Real Estate Investment Organization Structures You Should Know for the Real Estate License Exam
People invest in real estate as individuals or sometimes together with another person or several other people. The Real Estate License Exam may have questions about how different organizational structures are used to accomplish different investment goals. Does it surprise you to find out that you also can invest in real estate without actually owning property or having ownership responsibilities?
Real estate investment syndicates
A real estate investment syndicate is an ownership structure in which a number of people join together to invest in a single property. The term syndicate or syndication is more a descriptive than it is an actual form of ownership. The legal structure of the syndicate can take different forms. The key point to remember about syndicates is that they are created to invest in one piece of property.
Private syndication usually involves a small group of people, sometimes already known to each other. Public syndication involves a larger group of people, which may offer investments to the public in the form of securities or shares.
Depending on factors such as the total number of investors and the value of the investment, the syndicate may be subject to federal and state securities laws designed to protect the public, which commonly are referred to as blue sky laws. Two forms of syndicates used for real estate investments are general and limited partnerships. The principal difference between the two forms is the extent of management control and liability.
In the general partnership, all partners share management responsibility, profits and losses, and liability. If, for example, the partners are successfully sued and insurance can’t cover the judgment, each partner can be held personally liable for the judgment.
In a limited partnership, one partner usually is known as the general partner and is ultimately responsible for any losses or liabilities on the project. Limited partners are entitled to certain profits (and losses, if they’re beneficial to their tax situations), but the partners have no management responsibility, and their losses are limited to the amounts of their individual investments.
Real estate investment trusts
Real estate investment trusts (REITs) are trusts designed to pool the money of multiple investors in real estate projects. Real estate investment trusts are like stock investments or mutual funds that usually invest in a series of projects, real estate investments, or mortgages. The REIT can continue as old investments are sold and new ones bought. REITs are available in these three different types:
Equity trust: A REIT that invests in a number of different kinds of real estate and sells shares to investors.
Mortgage trust: A REIT that uses shareholders’ money to buy and sell real estate mortgage loans rather than properties.
Combination trust: A REIT that invests shareholders’ money in property equities and mortgage loans.
Real estate mortgage investment conduits
A real estate mortgage investment conduit (REMIC) is a type of investment tool that uses shareholders’ funds to invest in mortgage loans. A REMIC may sound like a mortgage trust, but they’re two different beasts. A number of complex rules govern REMICs regarding the types of mortgages and interest payments to investors.
None of these details is likely to be on an exam. In fact, REMIC may be one of the wrong choices in a question about real estate investments, so keep your eyes peeled.