There’s a saying that there’s strength in numbers, and that couldn’t be more applicable in real estate investing. While the potential high returns of real estate attract many, the high cost of entry and the complexity of market trends and regulations can be overwhelming for most if you do it solo.
The rise of investing groups simplifies entry into the market by enabling investors to combine their funds and expertise to buy properties.
So, what do these groups look like? They can vary a lot – friends informally contributing to a fixer-upper project, accredited investors in structured LLCs targeting commercial properties, or an online platform where investors crowdfund a portfolio of rental assets.
Even though the setup can look pretty different from one group to the next, the basic idea stays the same: together, a group can accomplish much more than anyone could manage on their own. This is exactly why I did my first hotel syndication in 2019. I needed capital to grow my business — I couldn’t do it on my own.
Although the chance of making significant returns is attractive, diving into an investing group without thorough research can be risky. This article will lay out all the key things you need to know about investing groups, perfect for anyone thinking about collaborating with others to make bigger and bolder real estate investments.
A real estate investing group is a group of participating investors who pool their resources, such as money and expertise, to invest in properties.
Benefits of joining a group include shared expertise, accessibility to premium investments, risk distribution, connections, tax advantages, and promoting discipline.
However, risks/considerations also exist, such as loss of control, illiquidity of investments, fees, conflicts of interest, and due diligence reliance. Proper vetting is vital before joining.
Readers support our site. If you purchase through links on our site, I might receive an affiliate commission at no additional cost to you.
What is an Investing Group?
An investing group, in the context of real estate, is a group of people who pool their investment funds, knowledge, and investing skills together to access larger and more sophisticated investment opportunities.
Here’s a closer look at how they operate:
They make it possible for you to get into real estate deals with much less money than going alone. The group pools funds from all participants to get the necessary resources to purchase properties.
These groups often adopt legal entity structures like partnerships, LLCs, or private equity funds, which directly facilitate the distribution of profits, losses, and tax advantages to members, aligning with regulations overseen by entities like the SEC (Securities and Exchange Commission).
Someone in charge, like a general partner or a sponsor, usually makes the investment decisions, finds the deals, and then looks after them for the group.
Some groups focus on flipping houses quickly for a profit, while others might invest in rental properties, commercial real estate, or development projects for longer-term gains.
The main goal is to make money for everyone involved, either through rent or by selling properties for more than they cost.
Before you jump in, it’s wise to look at the risks, what you could make, how long your money will be tied up, who’s managing the investments, what fees you’ll pay, and other important stuff.
Types of Investing Groups
Some people choose to start their own investment club, pooling money just with friends and colleagues. However, there are also advantages to joining an established investing group.
There are several types of investing groups in real estate, each with its own structure, investment focus, and benefits. Here are some of the main types:
Real Estate Crowdfunding Platforms
These online crowdfunding platforms allow investors to pool their money together to fund real estate projects with a smaller amount of capital. Investors typically receive shares in the ownership of the property or a debt investment that pays interest, depending on the structure of the investment. They generate returns through collecting rental income, earning interest on loans, or selling properties for capital gains.
Real Estate Syndication
In syndications, a group of passive investors pool their money to invest in big commercial real estate projects. A general partner leads the partnership and takes on the risk and responsibility of finding and managing the investment, while the limited partners contribute funds and receive a portion of the profits.
Real Estate Investment Club
These investment clubs bring people together to learn and share information about real estate investing. Members might pool their money for joint investments, but there’s also a big focus on education and networking.
SparkRental, for example, is an online co-investing club that allows members to pool $5-10K with others in the club to invest in pre-vetted real estate syndication deals on a monthly basis. Beyond the co-investing aspect, SparkRental offers online meetings, community support, accountability partners, and gives you direct access to the club founders.
Benefits of Joining an Investing Group
Joining an investing group offers several benefits, particularly for those looking to diversify their investment portfolio and gain access to a broader range of opportunities.
Here are some of the main advantages:
Shared Knowledge and Experience: When you’re in an investing group, you pool more than just your cash. Everyone brings their own experiences and skills to the table, which means you can make smarter decisions together. For newcomers, this is a great learning opportunity, and for seasoned investors, it offers a chance to share their knowledge and see things from a new angle.
Accessibility – Together, you can get into bigger investments, such as commercial real estate. Investing just $5K-10K can be enough to participate.
Diversification – Investing as part of a group can help spread the risk. Instead of one person bearing the complete downside of a failed investment, investing groups spread the risk amongst all associated members. This can make it easier to manage losses and recover from setbacks.
Networking – You’ll meet other local investors with similar interests and goals. These connections can be valuable for your career, future investments, or simply gaining a broader understanding of the investment world.
Tax Advantages – The special structures often used by investing groups, like partnerships or LLCs, come with significant tax perks. These setups can lead to tax efficiencies and allow for the deferment of taxes on capital gains, property appreciation, and recaptured depreciation, among others.
Staying Disciplined: Regular meet-ups and chats with the group help keep everyone on their toes, encouraging a more disciplined approach to investing and making it easier to keep on top of market trends and strategies.
Challenges and Considerations
Joining a real estate investment group can sound very appealing – you get access to big property deals without needing to find and manage the properties yourself. But there are also downsides to consider before putting your money into one of these groups.
Loss Control – In groups, especially those with a designated manager or lead investor, control and trust issues can arise. Investors need to have confidence in those making the day-to-day decisions and managing the investments.
Illiquidity – Sometimes, pulling your money out of a group investment isn’t as easy as it sounds. Money gets tied up for extended periods, often 5-10 years. Exiting a group investment or selling your share might be subject to conditions or limitations, making it harder to access your funds quickly if needed.
Fees & Expenses – Even though joining forces can save some money, there might still be fees for managing the group or investments that could lower your profits. Typical sponsor fees include acquisition, disposition, property management, performance fees, etc.
Conflicts of Interest – It can be tricky to get everyone to agree on what to invest in, especially when people have different ideas about how much risk they want to take or what they want to achieve.
Due Diligence – Relying on the group or a manager to perform due diligence on investments can be a double-edged sword. Investors must trust the group’s expertise and diligence processes but should also do their own research to ensure investments align with their expectations and risk tolerance.
Joining an Investing Group
Thanks to technology, there are now tons of options for joining investment groups, but figuring out which one to go for can be tricky. Remember, these groups aren’t all the same, so choosing wisely is key. Here’s a straightforward guide on what to do before you decide where to put your money.
Research: Look for groups that match your investing ideas and goals. This can be through online platforms, social media, investment forums, or local meetups.
Understand the Group’s Structure: Before committing, make sure you understand how the group operates, its investment strategy, and its legal structure. Ask about past performance, but remember, past success doesn’t guarantee future results.
Review the Agreement: Be sure to you review the group’s membership agreement. It should clearly outline the process for making decisions, detail the fee structure, explain your obligations, and specify how you can exit the group if you wish.
Meet the Members: Try connecting with some group members, in-person or virtually. This helps you get a feel for the group dynamics and whether you’ll fit in.
Start Small: If you’re unsure, consider starting with a smaller investment until you’re more comfortable with the group’s decisions and performance.
Whether starting or joining an investing club, the key is clear communication, shared goals, and trust among members. Proper due diligence and a well-thought-out structure can lead to a successful and enjoyable investment experience.
Joining the right real estate investing group can make a big difference in boosting your investment portfolio. When you’re part of a team where trust and shared goals are the foundation, navigating the real estate market becomes much smoother.
At the end of the day, no one can accurately predict the future of the real estate market, but with a good group, you’re not dealing with the ups and downs by yourself. You have a team to share advice, strategies, and even offer support when things don’t go as expected. While not every investment will be a success, being in the right group can help you bounce back and keep going, no matter what challenges the market presents.
Investing group: FAQs
How are profits and losses distributed in an investing group?
Every syndication should have an Offering Memorandum or similar document that details the rules for profit and loss distribution. Typically, profits and losses are distributed based on each member’s ownership stake in the investing group. For example, if you’ve contributed 10% of the total capital, you may receive 10% of the profits or bear 10% of the losses unless the operating agreement specifies otherwise.
What should I look for in an investing group before joining?
Before joining a real estate investing group, understand its investment focus and strategy to make sure it matches your investment goals. Look into the group’s past performance, understand the structure of the group, and be clear about any fees you’ll have to pay. It’s also wise to look into the legal and tax implications, know your exit options, and how you can liquidate your investment.
Is joining an investing group profitable?
Yes, joining an investing group can be profitable, but it depends on various factors, such as the group’s investment strategy, the market conditions, and how well the group’s investments perform. These groups allow people to combine their money to get into bigger deals, which might lead to better returns. But the costs of being part of a group, like management fees, can reduce the profit you take home. As always, conducting thorough due diligence is vital.