Filed Pursuant to Rule 424(b)(3)
Registration No. 333-113863

PALADIN REALTY INCOME PROPERTIES, INC.

SUPPLEMENT NO. 1 DATED JUNE 5, 2007

TO THE PROSPECTUS DATED APRIL 6, 2007

This prospectus supplement No. 1 (this “Supplement”) is part of, and should be read in conjunction with, the prospectus of Paladin Realty Income Properties, Inc. dated April 6, 2007 (the “Prospectus”). Unless otherwise defined herein, capitalized terms used in this Supplement shall have the same meanings as set forth in the Prospectus.

A. Quarterly Report on Form 10-Q for the period ended March 31, 2007

On May 15, 2007, we filed our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 with the Securities and Exchange Commission. Attached hereto as Exhibit A is this quarterly report (without exhibits).

B. Election of Officers

On May 7, 2007, our Board of Directors appointed Whitney A. Greaves to the newly created position of Chief Operating Officer and William K. Dunbar to the newly created position of Chief Investment Officer.

The Company hereby amends the table of directors and executive officers on page 49 of the Prospectus to include the following:

Name	Age	Positions
Whitney A. Greaves	43	Chief Operating Officer
William K. Dunbar	47	Chief Investment Officer

In addition, the Company hereby adds the following disclosure to page 51 of the Prospectus at the end of the section entitled “Directors and Independent Officers”:

Whitney A. Greaves, age 43, has served as our Chief Operating Officer since May 2007. Ms. Greaves also serves as a Vice President of Paladin Advisors, LLC (“Paladin Advisors”) and a Vice President and Principal of Paladin Realty Partners, LLC (“Paladin Realty”). Paladin Realty is our sponsor and the managing member of Paladin Advisors. Paladin Advisors is our advisor.

Prior to joining Paladin Realty in 1995, Ms. Greaves was a First Vice President and Portfolio Manager for First Nationwide Bank in San Francisco. During her seven year tenure with First Nationwide, her responsibilities included management and disposition of portfolios of non-performing loans and real estate assets. Ms. Greaves was also responsible for restructuring tax-exempt bond financings and credit enhancement facilities with the Federal Home Loan Bank and Fannie Mae, resolving complex construction and partnership litigation disputes and managing several environmental remediation projects. Ms. Greaves has been a member of various industry organizations including the Pension Real Estate Association and the Urban Land Institute.

Ms. Greaves graduated from the University of Redlands with a Bachelor’s degree in Economics and Political Science.

William K. Dunbar, age 47, has served as our Chief Investment Officer since May 2007. Mr. Dunbar is also a Vice President of Paladin Advisors and a Vice President and Principal of Paladin Realty. Mr. Dunbar focuses primarily on apartment, industrial, retail and office investments.

Prior to joining Paladin Realty in 1998, Mr. Dunbar was a Senior Vice President of Greystone Realty Corp., where he acquired residential and commercial real estate totaling several hundred million dollars, and originated and managed a joint venture development fund. Previously, Mr. Dunbar was an Analyst for Equity Group Investments, where he evaluated various commercial property and real estate company acquisitions. Mr. Dunbar began his career as a Real Estate Loan Officer for Chemical Bank in New York. He has been a member of various industry organizations including the Pension Real Estate Association and the Urban Land Institute.

Mr. Dunbar graduated from Cornell University with a Bachelor’s degree and from the J.L. Kellogg Graduate School of Management at Northwestern University with a Masters degree in Management.

Exhibit A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 000-51860

PALADIN REALTY INCOME PROPERTIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	20-0378980
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

10880 Wilshire Blvd., Suite 1400 Los Angeles, California	90024
(Address of Principal Executive Offices)	(Zip Code)

(310) 996-8704

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ¨                    Accelerated Filer  ¨                    Non-Accelerated Filer  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

As of May 11, 2007, there were 1,493,826 outstanding shares of common stock of Paladin Realty Income Properties, Inc.

PALADIN REALTY INCOME PROPERTIES, INC.

INDEX

		Page
PART I    FINANCIAL INFORMATION
Item 1.	Financial Statements	S-1
	Paladin Realty Income Properties, Inc. and Subsidiaries Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006	S-1
	Paladin Realty Income Properties, Inc. and Subsidiaries Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (unaudited)	S-2
	Paladin Realty Income Properties, Inc. and Subsidiaries Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2007 (unaudited)	S-3
	Paladin Realty Income Properties, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited)	S-4
	Notes to Consolidated Financial Statements	S-5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	S-16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	S-26
Item 4.	Controls and Procedures	S-26
PART II    OTHER INFORMATION
Item 1.	Legal Proceedings	S-27
Item 1A.	Risk Factors	S-27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	S-27
Item 3.	Defaults Upon Senior Securities	S-27
Item 4.	Submission of Matters to a Vote of Security Holders	S-27
Item 5.	Other Information	S-27
Item 6.	Exhibits	S-28

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PALADIN REALTY INCOME PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31, 2007			December 31, 2006
ASSETS
Real Estate:
Building and improvements	$	36,429,866		$	36,418,755
Land		3,781,578			3,781,578
Furniture, fixtures and equipment		684,168			659,788
In-place leases		823,508			823,508
		41,719,120			41,683,629
Less: Accumulated depreciation and amortization		(1,058,867	)		(616,887	)
Total real estate, net		40,660,253			41,066,742
Investment in real estate joint venture		1,770,102			1,748,869
Cash and cash equivalents		1,033,169			976,231
Restricted cash		1,208,104			311,797
Prepaid insurance and other assets, net		840,107			671,301
TOTAL ASSETS	$	45,511,735		$	44,774,940
LIABILITIES AND SHAREHOLDERS’ EQUITY
Mortgages payable	$	32,850,000		$	32,850,000
Notes payable to affiliate		1,150,000			3,800,000
Due to affiliates		554,568			853,622
Unaccepted subscriptions for common shares		899,471			22,000
Accrued expenses and other liabilities		641,671			788,374
Dividends payable		117,097			82,756
Total liabilities		36,212,807			38,396,752
Minority interest		160,761			166,891
Shareholders’ equity
Preferred shares, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding		—			—
Common shares, $0.01 par value, 750,000,000 shares authorized; 1,225,199 shares and 830,545 shares issued and outstanding as of March 31, 2007 and December 31, 2006, respectively		12,252			8,305
Additional paid-in-capital		10,707,989			7,247,818
Accumulated deficit and dividends		(1,582,074	)		(1,044,826	)
Total shareholders’ equity		9,138,167			6,211,297
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	45,511,735		$	44,774,940

See notes to consolidated financial statements

S-1

PALADIN REALTY INCOME PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended March 31,
	2007			2006
Revenues
Rental income	$	1,092,540		$	—
Other income		88,872			—
Interest income		4,996			2,103
Total Revenues		1,186,408			2,103
Expenses
Property operating expenses		355,480			—
Real property taxes		98,651			—
General and administrative expenses		188,537			10,854
Interest expense, including amortization of deferred financing costs		574,262			—
Depreciation and amortization expense		441,984			—
Total Expenses		1,658,914			10,854
Loss before equity in earnings and minority interest		(472,506	)		(8,751	)
Equity in earnings from real estate joint venture		21,233			20,271
Minority interest		(79,228	)		794
Net income (loss)	$	(372,045	)	$	10,726
Net income (loss) per common share
Basic	$	(0.38	)	$	0.04
Diluted	$	(0.38	)	$	0.04
Weighted average number of common shares outstanding
Basic		986,337			246,273
Diluted		986,337			247,739

See notes to consolidated financial statements

S-2

PALADIN REALTY INCOME PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the three months ended March 31, 2007

(Unaudited)

	Common Shares			Additional Paid-in Capital			Accumulated Deficit and Dividends			Total Shareholders’ Equity
	Common Shares	Amount
BALANCE, December 31, 2006	830,545	$	8,305	$	7,247,818		$	(1,044,826	)	$	6,211,297
Issuance of common shares	394,654		3,947		3,938,584			—			3,942,531
Selling commissions and dealer manager fees	—		—		(367,920	)		—			(367,920	)
Offering costs	—		—		(120,355	)		—			(120,355	)
Share-based compensation expense	—		—		9,862			—			9,862
Dividends declared	—		—		—			(165,203	)		(165,203	)
Net loss	—		—		—			(372,045	)		(372,045	)
BALANCE, March 31, 2007	1,225,199	$	12,252	$	10,707,989		$	(1,582,074	)	$	9,138,167

See notes to consolidated financial statements

S-3

PALADIN REALTY INCOME PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(372,045	)	$	10,726
Adjustments to reconcile net income (loss) to net cash used in operating activities
Equity in earnings from real estate joint venture		(21,233	)		(20,271	)
Distributions from real estate joint venture		—			20,271
Depreciation and amortization expense		441,984			—
Amortization of deferred financing costs		23,859			—
Amortization of deferred compensation		9,862			1,712
Minority interest		(79,228	)		794
Changes in operating assets and liabilities:
Increase in restricted cash		(18,836	)		—
Increase in prepaid insurance and other assets		(119,572	)		(163,777	)
Increase (decrease) in due to affiliates		40,564			(54,918	)
Increase (decrease) in accrued expenses and other liabilities		(146,703	)		35,015
Net cash used in operating activities		(241,348	)		(170,448	)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for real estate and improvements		(35,491	)		—
Decrease in due to affiliates		(357,456	)		—
Investment in real estate joint venture		—			(40,794	)
Distributions from real estate joint venture in excess of equity in earnings		—			315
Net cash used in investing activities		(392,947	)		(40,479	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable to affiliate		(2,650,000	)		—
Proceeds from issuance of common shares		3,942,531			1,424,287
Increase in unaccepted subscriptions for common stock		877,471			75,000
Increase in unaccepted subscriptions for common stock in restricted cash		(877,471	)		(75,000	)
Selling commissions and dealer manager fees		(367,920	)		(133,201	)
Offering costs		(102,517	)		(42,729	)
Decrease in due to affiliates		—			(47,806	)
Dividends paid		(130,861	)		(28,471	)
Distributions to minority interest		—			(2,926	)
Net cash provided by financing activities		691,233			1,169,154
Net increase in cash and cash equivalents		56,938			958,227
Cash and cash equivalents—beginning of period		976,231			71,131
Cash and cash equivalents—end of period	$	1,033,169		$	1,029,358
Supplemental disclosure of non-cash investing and financing activities
Offering costs due to affiliate	$	17,838		$	—
Dividends payable	$	117,097		$	32,257
Issuance of common stock for compensation plan	$	—		$	120,000
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	367,255		$	—

See notes to consolidated financial statements

S-4

Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2007 and 2006 (unaudited)

1. Organization

Paladin Realty Income Properties, Inc., a Maryland corporation (“Paladin REIT”), was formed on October 31, 2003 and intends to provide investors the potential for income through investment in a diversified portfolio of real estate properties, focusing primarily on investments that produce current income. Paladin REIT owns interests in three income-producing properties as of March 31, 2007, consisting of 801 Fiber Optic Drive, a 56,336 square foot distribution facility built in 2001 that is 100% leased to FedEx Ground Package System, Inc., a subsidiary of FedEx Corporation; Champion Farms Apartments, a 264-unit luxury multifamily rental community built in 2000; and Fieldstone Apartments, a 264 unit multifamily community property built in 2001. Paladin REIT intends to invest in a variety of real estate product types, including apartments, office buildings, industrial buildings, shopping centers and hotels. Paladin REIT may also make real estate related investments, which include first mortgages or second mortgages, mezzanine loans or preferred equity investments relating to the same types of properties that Paladin REIT may acquire directly. Paladin REIT intends to qualify as a REIT and to elect to be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2007. Subject to certain restrictions and limitations, the business of Paladin REIT is managed by Paladin Realty Advisors, LLC (“Paladin Advisors”), an affiliate of Paladin REIT, pursuant to an advisory agreement dated February 28, 2005, as amended February 28, 2007 (the “Advisory Agreement”). Paladin Advisors supervises and manages the day-to-day operations of Paladin REIT and selects the real estate and real estate related investments it acquires, subject to oversight by the board of directors. Paladin Advisors also provides marketing, sales and client services on behalf of Paladin REIT.

On February 23, 2005, Paladin REIT’s initial public offering (the “Offering”) was declared effective and Paladin REIT commenced its offering efforts. As of March 31, 2007 Paladin REIT had received proceeds of $12,079,864 for 1,212,699 shares.

Paladin REIT owns its assets and conducts its operations through Paladin Realty Income Properties, L.P., its operating partnership (“Paladin OP”). As of March 31, 2007 and December 31, 2006, Paladin Advisors holds a 1.6% and 2.4% limited partnership interest, respectively, and Paladin REIT holds a 98.4% and 97.6% general partnership interest, respectively, in Paladin OP. Management expects Paladin REIT’s ownership percentage in Paladin OP to continue to increase as Paladin REIT invests net proceeds from the Offering in Paladin OP. Paladin REIT had no operations prior to November 2, 2005.

2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Paladin REIT and its wholly-owned and controlled entities (collectively, the “Company”). In accordance with the Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), Consolidation of Variable Interest Entities (“FIN 46R”), the Company also consolidates any variable interest entities (VIEs) of which it is the primary beneficiary as defined. When the Company does not have a controlling interest in an entity but exerts a significant influence over the entity, the Company applies the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.

Real Estate and Depreciation

Real estate is stated at cost, less accumulated depreciation. The Company allocates the cost of newly acquired properties between net tangible and identifiable intangible assets. The primary intangible asset associated with an apartment property acquisition is the value of the existing lease agreements. When allocating

S-5

cost to an acquired property, the Company allocates costs to the estimated value of the land, building and fixtures assuming the property is vacant and to the estimated intangible value of the existing lease agreements. The Company estimates the intangible value of the lease agreements by determining the lost revenue associated with a hypothetical lease-up. The Company depreciates the building and fixtures based on the expected useful life of the asset, which is 45 years for the building and improvements and a range of 5 to 7 years for furniture, fixtures and equipment. The intangible value of the lease agreements is amortized over the average remaining life of the existing leases, which ranges from three to 24 months. This amortization is included in depreciation and amortization expense on the accompanying consolidated statements of operations. Expenditures for repairs and maintenance are expensed as incurred.

The Company reviews long-lived assets and related identifiable intangibles for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. When such events or changes in circumstances occur, recoverability of the asset to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows, undiscounted and without interest, expected to be generated by the asset. If the sum of the expected future cash flows (undiscounted and without interest) is less than the Company’s carrying amount for the asset, an impairment loss is recognized based upon the asset’s fair value.

Investments

The Company evaluates its investments in accordance with Financial Accounting Standards Board, Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” which is referred to as FIN 46R. If the Company determines that the joint venture is a “variable interest entity” (“VIE”) and that the Company is the “primary beneficiary” as defined in FIN 46R, it will account for such investment as if it were a consolidated subsidiary. For a joint venture investment which is not a VIE or in which the Company is not the primary beneficiary, the Company considers other relevant accounting literature including Accounting Principles Board Opinion 18— “The Equity Method of Accounting for Investments in Common Stock,” Statement of Position (“SOP”) 78-9— “Accounting for Investments in Real Estate Ventures,” and Emerging Issues Task Force Issue (“EITF”) 04-5 to determine the method of accounting for each of the partially-owned entities. In accordance with the above pronouncements, the Company determines whether it should consolidate the entity or account for it on the equity method or cost method. Factors considered in determining whether or not the Company exercises control include substantive participating rights of partners on significant business decisions, including dispositions and acquisitions of assets, financing and operating and capital budgets, board and management representatives and authority and other contractual rights of the Company’s partners. To the extent that the Company is deemed to control these entities, these entities will be consolidated.

As of March 31, 2007, Paladin OP holds a 70% ownership interest in Springhurst Housing Partners, LLC (“Springhurst”), a 65% ownership interest in Glenwood Housing Partners I, LLC (“Glenwood”) and a 74% ownership interest in PRIP 801, LLC as described in Note 3. Paladin REIT has determined that Paladin OP and its investees are not VIEs. Paladin REIT consolidates Paladin OP, Springhurst and Glenwood, as it is the majority owner and exercises control over all significant decisions. Paladin REIT accounts for its investment in PRIP 801, LLC under the equity method of accounting, as the other member has substantive participating rights as defined in EITF 04-5 and SOP 78-9. This investment is recorded initially at cost, and subsequently adjusted for equity in earnings or losses and cash contributions and distributions.

On a periodic basis the Company will evaluate whether there are any indicators that the value of its investments in partially-owned entities are impaired. An investment is impaired if the Company’s estimate of the value of the investment is less than the carrying amount. The ultimate realization of the Company’s investment in partially-owned entities is dependent on a number of factors including the performance of that entity and market conditions. If the Company determines that a decline in the value of a partially-owned entity is other than temporary, then the Company would record an impairment charge.

S-6

Deferred Loan Costs

Loan costs are capitalized and amortized on a straight-line basis over the life of the related loan, which approximates the effective interest method. The amortization is recorded as a component of interest expense.

Revenue Recognition

The Company primarily leases residential apartments to tenants under non-cancellable operating leases with terms ranging from three to 24 months. Rental income related to leases is recognized in the period earned over the lease term in accordance with Statement of Financial Accounting Standards No. 13, “Accounting for Leases”.

Other income consists of various tenant related charges and are recognized as revenue in the period in which the applicable charge is incurred.

Accounts Receivable

Bad debts are recorded under the specific identification method, whereby, uncollectible receivables are directly written off when identified.

Use of Estimates

The presentation of the consolidated financial statements requires management to make estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of the property, plant and equipment, valuation allowances for receivables, and deferred income tax assets. Actual results could differ from those estimates.

Cash Equivalents

Cash equivalents represent highly liquid investments with maturities at the date of purchase of three months or less.

Restricted Cash

Restricted cash includes subscription proceeds that are held in escrow until investors are admitted as stockholders. Upon acceptance of stockholders, shares of stock are issued, and we receive the subscription proceeds. Restricted cash included $899,471 and $22,000 as of March 31, 2007 and December 31, 2006, respectively, for proceeds that were held in escrow. At March 31, 2007 and December 31, 2006, restricted cash also included $308,633 and $289,797 held in restricted accounts for tenant improvements, repairs, property taxes and insurance as required by lenders.

Income Taxes

For the year ending December 31, 2007, the Company intends to make an election to be taxed for such year as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company believes that it will be organized and operate in such a manner as to qualify for treatment as a REIT and intends to operate in such a manner so that the Company will remain qualified as a REIT for federal income tax purposes.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109.” FIN 48 increases the relevancy and comparability of

S-7

financial reporting by clarifying the way companies account for uncertainty in measuring income taxes. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. This Interpretation only allows a favorable tax position to be included in the calculation of tax liabilities and expenses if a company concludes that it is more likely than not that its adopted tax position will prevail if challenged by tax authorities. The Company adopted FIN 48 as required effective January 1, 2007. The adoption of FIN 48 did not have a material impact on its consolidated financial position, results of operations or cash flows.

Prior to the election to be taxed as a REIT, the Company incurred net operating losses for federal income tax purposes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates for which the temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities are recognized in earnings in the period enacted. As of March 31, 2007, the Company has recorded a deferred tax asset which was fully offset by a valuation allowance. All of the Company’s tax years are subject to examination by tax jurisdictions as of the adoption date.

Organization and Offering Costs

Organization costs are expensed as incurred and offering costs are charged to stockholders’ equity. These costs are subject to a 3% limitation of the gross proceeds from the Offering pursuant to the Company’s Advisory Agreement with Paladin Realty Advisors, LLC, as described in note 6.

Expense Reimbursement

Pursuant to the Advisory Agreement, Paladin Advisors is entitled to reimbursement of actual expenses incurred for administrative and other services provided to Paladin REIT by Paladin Advisors and its affiliates for which they do not otherwise receive a fee. Paladin REIT will not reimburse Paladin Advisors for operating expenses that in the fiscal year then ended exceed the greater of (1) 2% of the average invested assets of Paladin REIT or (2) 25% of the net income of Paladin REIT (the “2%/25% Rule), and Paladin Advisors must reimburse Paladin REIT quarterly for any amounts by which the operating expenses of Paladin REIT exceeds the 2%/25% Rule in the previous four consecutive fiscal quarters (the “Expense Period”).

The average invested assets of Paladin REIT for any period are equal to the average book value of Paladin REIT’s assets invested in equity interests in, and loans secured by, real estate before reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each month during the period. The net income of Paladin REIT for any period is equal to Paladin REIT’s total revenue less total expenses other than additions to reserves for depreciation, bad debts or other similar non-cash reserves for such period. Operating expenses include all expenses incurred by Paladin REIT under general accepted accounting principles (including the asset management fee), but excluding organization and offering expenses, selling commissions and dealer manager fees, interest payments, taxes, non-cash expenditures such as depreciation, amortization and bad debt reserves, the subordinated disposition fee, acquisition and advisory fees and expenses and distributions pursuant to Paladin Advisors’ subordinated participation interest in Paladin OP.

Paladin Advisors must reimburse the excess expenses to Paladin REIT within 60 days after the end of each fiscal quarter unless the independent directors determine that the excess expenses were justified based on unusual and nonrecurring factors which they deem sufficient. Within 60 days after the end of any Expense Period for which total operating expenses exceed the 2%/25% Rule, Paladin REIT will send its stockholders a written disclosure, together with an explanation of the factors the independent directors considered in arriving at the conclusion that the excess expenses were justified. However, at Paladin Advisors’ option, Paladin Advisors or its affiliate, as applicable may defer receipt of any portion of the asset management fee or reimbursement of expenses and elect to receive such payments, without interest, in any subsequent fiscal year that Paladin Advisors designates.

S-8

During the Expense Period ended March 31, 2007, Paladin REIT’s operating expenses including expenses incurred on behalf of Paladin REIT by Paladin Advisors and its affiliates exceeded the 2%/25% Rule by $686,032. In accordance with the Advisory Agreement, Paladin REIT recognizes on a quarterly basis amounts not exceeding the 2%/25% Rule.

Per Share Data

The Company presents both basic and diluted earnings (loss) per share, or EPS. Basic EPS excludes potentially dilutive securities and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Dilutive EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised, where such exercise would result in a lower EPS amount. The diluted EPS would include weighted average unvested restricted shares issued to independent directors totaling 8,000 and 12,000 shares as of March 31, 2007 and 2006 but are excluded from the calculation for March 31, 2007 as their effect would be antidilutive. However, the calculation of diluted EPS includes 1,466 shares for the three months ended March 31, 2006.

Unaccepted Subscriptions for Common Shares

Unaccepted subscriptions for common shares includes proceeds related to subscriptions which were held in escrow but had not been accepted by the Company as of March 31, 2007 and December 31, 2006.

Fair Value of Financial Instruments

The fair values of the Company’s cash and cash equivalents, restricted cash, other assets, dividends payable and other liabilities approximate the carrying values due to the short-term nature of these financial instruments. The fair value of the mortgage and note payable to affiliates approximates the carrying value.

Stock-based Compensation

Under the terms of the Independent Director Incentive Stock Plan, the Company granted 3,000 shares at fair value of $10 of restricted common stock to each of the four independent directors on March 21, 2006. One-third of the restricted common stock will vest on each of the first three anniversaries of December 2, 2005, the date the Company reached its minimum offering. There are 60,000 shares in total authorized under the Independent Director Incentive Stock Plan, which expires on February 28, 2015.

On March 21, 2006, the Company started recording compensation expense for restricted common stock as required by Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment, revised 2004” (“SFAS No. 123(R)”). Compensation expense for common stock unvested at March 21, 2006 is based on the grant date fair value of the common shares calculated under SFAS No. 123(R) and will be recognized using the straightline attribution method, assuming no forfeitures. Compensation expense is only recorded for common shares expected to be vested. The Company recognizes the expense related to these shares over the vesting period. For the periods ended March 31, 2007 and 2006, the Company recorded $9,862 and $1,712, respectively, of related compensation expense which amounts are included in general and administrative expenses in the accompanying consolidated statements of operations. Total compensation costs on nonvested shares on March 31, 2007 is $66,960, and the remaining weighted average period over which it is expected to be recognized is two years.

As of March 31, 2007, 4,000 shares have vested and the fair value is $10 per share. There are 8,000 shares unvested and there have been no forfeitures as of March 31, 2007.

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Reportable Segments

FASB Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of Enterprise and Related Information,” establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. Management has determined that the Company has one reportable segment, which is owning interests in real estate investments.

Environmental Matters

Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property as well as certain other potential costs relating to hazardous or toxic substances. these liabilities may include government fines and penalties and damages for injuries to persons and adjacent property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of or disposal of such substances. As of March 31, 2007, the Company is not aware of any environmental matter that could have a material impact on the consolidated financial statements.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value, and expands the related disclosure requirements. This statement is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. The Company does not expect the adoption of SFAS 157 to have a material impact on its consolidated financial position, results of operations or cash flows.

3. Investments

Investments in Real Estate

Paladin OP holds a 70% ownership interest in Springhurst, which owns Champion Farms Apartments. Champion Farms Apartments is a 264-unit luxury multifamily rental community built in 2000. Paladin OP also holds a 65% ownership interest in Glenwood, which owns Fieldstone Apartments. Fieldstone Apartments is a 264-unit luxury multifamily rental community built in 2001. The Company consolidates Springhurst and Glenwood.

Investment in Unconsolidated Joint Venture

Paladin OP also has a 74% interest in PRIP 801, LLC, a joint venture between Paladin OP and 801 FO, LLC, which owns 801 Fiber Optic Drive. Paladin OP accounts for its investment in PRIP 801, LLC under the equity method of accounting.

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Condensed financial information of PRIP 801, LLC is summarized as follows:

Condensed Balance Sheets

March 31, 2007 and December 31, 2006

(unaudited)

	March 31, 2007		December 31, 2006
ASSETS
Investment in real estate, net	$	3,995,454	$	4,015,668
Other assets, net		210,429		159,282
Total Assets	$	4,205,883	$	4,174,950
LIABILITIES AND MEMBERS’ EQUITY
Mortgage loan payable	$	1,950,000	$	1,950,000
Other liabilities		29,680		28,348
Members’ equity		2,226,203		2,196,602
Total Liabilities and Members’ Equity	$	4,205,883	$	4,174,950
Company’s share of Members’ Equity*	$	1,647,476	$	1,625,571

Condensed Statements of Operations

For the three months ended March 31, 2007 and 2006

(unaudited)

	March 31, 2007			March 31, 2006
Revenues and interest income	$	84,647		$	84,871
Expenses		(55,046	)		(56,570	)
Net income	$	29,601		$	28,301
Company’s share of net income*	$	21,905		$	20,943

* The difference in the Company’s share of Members’ Equity and the Company’s share of net income compared to the balance sheets and statements of operations is attributed to the depreciation expense of the acquisition costs incurred by the Company.

The mortgage loan pays interest only at a fixed interest rate of 5.498% through November 1, 2010, the anticipated repayment date. If the mortgage loan is not repaid or refinanced as of the anticipated repayment date, interest will accrue at a rate per annum equal to the greater of (a) 8.498% and (b) the treasury rate plus three percentage points. Pursuant to the terms of a cash management agreement, the borrower is required to post a $550,000 letter of credit by December 1, 2007 of the loan date, or the lender will sweep and retain all cash flow from the Property. If the borrower does not pay off the loan on November 1, 2010, the lender can apply the letter of credit (or retained cash flow) and will continue to sweep all cash flow to repay the loan. In the event of a default under the loan documents, the cash management agreement further provides that the lender may sweep cash from all accounts maintained by the borrower with the lender (including rent accounts from the property). The estimated principal balance to be due at the anticipated repayment date is $1,950,000.

In general, the mortgage loan may not be prepaid until January 31, 2008. In general, no sale, encumbrance or other transfer of an interest in the property is permitted without the lender’s prior written consent. Alex Gilbert, the managing member of 801 FO, LLC has guaranteed the non-recourse standard loan carve outs, and in exchange for his guarantee, Paladin Realty has agreed to fully indemnify Mr. Gilbert against any defaults caused

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by the borrower through standard default provisions such as bankruptcy, fraud, misapplication of proceeds and certain environmental violations. The loan agreement obligation is secured by a mortgage on the property and an assignment of rents and personal property. In addition PRIP 801, LLC has entered into an environmental and hazardous substance indemnification agreement.

The agreements contain various covenants, which among other things, limit the ability of the borrowers to incur indebtedness, engage in certain business activities, enter into material leases on the property and transfer its interest in the property among others. The loan agreements also contain customary events of default, including, without limitation, payment defaults, cross-defaults to certain other agreements with respect to the property and bankruptcy-related defaults. In the event of a default, the loan may be accelerated and all amounts due under the loan will become immediately due and payable.

4. Mortgages and Notes Payable

Mortgages Payable

In connection with the acquisition of Springhurst, a mortgage loan in an amount of $16,350,000 on the property was put in place. The mortgage loan pays interest only at a fixed interest rate of 6.14% through July 1, 2016, the maturity date, at which time the principal and any unpaid interest shall become due and payable. In general, the mortgage loan may be voluntarily or involuntarily prepaid subject to certain prepayment penalties. The loan agreement obligation is secured by a mortgage on the property and an assignment of rents and personal property.

In connection with the acquisition of Glenwood, the Company assumed the mortgage loan in the amount of $16,500,000. The mortgage loan requires interest only payments at a rate of 6.05%, until July 1, 2011, after which principal and interest are payable monthly on a 30-year amortization schedule until the loan’s maturity on July 1, 2014, at which time all remaining principal and interest shall become due and payable. Approximately $15,900,000 will be due at maturity. In general, the mortgage loan may be voluntarily or involuntarily prepaid subject to certain prepayment penalties. The loan agreement obligation is secured by a mortgage on the property and an assignment of rents and personal property.

Both loan agreements for Springhurst and Glenwood contain various covenants, which among other things, limit the ability of the borrower to incur indebtedness, engage in certain business activities, enter into material leases on the property and transfer their interest in the property among others. The loan agreements also contain certain customary events of default, including, without limitation, payment defaults, cross-defaults to certain other agreements with respect to the property and bankruptcy-related defaults. In the event of default, the loan may be accelerated and all amounts due under the loan will become immediately due and payable.

Notes Payable to Affiliate

The acquisition of the property interest in Champion Farms was partially funded through a note by and between Paladin Realty and Paladin REIT in the amount of $3,100,000. As of March 31, 2007, the Champion Farms Company Note has been repaid in full.

The acquisition of the interest in Fieldstone Apartments was partially funded through two notes by and between Paladin Realty and Paladin REIT in the amounts of $1,100,000 and $2,000,000 respectively. Both notes carry interest rates based on LIBOR plus 2.5%, which was 7.8% as of March 31, 2007. As of March 31, 2007, the outstanding balance of the Company Fieldstone Notes was $1,150,000.

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5. Shareholders’ Equity

Preferred Shares

Paladin REIT’s board of directors, through Paladin REIT’s articles of incorporation, has the authority to authorize the issuance of 100,000,000 preferred shares in one or more classes or series. The rights and terms of such preferred shares will be determined by the board of directors. However, the voting rights of the preferred shares sold in a private offering shall not exceed voting rights which bear the same relationship to the voting rights of common shares as the consideration paid for each such preferred share bears to the book value of each outstanding common share. As of March 31, 2007 and December 31, 2006, Paladin REIT had not issued any preferred shares.

Dividends

The board of directors has declared dividends for the periods listed below to stockholders of record as the close of business each day during the applicable period and paid on the dates listed below. Dividends to shareholders are characterized for federal income tax purposes as ordinary income, capital gains, non-taxable return of capital or a combination of the three. Dividends that exceed our current and accumulated earnings and profits (calculated for tax purposes) constitute a return of capital for tax purposes rather than a dividend and reduce the shareholders’ basis in the common shares. Each of the dividends described below have been a return of capital.

Period	Annualized Rate Declared (1)		Date Paid/To be Paid
February 1, 2006 to February 28, 2006	6.0	%	March 15, 2006
March 31, 2006 to March 31, 2006	6.0	%	April 17, 2006
April 1, 2006 to April 30, 2006	6.0	%	May 15, 2006
May 1, 2006 to May 31, 2006	6.0	%	June 15, 2006
June 1, 2006 to June 30, 2006	6.0	%	July 17, 2006
July 1, 2006 to July 31, 2006	6.0	%	August 15, 2006
August 1, 2006 to August 31, 2006	6.0	%	September 15, 2006
September 1, 2006 to September 30, 2006	6.0	%	October 16, 2006
October 1, 2006 to October 31, 2006	6.0	%	November 15, 2006
November 1, 2006 to November 30, 2006	6.0	%	December 15, 2006
December 1, 2006 to December 31, 2006	6.0	%	January 15, 2007
January 1, 2007 to January 31, 2007	6.0	%	February 15, 2007
February 1, 2007 to February 28, 2007	6.0	%	March 15, 2007
March 1, 2007 to March 31, 2007	6.0	%	April 16, 2007
April 1, 2007 to April 30, 2007	6.0	%	May 15, 2007

(1) Dividends were declared in the amount of $0.0016438 per share per day, representing an annualized rate of return of 6.0% on an investment of $10.00 per share if paid each day over a 365-day period.

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6. Related Party Transactions

The Advisory Agreement entitles Paladin Advisors to specified fees upon the provision of certain services with regard to the Offering and investment of funds in real estate and real estate related investments, among other services, as well as reimbursement for organization and offering costs incurred by Paladin Advisors on behalf of the Company and certain costs incurred by Paladin Advisors and its affiliates in providing services to the Company.

Amounts due to Affiliate

(unaudited)

	March 31, 2007		December 31, 2006
General and administrative expenses due to affiliate (1)	$	166,568	$	126,004
Organization and offering costs due to affiliate (2)		166,958		149,120
Acquisition fees due to affiliate (3)		221,042		578,498
Total due to affiliate	$	554,568	$	853,622
Deferred general and administrative expenses due to affiliate	$	1,293,180	$	1,292,517
Deferred organization and offering costs due to affiliate	$	4,171,792	$	4,018,284

(1) During the three months ended March 31, 2007, the Company paid $168,166 of general and administrative expenses. Due to the application of the 2%/25% Rule (as discussed in Note 2), the Company was able to recognize a total of $177,176 of general and administrative expenses in its consolidated statement of operations with the additional amount of $9,010 recorded as due to affiliate. Paladin Advisors has elected to defer (without interest) the net balance of $166,568 in general and administrative expenses due to affiliate.

(2) Organization and offering costs of the Company are paid by Paladin Advisors or its affiliates, including Paladin Realty, on behalf of the Company and directly by the Company. Organization and offering costs consist of actual legal, accounting, printing and other offering expenses, including amounts to reimburse Paladin Advisors, its affiliates or Prospect Financial Advisors, LLC (“Prospect”), its dealer manager, for all marketing related costs and expenses, including, but not limited to, expenses relating to registering and marketing the shares and other marketing and organization costs, technology costs and expenses attributable to the Offering, and payment or reimbursement of bona fide due diligence expenses of Prospect and broker-dealers participating in the Offering. Pursuant to the Advisory Agreement, the Company is obligated to reimburse Paladin Advisors or its affiliates for amounts advanced for organization and offering costs, provided that Paladin Advisors and its affiliates are responsible for the payment of organization and offering costs to the extent they exceed 3.0% of gross proceeds from the Offering and will be required to return to the Company any amount the Company reimburses them in excess of 3.0% of the gross proceeds from the Offering. Following receipt of the minimum offering on December 2, 2005, such costs only become a liability of the Company to the extent they do not exceed 3.0% of the gross proceeds of the Offering. During the three months ended March 31, 2007, the Company paid $102,517 of offering costs. Due to the application of the 3% limitation, the Company was able to recognize a total of $120,355 as a charge to stockholders’ equity with the additional amount of $17,838 recorded as due to affiliate. Paladin Advisors has elected to defer (without interest) the net balance of $166,958 in organization and offering costs due to affiliate.

(3) Paladin Advisors was entitled to acquisition and advisory fees related to 801 Fiber Optic Drive, Champion Farms Apartments and Fieldstone Apartments. Paladin Advisors has elected to defer all of these fees (without interest). As of March 31, 2007, only the Fieldstone Apartments acquisition fee is still being deferred.

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7. Subsequent Events

Sale of Common Shares

From April 1, 2007 to April 27, 2007, the Company has raised $1,632,246 in offering proceeds through the sale of 163,374 common shares in the offering.

Redemptions

Since March 31, 2007, three shareholders have redeemed 2,537 shares for $25,593.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Paladin Realty Income Properties, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Paladin Realty Income Properties Inc., a Maryland corporation, and its consolidated subsidiaries.

Forward-Looking Statements

Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the Securities and Exchange Commission, or the “SEC”, contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Paladin Realty Income Properties, Inc., which we refer to as “Paladin REIT” or the “Company”, and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. You should not place undue reliance on these forward-looking statements. Statements regarding the following subjects are forward-looking by their nature:

• our business strategy;

• our projected operating results;

• our ability to obtain future financing arrangements;

• estimates relating to our future distributions;

• our understanding of our competition;

• market trends;

• projected capital expenditures; and

• use of the proceeds of our Offering.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common stock, along with the following factors that could cause actual results to vary from our forward-looking statements:

• the factors referenced in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2006;

• changes in our business strategy;

• availability, terms and deployment of capital;

• availability of qualified personnel;

• changes in our industry, interest rates or the general economy; and

• the degree and nature of our competition.

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We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward- looking statements attributable to us or persons acting on our behalf are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless required by law.

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our operations and our present business environment. MD&A is provided as a supplement to—and should be read in conjunction with—our consolidated financial statements and the accompanying notes thereto contained in Item 1 of this report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and timing of events could differ materially from those anticipated in these forward-looking statements, as a result of a number of factors, including those factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and other factors presented throughout this report.

We are a Maryland corporation formed on October 31, 2003 that intends to invest in a diversified portfolio of real estate properties, focusing primarily on properties that produce current income. We own interests in three income-producing properties as of March 31, 2007, including 801 Fiber Optic Drive, a 56,336 square foot distribution facility built in 2001 that is leased to FedEx Ground Package System, Inc., a subsidiary of FedEx Corporation; Champion Farms Apartments, a 264-unit luxury multifamily rental community built in 2000; and Fieldstone Apartments, a 264 unit multifamily community property built in 2001. We intend to invest in a variety of real estate product types, including apartments, office buildings, industrial buildings, shopping centers and hotels. In addition, we may make or acquire mortgage loans secured by, or preferred equity investments in entities that own, the same types of properties that we may acquire directly, which we refer to collectively as real estate related investments. We intend to qualify as a real estate investment trust, or REIT, and to elect to be taxed as a REIT beginning with the taxable year ending December 31, 2007. We own our assets and conduct our operations through Paladin Realty Income Properties, L.P., our operating partnership, which we refer to as “Paladin OP.”

On February 23, 2005, we commenced our initial public offering of 35,000,000 common shares of the Company, par value $0.01 per share to the public on a best efforts basis at a price of $10.00 per share. We also registered up to 3,500,000 common shares to be issued during the offering pursuant to our dividend reinvestment plan at a price of $10.00 per share. On December 2, 2005, we reached our minimum offering by receiving $1,246,670 in subscriptions, excluding subscriptions received from Pennsylvania investors. As of March 31, 2007, we had sold 1,212,699 shares of our common stock in the offering for aggregate gross proceeds of $12,079,864.

Critical Accounting Policies

We believe our most critical accounting policies are the accounting for lease revenues (including straight-line rent), the regular evaluation of whether the value of a real estate asset has been impaired, real estate purchase price allocations and accounting for joint ventures. Each of these items involves estimates that require management to make judgments that are subjective in nature. We rely on our experience, we collect historical data and current market data, and we analyze these assumptions in order to arrive at what we believe to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgments on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates.

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Real Estate and Depreciation

Real estate is stated at cost, less accumulated depreciation. We allocate the cost of newly acquired properties between net tangible and identifiable intangible assets. The primary intangible asset associated with an apartment property acquisition is the value of the existing lease agreements. When allocating cost to an acquired property, we allocate costs to the estimated value of the land, building and fixtures assuming the property is vacant and to the estimated intangible value of the existing lease agreements. We estimate the intangible value of the lease agreements by determining the lost revenue associated with a hypothetical lease-up. We depreciate the building and fixtures based on the expected useful life of the asset, which is 45 years for the building and improvements and a range of 5 to 7 years for furniture, fixtures and equipment. The intangible value of the lease agreements is amortized over the average remaining life of the existing leases, which ranges from three to 24 months. This amortization is included in depreciation and amortization expense on the accompanying consolidated statements of operations. Expenditures for repairs and maintenance are expensed as incurred.

We review long-lived assets and related identifiable intangibles for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. When such events or changes in circumstances occur, recoverability of the asset to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows, undiscounted and without interest, expected to be generated by the asset. If the sum of the expected future cash flows (undiscounted and without interest) is less than our carrying amount for the asset, an impairment loss is recognized based upon the asset’s fair value.

Investments

We evaluate our investments in accordance with Financial Accounting Standards Board, Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” which is referred to as FIN 46R. If we determine that the joint venture is a “variable interest entity” (“VIE”) and that we are the “primary beneficiary” as defined in FIN 46R, we will account for such investment as if it were a consolidated subsidiary. For a joint venture investment which is not a VIE or in which we are not the primary beneficiary, we consider other relevant accounting literature including Accounting Principles Board Opinion 18—“The Equity Method of Accounting for Investments in Common Stock,” Statement of Position (“SOP”) 78-9—“Accounting for Investments in Real Estate Ventures,” and Emerging Issues Task Force Issue (“EITF”) 04-5 to determine the method of accounting for each of the partially-owned entities. In accordance with the above pronouncements, we determine whether we should consolidate the entity or account for it on the equity method or cost method. Factors considered in determining whether or not we exercise control include substantive participating rights of partners on significant business decisions, including dispositions and acquisitions of assets, financing and operating and capital budgets, board and management representatives and authority and other contractual rights of our partners. To the extent that we are deemed to control these entities, these entities will be consolidated.

As of March 31, 2007, we held a 98.4% ownership interest in Paladin OP and Paladin OP holds a 70% ownership interest in Springhurst Housing Partners, LLC (“Springhurst”), a 65% ownership interest in Glenwood Housing Partners I, LLC (“Glenwood”) and a 74% ownership interest in PRIP 801, LLC as described in Note 3 to the consolidated financial statements. We have determined that Paladin OP and its investees are not VIEs. We consolidate Paladin OP, Springhurst and Glenwood, as we are the majority owner and exercise control over all significant decisions. We account for our investment in PRIP 801, LLC under the equity method of accounting, as the other member has substantive participating rights as defined in EITF 04-5 and SOP 78-9. This investment is recorded initially at cost, and subsequently adjusted for equity in earnings or losses and cash contributions and distributions.

On a periodic basis we will evaluate whether there are any indicators that the value of our investments in partially-owned entities are impaired. An investment is impaired if our estimate of the value of the investment is less than the carrying amount. The ultimate realization of our investment in partially-owned entities is dependent on a number of factors including the performance of that entity and market conditions. If we determine that a decline in the value of a partially-owned entity is other than temporary, then we would record an impairment charge.

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Revenue Recognition

We primarily lease residential apartments to tenants under non-cancellable operating lease with terms ranging from three to 24 months. Rental income related to leases is recognized in the period earned over the lease term in accordance with Statement of Financial Accounting Standards No. 13, “Accounting for Leases”. Other income consists of various tenant related charges and are recognized as revenue in the period in which the applicable charge is incurred.

Accounts Receivable

Bad debts are recorded under the specific identification method, whereby, uncollectible receivables are directly written off when identified.

Use of Estimates

The presentation of the consolidated financial statements requires management to make estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Income Taxes

For the year ending December 31, 2007, we intend to make an election to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. We believe that we will be organized and operate in such a manner as to qualify for treatment as a REIT and intend to operate in such a manner so that we will remain qualified as a REIT for federal income tax purposes.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value, and expands the related disclosure requirements. This statement is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. We do not expect the adoption of SFAS 157 to have a material impact on our consolidated financial position, results of operations or cash flows.

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109.” FIN 48 increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in measuring income taxes. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. This Interpretation only allows a favorable tax position to be included in the calculation of tax liabilities and expenses if a company concludes that it is more likely than not that its adopted tax position will prevail if challenged by tax authorities. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on our consolidated financial position, results of operations or cash flows.

Results of Operations

Comparison of the Quarter Ended March 31, 2007 to the Quarter Ended March 31, 2006

Rental income for the quarter ended March 31, 2007 was $1,092,540. We had no rental income for the quarter ended March 31, 2006 because we acquired Champion Farms Apartments in June 2006 and Fieldstone Apartments in December 2006. We expect rental income to continue to increase in future periods, as compared to historical periods, as a result of owning our investments in real estate acquired in 2006 and future acquisitions of real estate investments.

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Other income for the quarter ended March 31, 2007 was $88,872. Other income consists of various tenant related charges and are recognized as revenue in the period in which the applicable charge is incurred. We had no other income for the quarter ended March 31, 2006.

Property operating expenses for the quarter ended March 31, 2007 were $355,480 relating to property operating expenses incurred for Champion Farms Apartments and Fieldstone Apartments. We had no property operating expenses for the quarter ended March 31, 2006. Property operating expenses were approximately 30% of total revenues for the quarter ended March 31, 2007. We expect property operating expenses to continue to increase in future periods, as compared to historical periods, as a result of owning our investments in real estate acquired in 2006 for an entire year and future acquisitions of real estate investments.

General and administrative expenses were $188,537 for the quarter ended March 31, 2007 compared to $10,854 for the quarter ended March 31, 2006. The increase in general and administrative expenses related primarily to asset management fees, independent director fees, directors’ and officers’ liability insurance and amortization of restricted stock held by our independent directors.

Interest expense, including amortization of deferred financing costs, was $574,262 for the quarter ended March 31, 2007. We had no interest expense for the quarter ended March 31, 2006. The increase in interest expense was primarily related to mortgage notes payable and indebtedness incurred in connection with the acquisition of Champion Farms Apartments and Fieldstone Apartments and certain financing costs that we incurred in connection with such indebtedness.

Depreciation and amortization expense was $441,984 for the quarter ended March 31, 2007. We had no depreciation and amortization expense for the quarter ended March 31, 2006. Depreciation and amortization expense in 2007 is a result of our 2006 acquisitions.

Equity in earnings from real estate joint venture were at $21,233 for the quarter ended March 31, 2007 compared to $20,271 for the quarter ended March 31, 2006.

Minority interest increased from an income allocation of $794 for the quarter ended March 31, 2006 to a loss allocation of $79,228 for the quarter ended March 31, 2007 due to our investments in Champion Farms and Fieldstone Apartments and the investments by the other partners in these joint ventures.

Related Party Transactions and Agreements

Organization and Offering Costs. Our organization and offering costs are paid by Paladin Advisors or its affiliates, including Paladin Realty, on behalf of us and directly by us. Organization and offering costs consist of actual legal, accounting, printing and other offering expenses, including amounts to reimburse Paladin Advisors, its affiliates or Prospect Financial Advisors, LLC (“Prospect”), our dealer manager, for all marketing related costs and expenses, including, but not limited to, expenses relating to registering and marketing the shares and other marketing and organization costs, technology costs and expenses attributable to the Offering, and payment or reimbursement of bona fide due diligence expenses of Prospect and broker-dealers participating in the Offering. Pursuant to the Advisory Agreement, we are obligated to reimburse Paladin Advisors or its affiliates for amounts advanced for organization and offering costs, provided that Paladin Advisors and its affiliates are responsible for the payment of organization and offering costs to the extent they exceed 3.0% of gross proceeds from the Offering and will be required to return to us any amount we reimburse them in excess of 3.0% of the gross proceeds from the Offering.

We had incurred organization and offering costs of $4,368,971 and $3,314,265 as of March 31, 2007 and 2006, respectively, which includes $4,171,792 and $3,223,729, respectively, paid by Paladin Advisors as described in Note 6 of the notes to our consolidated financial statements included herewith. Following receipt of the minimum offering on December 2, 2005, such costs only become a liability to us to the extent they do not exceed 3.0% of the gross proceeds of the Offering. When recorded by us, organization costs are expensed as

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incurred and offering costs are charged to shareholders’ equity. For the quarters ended March 31, 2007 and 2006, we have recognized $120,355 and $0, respectively, of offering costs.

As of March 31, 2007, $313,003 in offering costs have been charged to shareholders’ equity.

Subject to the 3% limitation, the remaining $4,004,834 in organization and offering costs, as of March 31, 2007 will be recognized in future periods as we receive additional proceeds of the Offering.

Expense Reimbursement. Pursuant to the Advisory Agreement, Paladin Advisors is entitled to reimbursement of actual expenses incurred for administrative and other services provided to us by Paladin Advisors and its affiliates for which they do not otherwise receive a fee. We will not reimburse Paladin Advisors for operating expenses that in the fiscal year then ended exceeded the greater of (1) 2% of our average invested assets or (2) 25% of our net income (the “2%/25% Rule”), and Paladin Advisors must reimburse us quarterly for any amounts by which our operating expenses exceed the 2%/25% Rule in the previous four consecutive fiscal quarters (the “Expense Period”).

Our average invested assets for any period are equal to the average book value of our assets invested in equity interests in, and loans secured by, real estate before reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each month during the period. Our net income for any period is equal to our total revenue less total expenses other than additions to reserves for depreciation, bad debts or other similar non-cash reserves for such period. Operating expenses include all expenses incurred by us under general accepted accounting principles (including the asset management fee), but excluding organization and offering expenses, selling commissions and dealer manager fees, interest payments, taxes, non-cash expenditures such as depreciation, amortization and bad debt reserves, the subordinated disposition fee, acquisition and advisory fees and expenses and distributions pursuant to Paladin Advisors’ subordinated participation interest in Paladin OP.

Paladin Advisors must reimburse the excess expenses to us within 60 days after the end of each fiscal quarter unless the independent directors determine that the excess expenses were justified based on unusual and nonrecurring factors which they deem sufficient. Within 60 days after the end of any Expense Period for which total operating expenses exceed the 2%/25% Rule, we will send our stockholders written disclosure, together with an explanation of the factors the independent directors considered in arriving at the conclusion that the excess expenses were justified. However, at Paladin Advisors’ option, Paladin Advisors or its affiliate, as applicable may defer receipt of any portion of the asset management fee or reimbursement of expenses and elect to receive such payments, without interest, in any subsequent fiscal year that Paladin Advisors designates.

During the Expense Period ended March 31, 2007, our operating expenses including expenses incurred on behalf of us by Paladin Advisors and its affiliates exceeded the 2%/25% Rule by $686,032. In accordance with the Advisory Agreement, we recognize on a quarterly basis amounts not exceeding the 2%/25% Rule.

As of March 31, 2007, Paladin Advisors and its affiliates had incurred $1,293,180 in general and administrative expenses on our behalf, $9,010 of which are accrued and recorded as due to affiliates at March 31, 2007.

Pursuant to the terms of the Advisory Agreement, Paladin Advisors has elected to defer (without interest) receipt of all of these expenses.

Acquisition and Advisory Fees. Pursuant to the terms of the Advisory Agreement, we pay Paladin Advisors acquisition and advisory fees consisting of 2.75% of (1) the contract purchase price for a property acquired directly or through a joint venture or (2) with respect to real estate related investments, the appraised value of the underlying property, not to exceed 5.5% of the funds we advance with respect to the investment. Paladin Advisors was entitled to acquisition and advisory fees of $578,498 relating to the acquisition of 801 Fiber Optic Drive, Champion Farms Apartments and Fieldstone Apartments. The acquisition and advisory fees were

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capitalized as part of our investment in 801 Fiber Optic Drive, Champion Farms and Fieldstone. We paid $357,456 of acquisition fees to Paladin Advisors during the quarter ended March 31, 2007. Pursuant to the terms of the Advisory Agreement, Paladin Advisors has elected to defer (without interest) receipt of the balance of $221,042.

Asset Management Fees. Pursuant to the terms of the Advisory Agreement, an annual asset management fee is payable to Paladin Advisors monthly in an amount equal to one-twelfth of 0.6% of (1) the contract purchase price of a property acquired directly or through a joint venture or (2) with respect to real estate related investments, the appraised value of the underlying property, not to exceed 1.2% of the funds we advance with respect to the investment. Paladin Advisors receives this fee for supervising the management, leasing, development and construction services provided for our properties by third parties and management of real estate related investments. Paladin Advisors is entitled to asset management fees of $93,029 relating to the management of 801 Fiber Optic Drive, Champion Farms Apartments and Fieldstone Apartments. Pursuant to the terms of the Advisory Agreement, Paladin Advisors has elected to defer (without interest) receipt of all of these fees.

Trends or Uncertainties

Our management is not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of real estate and real estate related investments.

Liquidity and Capital Resources

During the three months ended March 31, 2007, our source of funds were:

• net proceeds of $3,454,256 from the sale of 394,654 common shares in our initial public offering; and

• net operating income of $727,281 from our investments in real estate.

Net operating income is defined as rental and other income less operating expenses and real estate taxes, which excludes depreciation and amortization expense, general and administrative expenses, interest income and interest expense.

We consider net operating income to be an appropriate supplemental performance measure because net operating income reflects the operating performance of our properties and excludes certain items that are not considered to be controllable in connection with the management of the property such as depreciation, interest expense, interest income and general and administrative expenses. Additionally, we believe that net operating income is a widely accepted measure of comparative operating performance in the real estate investment community. However, our use of the term net operating income may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount. We believe that the line on our consolidated statement of operations entitled “net loss” is the most directly comparable GAAP measure to net operating income. The following table is a reconciliation of net operating income to our reported net loss from continuing operations:

Net Operating Income	$	727,281
Equity in income of real estate joint venture		21,233
Interest income		4,996
Depreciation and amortization expense		(441,984	)
Interest expense		(574,262	)
General and administrative expenses		(188,537	)
Minority Interest		79,228
Net Loss	$	(372,045	)

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We are dependent upon the net proceeds to be received from the offering to conduct our proposed activities. The capital required to purchase real estate and real estate related investments will be obtained from the offering and from any indebtedness that we may incur in connection with the acquisition of any real estate and real estate related investments thereafter. We anticipate our sources of funds will continue to consist of the net proceeds of the offering and indebtedness. We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

Net cash used in operating activities for the three months ended March 31, 2007 was $241,348 and $170,448 for the comparable period of 2006.

Net cash used in investing activities for the three months ended March 31, 2007 was $392,947, which included $35,491 relating to improvements to our real estate investments and payment of $357,456 of acquisition fees owed to Paladin Advisors. Net cash used in investing activities for the three months ended March 31, 2006 was $40,479. Such use of funds was primarily related to legal fees relating to our investment in 801 Fiber Optic Drive accrued as of December 31, 2005 and paid during the three months ended March 31, 2006.

Net cash provided by financing activities was $691,233 for the three months ended March 31, 2007 related to $3,942,531 in proceeds from the issuance of common shares in our offering offset primarily by $2,650,000 of payments on note payable to affiliate, $367,920 of selling commissions and dealer manager fees, $102,517 of offering costs and $130,861 of dividends paid. Net cash provided by financing activities for the three months ended March 31, 2006 was $1,169,154 and primarily related to $1,424,287 in proceeds from the issuance of common shares offset by $133,201 in selling commissions and dealer manager fees, $42,729 in offering costs, $47,806 in due to affiliates, and $28,471 in dividends paid.

Mortgage Notes Payable

In connection with the acquisition of an interest in Champion Farms Apartments, we entered into a mortgage loan in an amount of $16,350,000 (the “Champion Farms Mortgage”). The Champion Farms Mortgage pays interest only at a fixed interest rate of 6.14% through July 1, 2016, the maturity date, at which time the principal and any unpaid interest will become due and payable. In general, the Champion Farms Mortgage may be voluntarily or involuntarily prepaid subject to certain prepayment penalties. The loan agreement obligation is secured by a mortgage on the property and an assignment of rents and personal property.

In connection with the acquisition of an interest in Fieldstone Apartments, the Company assumed a mortgage loan in the amount of $16,500,000 (the “Fieldstone Mortgage”). The Fieldstone Mortgage requires interest only payments at a rate of 6.05%, until July 1, 2011, after which principal and interest are payable monthly on a 30-year amortization schedule until the loan’s maturity on July 1, 2014, at which time all remaining principal and interest shall become due and payable. Approximately $15,900,000 will be due at maturity. In general, the Fieldstone Mortgage may be voluntarily or involuntarily prepaid subject to certain prepayment penalties. The loan agreement obligation is secured by a mortgage on the property and an assignment of rents and personal property.

Notes Payable to Affiliate

The acquisition of the property interest in Champion Farms was partially funded through a note by and between Paladin Realty and Paladin REIT in the amount of $3,100,000. As of March 31, 2007, the Champion Farms Company Note has been repaid in full.

The acquisition of the interest in Fieldstone Apartments was partially funded through two notes by and between Paladin Realty and Paladin REIT in the amount of $1,100,000 and $2,000,000 respectively. Both notes carry interest rates based on LIBOR plus 2.5%, which was 7.8% as of March 31, 2007. As of March 31, 2007, the outstanding balance of the Company Fieldstone Notes was $1,150,000. Additional terms and conditions of these

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notes are described in greater detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Our articles of incorporation do not permit borrowings that would cause our aggregate borrowings to exceed 65% of the aggregate asset value of all of our real estate and real estate related investments, unless approved by our independent directors and the justification for such excess borrowing is disclosed to our stockholders in our next quarterly report. Our leverage currently exceeds 65%. In accordance with our articles of incorporation, our board of directors, including our independent directors, approved our leverage increasing and exceeding 65% in connection with entering into the arrangements described above with Paladin Realty.

The board of directors determined that the excess leverage was justified for the following reasons: (1) the primary cause for the excess leverage related to short term borrowings used to make acquisitions which were guaranteed by members of our management; (2) the borrowings enabled us to purchase the assets and earn rental and interest income more quickly; and (3) the acquisitions are likely to increase the net offering proceeds from our initial public offering, thereby improving our ability to meet our goal of acquiring a diversified portfolio of properties to generate current income for investors and preserve investor capital. We will likely continue to exceed our charter’s leverage guidelines during the early stages of our operations.

Our articles of incorporation further provide that we may not borrow money from Paladin Advisors and its affiliates unless such loan is approved by a majority of our directors, including a majority of the independent directors as fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the same circumstances. Our board of directors, including our independent directors, determined that the notes are fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated third parties under the same circumstances and approved our entering into the notes.

Dividends

We paid $130,861 in dividends during the three months ended March 31, 2007. Our board of directors has declared dividends for the periods listed below to stockholders of record as the close of business each day during the applicable period and paid on the dates listed below.

Month	Annualized Rate Declared (1)		Date Paid	Total Dividends (2)
December 2006	6.0	%	January 15, 2007	$	40,432
January 2007	6.0	%	February 15, 2007	$	44,162
February 2007	6.0	%	March 15, 2007	$	46,267

(1) Dividends were declared in the amount of $0.0016438 per share per day, representing an annualized rate of return of 6.0% on an investment of $10.00 per share if paid each day over a 365-day period.

(2) On February 22, 2007, our board of directors declared dividends for the month of March 2007 which totaled $56,678 when paid on April 16, 2007. On March 20, 2007, our board of directors declared dividends for the month of April 2007 which will total approximately $62,200 when paid on May 15, 2007. On April 26, 2007, our board of directors declared dividends for the month of May 2007 which will total approximately $75,600 when paid on June 15, 2007.

These dividends were set by our board of directors at a level we believe to be appropriate based upon an evaluation of our assets and liabilities, projected levels of cash flow, additional capital and debt anticipated to be raised or incurred and invested in the future and our projected results of operations. During the quarterly period ended March 31, 2007, we paid $130,861 in dividends to our stockholders. However, through the three months ended March 31, 2007 we have had negative cash flows from operations and for the quarter ended March 31, 2007 cash flows from operations were insufficient to pay our operating expenses and to cover the dividends we have paid or declared to our stockholders. Specifically, net cash used in operations was $241,348 for the three

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months ended March 31, 2007. Because our cash flows from operations have been insufficient to pay our operating expenses and to cover the dividends we have paid or declared to our stockholders through the date of this Quarterly Report on Form 10-Q, we cannot assure you that we will be able to continue paying dividends to our stockholders at our historical per-share amounts, or that the dividends we pay will not decrease or be eliminated in the future. In order to permit us to pay dividends declared to date, we have used cash distributions from our investments, Paladin Advisors has paid expenses on our behalf, and Paladin Advisors has deferred the reimbursement of these expense payments and its receipt of asset management and acquisition and advisory fees.

As of March 31, 2007, Paladin Advisors had paid on our behalf $4,171,792 in organization and offering costs, none of which has been repaid. In addition, as of March 31, 2007, Paladin Advisors and its affiliates had paid on our behalf $1,293,180 in general and administrative expenses, none of which has been repaid. As described above, Paladin Advisors must reimburse us quarterly for any amounts by which our operating expenses exceed the 2%/25% Rule in any Expense Period. During the Expense Period ended March 31, 2007, our operating expenses including expenses incurred on behalf of us by Paladin Advisors and its affiliates exceeded the 2%/25% Rule by $686,032. In accordance with the Advisory Agreement, Paladin Advisors has deferred payment of such amount, and it was recorded as a reduction in general and administrative expenses and asset management fees, as described in Note 6 to our consolidated financial statements. As of March 31, 2007, Paladin Advisors was also entitled to acquisition and advisory fees of $221,042 relating to the acquisitions of Fieldstone Apartments and asset management fees of $93,029 relating to the management of 801 Fiber Optic Drive, Champion Farms Apartments and Fieldstone Apartments. The acquisition and advisory fees were capitalized as part of these investments. We paid $357,456 of acquisition fees to Paladin Advisors during the quarter ended March 31, 2007. Pursuant to the terms of the Advisory Agreement, Paladin Advisors has elected to defer (without interest) receipt of the remainder of these fees and expenses including the amounts that are accrued on the consolidated statement of operations for the three months ended March 31, 2007.

We are obligated to pay these amounts to Paladin Advisors in the future, and the payment of these obligations may impact our ability to pay future dividends. Paladin Advisors is not obligated to either pay expenses on our behalf or defer reimbursements of such expense payments or fees in future periods. At such time as Paladin Advisors requires us to reimburse such expense payments or pay those fees, or if Paladin Advisors were to cease paying expenses on our behalf or deferring reimbursement of expense payments or fees, our ability to pay dividends to our stockholders could be adversely affected, and we may be unable to pay dividends to our stockholders, or such dividends could decrease significantly. Additionally, if Paladin Advisors continues to pay expenses on our behalf and/or defer reimbursement of expense payments or fees, the ultimate repayment of these obligations could adversely impact on our ability to pay dividends in future periods as well as potentially adversely impact the value of your investment.

The amount of dividends to be distributed to our stockholders in the future will be determined by our board of directors and are dependent on a number of factors, including funds available for payment of dividends (including whether Paladin Advisors continues to pay expenses or defer and/or defer reimbursement of expense payments or fees), our financial condition, capital expenditure requirements, annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code and any limitations imposed by the terms of indebtedness we may incur and other factors.

Off-Balance Sheet Arrangements

As of March 31, 2007 and 2006, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Other than the repayment of $2.65 million of our notes payable to affiliate, as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this Quarterly Report on Form 10-Q, there were no material changes during the three months ended March 31, 2007 to the quantitative and qualitative disclosures about market risks provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

ITEM 4. CONTROLS AND PROCEDURES.

As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.

There have been no significant changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

There were no material changes in our Risk Factors as previously disclosed in Item 1A of our Form 10-K for the year ended December 31, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On February 23, 2005, our initial public offering (SEC File No. 333-113863) was declared effective and we commenced our offering efforts. As of March 31, 2007, we had sold 1,212,699 shares of common stock in the offering, raising gross offering proceeds of $12,079,864. From this amount, we have incurred $1,104,322 in selling commissions and dealer manager fees to Prospect Financial Advisors, LLC, $4,368,971 in organization and offering costs (of which $364,475 has been recorded in our financial statements), $578,498 in acquisition and advisory fees and $93,029 in asset management fees.

For information regarding how we used the net proceeds from our initial public offering (along with how we used cash from operating activities) through March 31, 2007, see our consolidated statements of cash flows included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

Exhibit No.	Description
3.1	Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q on August 15, 2005 and incorporated herein by reference)
3.2	Bylaws of the Registrant (filed as Exhibit 3.2 to Post-Effective Amendment No. 5 to the Registrant’s Form S-11 Registration Statement (File No. 333-113863), as amended to date, on April 6, 2007 (“Post-Effective Amendment No. 5”) and incorporated herein by reference)
4.1	Form of Subscription Agreement (filed as Appendix B to Post-Effective Amendment No. 5 and incorporated herein by reference)
10.1	Amendment No. 1, dated February 28, 2007, to the Dealer Manager Agreement by and between Paladin Realty Income Properties, Inc. and Prospect Financial Advisors, LLC, dated February 28, 2005 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 6, 2007 and incorporated herein by reference).
10.2	Amended and Restated Advisory Agreement by and between Paladin Realty Income Properties, Inc. and Paladin Realty Advisors, LLC dated February 28, 2007 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 6, 2007 and incorporated herein by reference).
31.1	Section 302 Certification of Principal Executive Officer
31.2	Section 302 Certification of Principal Financial Officer
32.1	Section 906 Certification of Principal Executive Officer
32.2	Section 906 Certification of Principal Financial Officer

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PALADIN REALTY INCOME PROPERTIES, INC.
Date: May 15, 2007	By:	/s/    JAMES R. WORMS
		James R. Worms President, Chief Executive Officer and Director (Principal Executive Officer)
Date: May 15, 2007	By:	/s/    JOHN A. GERSON
		John A. Gerson Executive Vice President, Chief Financial Officer and Director (Duly Authorized Officer and Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
3.1	Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2006 and incorporated herein by reference)
3.2	Bylaws of the Registrant (filed as Exhibit 3.2 to Post-Effective Amendment No. 5 filed on April 6, 2007 and incorporated herein by reference)
4.1	Form of Subscription Agreement (filed as Appendix B to Post-Effective Amendment No. 5 filed on April 6, 2007 and incorporated herein by reference)
10.1	Amendment No. 1, dated February 28, 2007, to the Dealer Manager Agreement by and between Paladin Realty Income Properties, Inc. and Prospect Financial Advisors, LLC, dated February 28, 2005 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 6, 2007 and incorporated herein by reference).
10.2	Amended and Restated Advisory Agreement by and between Paladin Realty Income Properties, Inc. and Paladin Realty Advisors, LLC dated February 28, 2007 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 6, 2007 and incorporated herein by reference).
31.1	Section 302 Certification of Principal Executive Officer
31.2	Section 302 Certification of Principal Financial Officer
32.1	Section 906 Certification of Principal Executive Officer
32.2	Section 906 Certification of Principal Financial Officer

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