Would you invest under these terms / offer these terms to investors?

[P3ter_Griffin]

Stock offerings by the company would be under these terms:

Payment of dividends would be tied to specific stock.

Dividend base rate would be 80% of profits.

Stocks do not qualify for dividends for first 12 months.



Until investors recouped their initial investment they would receive 100% dividend allocation. After investors recouped their initial investment and until they double their initial investment they would receive 62.5% dividend allocation (if every investor was at this stage effective dividend paid by the company would be 50% of profits). After investors doubled their money they would receive 25% dividend allocation (if every investor was at this stage effective dividend paid by the company would be 20% of profits). All un-allocated dividend money would be added to the companies investment pool.

 

[P3ter_Griffin]

If you are unable to decide after the first post:

Company would be primarily focused on real estate, income would be derived from flipping homes, building properties, and rent.

This would be in competition to REITs. REITs are generally obliged (I believe) to pay 80 or 90 % of profits as dividends. I think having the sliding dividend rate would allow the company to grow much quicker. It is reasonable I believe over some time frame that the 25% allocation could match the 100% allocation because the company would have more capital to grow.

 

[Zippyjuan]

What are their current profits? How long have they been in the industry?

 

[P3ter_Griffin]

What are their current profits? How long have they been in the industry?

These dynamics would change over time so different stock offerings would offer different answers. Lets say though it is a company which you have researched and feel confident they are on the right path and the BoD have good vision. If you'd like to think of it as an IPO that's fine too, first offering would be with 0 assets and 0 money in the bank, with a pool of talented individuals with past experience in different parts of the industry.

 

[Zippyjuan]

So this hypothetical company does not exist and has no profits. That is a big point. And not a good one.

If they got ten people to give them $10,000 each, this "company" would buy a house for $100k and try to flip it- including cost of purchasing it and remodeling it and taxes on everything. Say it made $20,000. Each of the ten gets $2,000. Is the person or persons running the company being paid or do they just have a share of equity from their own money- part of the co-op? Pool of money is still $100,000 to buy more houses (well, can't afford a lot of houses with $100k).

What if the house loses money? Costs to fix it turn out to be more than expected? Where do you get the money to take care of that? Do the managers have to come up with it? Are the share holders required to kick in more?

Can you walk away and get your money back? Or do you have to wait until you get enough dividends to pay back your investment?

No dividends for the first 12 months. So they get to play with your money for a year before you can possibly get any of it back. A free zero interest loan. Then in my example you need to sell five houses after this first year before the investor breaks even. Sometimes a house can take weeks or months to sell. Then we have new regulations which means it takes longer to close the sale of a home.

http://www.marketwatch.com/story/why-closing-on-a-home-could-soon-take-longer-2015-06-12

“Lenders will slow-walk every new mortgage to ensure there is not a disclosure mistake as even innocent errors can give borrowers extraordinary rights, including the ability to undo the loan,” Jaret Seiberg, a banking analyst with Guggenheim Partners in Washington, D.C. said in a research report.

One pressing question is what might happen when delays in closings that aren’t the fault of the borrower push them beyond an agreed-to 30-day, 60-day rate lock for loan interest rates.

That could mean two months just to close after you find a buyer. Meanwhile your money is tied up.

Flipping is risky even if you know what you are doing.

Why wouldn't I just put my money into a real REIT and get a solid, established company and returns right away?

I would pass.