Plan to set up a limited co to take over ownership property & invite others to invest

S

StillaMellis

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I have two houses let to tenants.

Each of them is "washing its face" i.e. the rental income pays the mortgage and other expenses.

Unfortunately one of them is on a 5-year interest only bank loan and the money to redeem the loan was in Bank of Ireland shares which have all but vanished.

There are three years to go. I am in my late sixties and in relatively poor health so I cannot get an ordinary 20-year mortgage. I have a family who will be only too delighted to inherit my savings however.

What do you think of my plan to set up a limited company to take over ownership of the "interest only" property and invite others to take shares in it.

By others I mean some family and friends but mostly strangers wishing to find a safe profitable berth for their money. For their 5,000 or 10,000 they would get a return of 3.3% per annum (the interest rate which I am already paying to the bank) and they would have the security of the bricks and mortar of the house waiting for the upturn in four or five year's time when it could be sold at a profit and they would get their original investment back plus appreciation plus the annual interest on the capital invested.

Other landlords might wish to join me and secure similar non-bank funding for their own properties.

I can only see one side of it at the moment. The good side. What are the snags and impediments?

Is there any prohibition on publishing a proposal, advertising, inviting a number of potential investors into a hotel room and persuading them to open their wallets? Say before the company was even set up? Or immediately afterwards?

Are there impediments to having a limited company owning residential property for letting? What of taxation?
 
Re: Inviting strangers to take shares in a private company

I'm not sure if I understand the proposal fully, but I assume that in order to acquire the initial property asset, the company would need to raise money to pay off the mortgage owed to the bank.

The likelihood here is that the company has immediately recorded a capital loss by turning a nice pile of cash into a less valuable asset (the mortgage owed in all probability exceeding even the most optimistic property valuation). Do all the directors go to jail at this stage for reckless trading?

I'm afraid I can't see how my understanding of the proposal could be attractive to investors.
 
Re: Inviting strangers to take shares in a private company

Hi SM,

Welcome to AAM.

Im moving your thread from Askaboutbusiness to Property Investment which is where all aspects of the property investment business is discussed on AAM.

Im also changing your title somewhat to more fully reflect the question.

aj
moderator.
 
Re: Plan to set up a limited co to take over ownership property & invite others to in

Thanks for your response, Mathepac, and thank you, adjapale, for directing me to this thread.

I appreciate that the price of property has gone down in the last year but rent is still more than covering the cost of capital invested. In this particular case €60,000 or 15% of initial purchase price of the house was paid by me as a deposit and the balance €340,000 was raised as an interest only loan.

It is a 5-bedroomed house in an excellent location beside a University college and the students are happy to pay a premium for it since they only require it for 8 or 9 months of the year.

For the rest of the year I am investigating the possibility of fitting it out with best quality bedding and furniture and either running a B & B in it or offering short-term lettings. I live nearby and if necessary would move into one room myself in order to keep an eye on things.

Viewing it as you have done, Mathepac, I realise I need to put on my thinking cap again. I have never been a member of a company never mind a Director but I have long experience of business as a sole-trader and a community activist etc.

If someone told me that I could earn a guaranteed 3% or €12,000 per year on an investment of €400,000 -- and probably more if short-term lettings or a B & B were introduced -- with the possibility of considerable appreciation of the asset itself in a few years time I think I would be attracted by it. Is 3% a good return? I think so. I have a Fixed Term Deposit account which seems to earn only .5% if not less per year.

To be honest, I would view the purchase of this particular house as the trigger or motivation to undertake the establishment of the company and then go on to purchase other suitable houses in good locations with a view to building up a portfolio of properties to let. This is certainly a good time to buy. If the proposed company attracted sufficient capital and looked a runner I would be willing to take the loss on this house of mine and look forward to a good return from the company.

At present I have all the trade contacts needed for house maintenance and I have never let a house that was not in excellent condition.

Essentially what motivates me is that houses produce income in the form of rent and, in normal times, capital appreciation and having a share in a company would allow my successors to inherit a good earner. I am confident "normal times" will come again soon not with the raging inflation of recent years but with modest growth year by year.

What I do not know is what impediments the State system might impose to prevent a corporate body from engaging in the provision of rented accommodation.
___________________________________________
Having written that I am now going to take a read through all the other topices in this thread and try and learn how to contribute ...
 
Re: Plan to set up a limited co to take over ownership property & invite others to in

Apologies for coming back to this:

Mathepac has clarified one issue for me: Suppose I let my €60K go to loss and sold the house to the company for €340K. Now what. We divide the income from the house in proportion to the shareholdings. Would that be more attractive?
 
Re: Plan to set up a limited co to take over ownership property & invite others to in

Will the company not have pay stamp duty for the purchase of the property? Unless you have access to funds to cover the capital loss yourself when settling the existing mortgage you will have difficulty in attracting investors.

Also, if you are in poor health how can you expect to run a B&B?

How have your calculated the return to investors?
 
Re: Plan to set up a limited co to take over ownership property & invite others to in

Thanks, jack2009. I hadn't thought of Stamp Duty. That's a further calculation for another day.

Nor had I thought of the actual methodology of transferring the existing house to the Company. This Forum has been the first discussion of the idea and has already been quite beneficial in alerting me to the first questions potential investors are bound to ask. At this stage there might be no need to transfer this particular house to the Company at all since there are three years more on the mortgage. By that time the company might be thriving, buying and letting houses. The price of houses might have improved and we all might have smiles on our faces. Buying the particular house that started this thread might be a relatively insignificant purchase by then.

Regarding my being in poor health thankfully there is nothing seriously wrong with me that is likely to shorten my days other than age itself and I am as enthusiastic as ever about all aspects of life especially business. Banks these days sieze on every excuse to refuse credit and age is an issue with them. Not with me. I am a retired professional with a pension and for many years I have already run a small business with one fulltime employee and a number of part-timers and outworkers working for us. I have experience of administration. I intend to continue working for another ten years at least hopefully more.

I would envisage the B & B venture as being easy to run and sufficiently viable to pay at least one part-time person to cook breakfasts, change the sheets, and do up the rooms.

Alternatively since there is a pub / restaurant within fifty yards of the place we could go continental and offer rooms only.

The record-keeping, bookings and enquiries could be dealt with in the existing office.

Regarding calculating what investors might earn in annual interest and capital appreciation:
Apart from knowing what I have to pay the Bank for the use of their money which seems to be 3.3% at the moment I have not thought of what investors might be able to get elsewhere. It is necessary to compare like with like however and consider the security of bricks and mortar versus the latest computer venture or gadget which may or may not succeed.

I shudder at the thought of buying into this or that fund because I always suspect there are fund managers dipping ladles in the pot every so often and looking after themselves generously not to mention providing themselves with chrome and glass offices, plush furniture and posh cars. Whether the fund is of any value after their endeavours doesn't matter to them. They have been paid.

With my idea the shareholders will at least own their proportionate share of so many houses and the company is unlikely to become so big that we will not all know each other well and through the Internet know the day-by-day developments involving the company. It is far from a get-rich-quick scheme. Hopefully it will be a 'get-richer-gradually over 4 or 5 years' venture.

The one problem I see myself is the difficulty of selling your share. If you can't find someone else to buy it you're stuck with it. On the other hand if the company is doing well other shareholders will be delighted to buy some extra shares.
 
Re: Plan to set up a limited co to take over ownership property & invite others to in

So, may I come back to the original question:

Is it prohibited for a Private Limited Company registered in Ireland to publish a prospectus looking for Irish or foreign investors or will the Irish authorities insist on such a request for funding going through some firm of Stockbrokers?

[I have just read the satirical novel BOMBARDIERS by Po Bronson which describes the antics of the salesmen in such firms selling worthless "Bonds" to gullible investors and I have begun to read A BONFIRE OF THE VANITIES which deals with the same theme. If people had only paid heed to these warnings in time ....]

The banks won't lend to me personally because I am too old. Would they be willing to lend more readily to the separate entity that is a "Limited Company" that has the capacity to continue in existence after I cease to be?

Although I have described the above "plan" and am very keen to become involved I do not envisage myself as MD or prime mover in the project.

I would hope that some younger more energetic entrepreneur would join with me and other armchair investors to get this project going.
 
Re: Plan to set up a limited co to take over ownership property & invite others to in

StillaMellis said:
Regarding calculating what investors might earn in annual interest and capital appreciation:
Apart from knowing what I have to pay the Bank for the use of their money which seems to be 3.3% at the moment I have not thought of what investors might be able to get elsewhere. It is necessary to compare like with like however and consider the security of bricks and mortar versus the latest computer venture or gadget which may or may not succeed.
Click to expand...

There is very little security in bricks and mortar these days due to the decline in prices. Noone knows if or when property prices will start to increase again because there is a huge oversupply at the moment. They are more likely to fall for the foreseeable future and it could take 10 years for them to start rising again. How are you going to value the property for this venture? Property prices have fallen by about 40% in the past two years and there are thousands of properties for sale without any interest in them. If the value of the property is less than than the mortgage (negative equity) after allowing for the £60k that you contributed then your idea is a non runner because you would be asking people to subscribe for negative asset...i.e. loose capital straight away in the hope that some day in the future the value of the asset may increase!
 
Re: Plan to set up a limited co to take over ownership property & invite others to in

Thanks for that, Steve D.

If there are thousands of houses out there going cheap would that not be a great opportunity for a company such as I envisage to aquire a considerable portfolio of them and get them earning a modest income until the current cycle ends and prices climb again?

In my own lifetime I bought one house for £9,000 and sold it five years later for £16,000. On another occasion I bought a rectangular fenced site of over one acre with planning permission and with water and electricity laid on for £9,000 and built a good-sized house on it two years later for less than £30,000. That's where I live now. There are probably sites for two or three modern houses on our garden even now.

Why am I telling this? Money is like the computer game Tetris: at any particular time prices seem cheap or dear but after a while you realise that in the longterm houses are the same -- people have to live somewhere -- but it is the value of money that has changed. The pint that cost 2/6 when I was young gradually approached 10/- (ten shillings) then £1 causing consternation to boozers everywhere. What does it cost now? Money kept losing its value but the pint was still a pint. I will not venture into the causes of the current downturn although I have strong views on it.

I appreciate that many houses have lost much of their value recently and my heart goes out to those caught at the peak but this one was bought at a discount of €25,000 initially and that is precisely why I do not want to sell it. It is well-built, spacious, in an ideal location for letting beside a college with a huge student population each year and has already proved a very good earner.

When I say spacious it was probably built more than twenty years ago. At that time giving good value for money meant giving space and fitted wardrobes in every room etc. Two bedrooms have ample room for separate twin beds, lockers, chairs, dressing tables, etc with one of those having an en-suite. The three single rooms also have generous space, two of them sharing a shower, washbasin and toilet between them. Even the smallest room "the boxroom" above the front hall has much more space than any similar room I have seen in more modern houses.

No matter how the market values that house in three years time -- and following the negative comments made on this thread -- I intend to keep it and pay off the bankloan some other way from other resources. Thankfully I am not stuck and at my age the idea of selling another of my houses to a member of my family who needs one is appealing and will raise sufficient cash to pay off the interest-only loan.

Even though I did not get a definitive answer to my real question regarding the legality of offering shares in a private company for sale worldwide on the Internet I have gained a lot from the responses received here and I thank everyone who bothered to read my first tentative posts to this forum.

Everyone has their own reasons for coming here and mine perhaps are not typical. Even having to get ideas down on paper or on to the screen is an achievement in itself and having the flaws and weaknesses pasted immediately by people who are more knowledgeable is a salutary lesson. I should probably pay for the information I require but that is down the road....

Now that I have discovered this Forum I shall certainly come back to it again and again. I have a few other irons in the fire which are reddening nicely and I may need some advice on other threads. :)

Best wishes to all and thanks again to those who responded. I am not afraid of being sent to jail for running a property company but I am not so sure yet of the legality of inviting people whom I do not know yet of joining me in the venture.

Stilla
 
Re: Plan to set up a limited co to take over ownership property & invite others to in

I dropped in to a solicitor who deals with conveyancing today and she didn't think much of my idea either. Why a company? she said. That would expose the members to extra taxation - stamp duty on the purchase of houses, as pointed out by jack2009, corporation profits tax on the company profits, and then taxation again on dividends distributing the proportion of the profits left after putting away some into a fund for maintenance and refurbishment. [Doesn't that apply to all shareholders in all companies or is the "Stamp Duty" a prohibitive tax that rules out companies holding house property?]

Why not a "consortium"? she said. I'm going to have to look up that word and see what it means.

She then described a very difficult situation where one member of a particular consortium needed to get some money out very badly, wanted to sell up and wind up the venture, taking whatever money might be available. The others refused. They also refused to buy his share. That is also the weakness of the small limited company. He would have to find someone else himself to buy his share and if the assets had fallen further in value that would mean he would have to sell cheap.

I got the answer to my question: there is no prohibition on advertising for people to join such a venture. [Was there ever? I remember reading somewhere that unless you had the approval of the stock exchange you could not request funding through "shares". I am still not sure.]

Unless someone else joins in and has something relevant to add I think this might be a good point to end this thread. Thanks everyone.
 
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