodigy has crowdfunded a building called BD Bacatá that will be the nation’s tallest. About 3,100 investors kicked in $171.8 million (COP308 billion) of the $239 million needed to build the 66-story skyscraper in downtown Bogotá. Investors can also buy and sell shares through a resale program, which functions like a secondary market.

Prodigy is currently under contract to buy 84 William Street in downtown Manhattan for $58 million. It plans to invest an additional $32 million. Prodigy says it intends to raise some $26 million in equity from individual investors in 11 countries. FTI Consulting, based in West Palm Beach, Fla., will ensure that Prodigy complies with the U.S. tax code, as well as anti-money-laundering laws, when accepting money from outside the country. “Instead of buying crappy condos in South Florida, this allows international investors to invest in real markets like New York and in assets that actually make sense,” says Niño, who was raised in Colombia and studied economics in Switzerland. Prodigy says William Street investors will see returns of 15 percent, compared with 21 percent for investors in BD Bacatá.

The company’s investors don’t yet include Americans because the U.S. allows only accredited investors—generally those who have assets of more than $1 million—to buy equity in private firms. That will soon change: The Jumpstart Our Business Startups Act, signed into law last April, allows anyone to invest as much as $2,000 or 5 percent of their income or net worth, whichever is greater, in closely held ventures. The Securities and Exchange Commission is still working on rules for investor safeguards required by the act.

SEC guarantees may not be enough for leery U.S. investors, says Dan Fasulo, a managing director at Real Capital Analytics. “It’s hard enough to develop a property down the block,” Fasulo says. “How are you going to do it sitting 3,000 miles away?”

Gustavo Gonzalez, a Colombian civil engineer who bought two shares of BD Bacatá in 2010 for 101 million pesos ($57,178), says the returns speak for themselves. Since his purchase, based on an advertisement he read in a local newspaper, the shares have appreciated by about 43 percent. “I like the idea that this is going to be the highest building in the country,” he says. Just as important, “I thought it was going to go up a lot, and that’s what happened.”

The bottom line: Once the SEC finalizes its safeguards, ordinary American investors will be able to buy a slice of individual properties.

http://www.businessweek.com/articles/2013-01-24/crowdfunding-for-real-estate-buy-a-slice-of-a-skyscraper

Real Estate and IRAs

With the housing market showing signs of stabilizing, investors are turning back to real estate. And an increasing number of affluent savers have been using their retirement accounts to purchase homes, rental apartments, and other properties. Done properly, such a strategy can generate good income with modest volatility.

But before you dive in, take heed: It’s a time-consuming proposition, and you’ll need to proceed carefully not just to avoid investment losses but also to stay clear of some nasty tax pitfalls.

To buy real estate within a retirement account, you first need to set up a “self-directed” IRA with a custodian. Once you’ve established the IRA, you can then use it to purchase practically any type of real estate, including vacant land, single- and multi-family homes, commercial properties, co-ops, and condos. But you’ll also have to adhere to a slew of IRS regulations.

For starters, “you can’t use real estate in a self-directed IRA for your personal benefit,” says Richard Price, a CPA with Houston-based Cornelius Stegent & Price. If you do, the IRS could disqualify the IRA, in which case you’d owe ordinary income taxes on the entire value of the property, plus a 10% penalty.

For instance, you could buy a Miami condo and rent it to third parties, but you couldn’t stay even one night there yourself. Nor could you rent it out or grant free use of it to most close relatives. You couldn’t renovate or actively manage the property yourself. You’re also prohibited from buying real estate for the IRA that you or selected family members already own.

To prevent the IRA from being disqualified, all income generated by the real estate must be paid directly into the IRA and remain there until you retire. If you sell the property, all proceeds must likewise stay in the IRA. Expenses, such as property taxes, insurance, and improvements, must come straight from the IRA; you can’t use personal funds to pay for them, and you can’t deduct them for tax purposes. You’ll therefore need to leave enough cash inside the IRA to keep the property running (for 2013, you can contribute up to $5,500 to your self-directed IRA, or $6,500 if you’re age 50 or older).

If you sell real estate within a regular self-directed IRA, any appreciation on the property will ultimately get taxed as ordinary income when you take withdrawals, at rates currently up to 35%.

But if you set up a self-directed Roth IRA (in which your contributions are made with after-tax dollars), all your property gains and withdrawals will be tax-free. That’s assuming, of course, that you have gains. There’s no guarantee that the real estate market won’t tank again. And rising property taxes, unplanned maintenance costs, and deadbeat tenants could also ding your returns.

The upside of real estate is big — but so are the headaches.

http://finance.fortune.cnn.com/2012/12/18/ira-real-estate/