A real estate operating company, also referred to as a REOC, is akin to a real estate investment trust, also known as a REIT. The primary differences between the two types of real estate investment businesses is the role of investors and the processing of earnings. A REOC invests funds into real estate transactions, and is publicly traded on the stock exchange. REOC puts profits back into the company, rather than dividing up profits among shareholders.
Investments and Profits with a REOC
A real estate operating company invests profits and only then distributes a dividend check to shareholders. For investors, the primary draw to a REOC is the ability to earn capital gains. Tax implications for REOC investors are vastly different than those for REIT investors.
Federal Tax Exemptions and Investment Guidelines
REOC investors don’t receive a federal tax exemption when putting money into the operating company, as REIT investors do. However, REOC investors can determine the type of real estate investments and business to partake in, without the stringent guidelines of an REIT.
How to Fund a Real Estate Operating Company Investment
Real estate investors can use cash, an IRA account, 1031 exchange account, home equity line of credit, stock funds, or reverse mortgages to invest in a REOC. Investors will have to provide proof of income or funds on hand before completing an investor registration packet.
Research the REOC Before Investing
Reputable real estate operating companies will provide a detailed company profile, profit and loss documentation, and a business plan to potential new investors. Investors should investigate the history of the REOC, and check with the local Better Business Bureau before signing any paperwork or committing any funds to the project.
Review Current Company Profit Margins and Equity Figures
Read all investment spreadsheets carefully before investing; review the information with a lender or attorney if possible. The REOC funding data should show the profit return on the most recent quarter of operation. The information should also depict how the capital funds were invested, as well as the current equity.