1272430--3/28/2006--PALADIN_REALTY_INCOME_PROPERTIES

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{investment, property, distribution}

{loan, real, estate}

{stock, price, share}

{debt, indebtedness, cash}

{tax, income, asset}

{provision, law, control}

{cost, contract, operation}

{personnel, key, retain}

{acquisition, growth, future}

{interest, director, officer}

{operation, natural, condition}

{cost, regulation, environmental}

{capital, credit, financial}

There is currently no public market for our common shares. Therefore, it will likely be difficult for you to sell your shares and, if you are able to sell your shares, you will likely sell them at a substantial discount. We are considered a blind pool offering, because, other than one initial investment we made in one property located in Little Rock, Arkansas and one potential investment in a property located in Louisville, Kentucky, we have not identified any specific real estate to purchase or real estate related investments to make with the net proceeds we will receive from this offering. If we are unable to find suitable investments, we may not be able to achieve our investment objectives. You may be unable to sell your shares because your ability to redeem your shares pursuant to our share redemption program is subject to significant restrictions and limitations. Because we will continue to sell shares for $10.00 per share for at least two years following the date of the commencement of our initial public offering on February 23, 2005, you will experience dilution if the value of our underlying net assets exceeds $10.00 per share. Because we established the offering price on an arbitrary basis, it may not be indicative of the price at which our shares would trade if they were actively traded. Risks Relating To Our Business We and our advisor are new companies with no operating histories, and we may not be able to operate successfully. We differ from prior programs sponsored by Paladin Realty in a number of respects, and therefore the past performance of those programs may not be indicative of our future results. Our ability to successfully conduct this offering is dependent in part on the ability of our dealer manager, Prospect Financial Advisors, LLC, to successfully establish, operate and maintain a network of brokers and agents. We may suffer from delays in locating suitable investments, which could reduce our ability to make distributions to our stockholders and your return on your investment. Because our offering is a best efforts offering, the dealer manager and the participating broker dealers are only required to use their best efforts to sell our shares. If we are unable to raise substantial funds in this offering, we will be limited in the number and type of investments we may make, which will result in a less diversified portfolio. We may not have sufficient funds to pay future dividends. We may structure acquisitions of property in exchange for limited partnership units in Paladin OP on terms that could limit our liquidity or our flexibility. We are uncertain of our sources of debt or equity for funding of future capital needs. If we are not able to locate sources of funding, our ability to make necessary capital improvements to our properties may be impaired or delayed. Payment of fees, distributions and expense reimbursements to Paladin Advisors and its affiliates will reduce cash available for investment and for distribution to our stockholders. We depend on key personnel, the loss of any of whom could be detrimental to our business. Our success will be dependent on the performance of Paladin Advisors as well as key employees of Paladin Advisors. Terrorist attacks and other acts of violence or war may affect the markets in which we operate, our operations and our profitability. Our results of operations, our ability to pay distributions to our stockholders and our ability to dispose of our investments are subject to general economic and regulatory factors we cannot control or predict. Risks Related To Conflicts of Interest We will compete with affiliates of Paladin Advisors for investment opportunities. As a result, Paladin Advisors may not cause us to invest in favorable investment opportunities which may reduce our returns on our investments. We will compete with affiliates of Paladin Advisors for tenants or hotel business, which may reduce our ability to attract and retain tenants and hotel business. If we enter into joint ventures with affiliates, we may face conflicts of interest or disagreements with our joint venture partners that will not be resolved as quickly or on terms as advantageous to us as would be the case if the joint venture had been negotiated at arm s length with an independent joint venture partner. As a result, your returns may be decreased by us entering into joint ventures with affiliates of Paladin Advisors. Paladin Advisors and employees of Paladin Advisors and its affiliates will face conflicts of interest relating to time management and allocation of resources, and our results of operations may suffer as a result of these conflicts of interest. Our officers will face conflicts of interest related to the positions they hold with affiliated entities, which could diminish the value of the services they provide to us. Paladin Advisors will face conflicts of interest relating to its compensation structure, which could result in actions that are not necessarily in the long-term best interests of our stockholders. The distribution payable to Paladin Advisors upon termination of the advisory agreement may also influence decisions about terminating Paladin Advisors or our acquisition or disposition of investments. We may acquire assets from, or dispose of assets to, entities managed by Paladin Advisors or its affiliates, which could result in us entering into transactions on less favorable terms than we would receive from a third party or that negatively affect the public s perception of us. The fees we pay Paladin Advisors under the advisory agreement and the distributions payable to Paladin Advisors under the Paladin OP partnership agreement were not determined on an arm s length basis and therefore may not be on the same terms as those we could negotiate with a third-party. Risks Associated With Our Organizational Structure Your interest in us will be diluted if we issue additional shares in this offering or otherwise. The limit on the number of shares a person may own may discourage a takeover attempt. Our articles of incorporation permit our board of directors to issue capital stock with terms that may subordinate the rights of the holders of our current common shares or discourage a third party from acquiring us, even if the acquisition was in our stockholders best interests. Certain provisions of Maryland law could restrict a change in control even if a change in control were in our stockholders interests. Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act. Risks Related To Investments In Real Estate If we acquire real estate or make real estate related investments at a time when the real estate market is experiencing substantial influxes of capital investment and competition for income producing properties, the real estate we purchase, or real estate related investments we make, may not appreciate or may decrease in value. Some or all of our properties may incur vacancies, which may result in reduced revenue and resale value, a reduction in cash available for distribution and a diminished return on your investment. We are dependent on tenants for our revenue, and lease terminations could reduce our distributions to our stockholders. Our real estate investments may include special use and single tenant properties that may be difficult to sell or re-lease upon tenant defaults or early lease terminations. Long-term leases may not result in fair market lease rates over time; therefore, our income and our distributions to our stockholders could be lower than if we did not enter into long-term leases. Your investment may be subject to additional risks if we make international investments. We may be unable to secure funds for future tenant or other capital improvements, which could limit our ability to attract or replace tenants and decrease your return on investment. Uninsured losses relating to real estate may reduce your returns. Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks. Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on your investment. Uncertain market conditions relating to the future disposition of properties could cause us to sell our properties at a loss in the future. We will be subject to additional risks if we invest in hotels that could increase our costs, limit our ability to manage the operations of hotels we own, decrease our profitability and limit the amount of distributions payable to our stockholders. We face possible liability for environmental cleanup costs and damages for contamination related to properties we acquire, which could substantially increase our costs and reduce our liquidity and cash distributions to stockholders. Our costs associated with complying with the Americans with Disabilities Act may reduce our cash available for distributions. Risks Associated With Debt Financing We expect to incur mortgage and other indebtedness, which may increase our business risks and impair our ability to make distributions to our stockholders. If mortgage debt is unavailable at reasonable rates, we may not be able to finance or refinance the properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make. Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders. Fluctuations in interest rates could increase our expenses, require us to sell investments or make it more difficult to make attractive investments. If we enter into financing arrangements involving balloon payment obligations, the repayment of the balloon payments may require us to enter into unfavorable refinancings or to divert funds from other sources, which would reduce dividends paid. Risks Associated With Real Estate Related Investments We do not have substantial experience in making or acquiring mortgage loans or other real estate related investments, which may result in our real estate related investments failing to produce returns or incurring losses. Our real estate related investments may be impacted by unfavorable real estate market conditions, which could decrease their value. Our returns on mortgage loans may be reduced by interest rate fluctuations. Delays in liquidating defaulted real estate related investments could reduce our investment returns. Returns on our mortgage loans may be limited by regulations. Foreclosures create additional risks, as we would be subject to all of the risks of owning the property on which we foreclose. If we liquidate prior to the maturity of our real estate related investments, we may be forced to sell those investments on unfavorable terms or at a loss. Risks Associated with Joint Ventures The terms of joint venture agreements or other joint ownership arrangements into which we may enter could impair our operating flexibility and our results of operations. We may structure our joint venture relationships in a manner which may limit the amount we participate in the cash flow or appreciation of an investment. We may not qualify as a REIT for federal income tax purposes, which would subject us to federal income tax on our taxable income at regular corporate rates, which would substantially reduce our ability to make distributions to our stockholders. We will not seek to obtain a ruling from the Internal Revenue Service that we qualify as a REIT for federal income tax purposes, and therefore the IRS could still determine we fail to qualify as a REIT, which would substantially reduce our ability to make distributions to our stockholders. Failure to make required distributions would subject us to tax. If Paladin OP fails to maintain its status as a partnership for federal income tax purposes, its income may be subject to taxation. Employee Benefit Plan and IRA Risks There are special considerations for pension or profit-sharing or 401(k) plans, health or welfare plans or individual retirement accounts whose assets are being invested in our common stock.

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1272430--3/28/2006--PALADIN_REALTY_INCOME_PROPERTIES_INC