Investing using the PPM

Investing using the PPM

Investing using the Profit Participation
Method (PPM)
has a major advantage. Investors
acquire profits from the property (such as price appreciation and rental
income,) without purchasing ownership of the property. The method is
widely used in commercial real estate, but is virtually unknown when it
comes to residential real estate. In the profit participation approach,
investors receive gains on the percentage of a property’s value that
they invest in, but do not pay property taxes because they do not own
any additional physical assets. It is the property owner’s
responsibility to pay the full real estate tax on the property. Here is
an example:

Suppose an investor invests $250,000 and purchases 25% of a property’s
profits in a two unit property (duplex) that is worth today $1,000,000.
It produces $4,000 rental income per month. Following improvements, the
property increases its value to $1.5M and rental income increases to
$8,000 per month. The investor receives 25% of the new rental income
amount ($2,000 per month) until the end of the agreement term or the
sale of the property. After 2 years, the owner decides to sell the
property and it sells for $1.5M. At closing, the investor receives his
investment plus 25% of the property value increase - $375,000 x
($250,000 + $125,000) plus the $30,000 interest that accrued at 2%
during the two year investment period. After adding the rental income of
$2,000 per month, the investor’s total gross income from the initial
$250,000 investment is $185,000 (or 74% IRR).

Legal disclaimer: HomeBrik, Inc, does not provide investment or taxation
advice. It is reader’s responsibility to have their taxations questions
answered by their tax advisers or attorneys.

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