Friday, December 6, 2013

The Best Money-making Idea I Never Did

Many of my best ideas ever came while I was shaving. Some I acted on, some I didn't. But the one I'm about to describe was--and still may be--among the best ever. It's not scammy and it's not a get-rich-quick thing. You still have to do it the old-fashioned way by employing focus and hard work.

First, you need to know what SCOR is. SCOR stands for Small Company Offering Registration. It's a federal law, adopted by most states, that allows very small companies access to public capital solicitation without the huge costs and regulatory hurdles required by the Securities and Exchange Commission. Read more about it here.

Under SCOR, a company can raise up to $1 million per year through selling securities to the public. That's not what it was in the 1990s, but it's still a start. Besides, that's per year. It can still make a dent in a startup's capital requirements. Think of it as a micro IPO program.

Second--and I know of only one guy who did this--you can form a REIT (Real Estate Investment Trust) under SCOR guidelines. REITs have their own rules. They must have 100 stockholders. No more than half the shares may be held by five individuals. Ninety-five percent of its income has to come from real estate-related sources (rent, mortgages, etc.) and ninety percent of the taxable income has to be distributed to the shareholders. Read about REIT rules here.

My plan was to form a hybrid REIT, that is, one in which income came from buying discounted mortgages along with owning quality rental properties. The thought was that even a slightly diversified revenue stream would offer investors some stability.

Most people understand rents. You buy a place and rent it out. But by using investor money with a REIT instead of a mortgage loan, the debt load is less and the cash flow is higher.

Although it's more challenging today than in previous eras to make money in discounted mortgages--something that's unfamiliar to even a lot of real estate people--it's still possible. Read this E-how post I wrote years ago on how to do it.

Assuming a good company, the REIT is a good deal for investors because there's a market, albeit a tiny one, for their investment. They can sell their shares and get their money back if they want. And the return can be pretty good--usually above the going rate. It's a good deal for startups, too, because a good business plan and lots of hard work can jumpstart them into a good-sized business fairly quickly.

Most SCOR startups are dismal failures. Dynamic successes are few, one being Willamette Vineyards in Salem, OR. This 2012 Denver Post article tells about two Colorado tech companies that used SCOR.

Using SCOR to form a REIT is another matter. The guy I knew who did it was a real estate broker in Marin County, CA, in the mid-1990s. His company bought a couple of warehouses and some office buildings, as I recall, and it was doing so well that he had to turn away investors. That said, he doesn't come up in a Google search, and I don't know what became of him.

Still, if you're an entrepreneur in 2013, it's a terrific way to jumpstart a real estate investment company. Finding 100 investors is usually not a problem for people already active in real estate. The key to success is a well-crafted business plan and its execution.