Property trusts provide a way for investors to receive capital appreciation and income from real estate without having to actually purchase and maintain the property themselves. These trusts can be listed–that is, listed on the stock exchange–and purchased through a stock broker, or unlisted–that is, founded privately, typically through solicitors, accountants, and financial advisors.
The managers of unlisted property trusts usually raise funds to buy or develop a particular piece of real estate. This means a group of people (not necessarily known to each other) are invited to pool their money until the purchase price required to acquire the chosen property is reached. Units for these types of trusts are bought and sold through the managers of the property trust.
The individual investors each own units in the trust. As an example, ten individuals are clients of an accountant, who has found a one million dollar property to buy that is returning a ten per cent per year profit. The accountant then invites these ten clients to contribute $100,000 each to purchase the property. The trust owns the property, but each unit holder holds 100,000 units and will receive ten per cent of the income from the property. If the property makes a net ten per cent profit, each unit holder will receive ten thousand dollars a year income.
Of course, the contributions do not have to be of equal value. The greater the proportion of the property units held by an individual, the greater the proportion of the profit she will receive. Most managers will take a fee for managing the trust.
Property trusts can be an excellent way to begin investing in the commercial or industrial real estate market if you do not have sufficient funds to purchase your property alone, or if you are having trouble obtaining a loan. Most accountants or financial advisors who offer these types of trusts require you to become their client. This is to protect themselves, and you, by ensuring that you are managing all aspects of your financial life in a responsible way. No other member of the trust wants to be associated with unit holders who cannot manage their money and who may ask prematurely to withdraw their funds from the trust.
A WORD OF WARNING
Never get involved in a property trust just because someone insists that it is ‘a good deal’. Only use reputable, licensed, trustworthy professionals who you either know personally, or who have an established reputable financial business.
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