REIG vs REIT: Which is best for you?

In real estate investing, there’s only so much one person can do alone before they can’t do anymore. That’s a big reason why investing in property often needs a team effort.

Lately, joining forces and money with others to invest in real estate has become much more popular. This strategy cuts down the investment cost and the effort needed to manage properties.

Two popular ways to do this are through real estate investment groups (REIGs) and real estate investment trusts (REITs). With REIG, you pool money with others to invest in various properties, while REIT lets you buy shares of a professionally managed portfolio of real estate assets.

Now, you might wonder, in the case of REIG vs REIT, which real estate investment strategy is the better choice for you? This article aims to help you understand these two options better. I’ll break down how each one works, highlight their key differences, and help you decide which fits best with your investment goals.

TL;DR

• REIGs vs. REITs: A REIG is a company that pools investors’ money to buy and sometimes manage properties directly. A REIT provides a more passive investment option by allowing investors to buy shares in companies that own, operate, or finance income-generating real estate.

• Investment Approach and Flexibility: REIGs let you choose and manage properties yourself, which could mean more profit but also more time and risk. REITs are easier to get into—you just buy shares—and you can easily sell them on the stock market. They pay regular dividends, so you get a steady income without managing properties directly.

• Starting Investments: To start investing in REIGs, you’ll need to do some research and find groups that match what you’re looking for. They usually have higher minimum entry, often starting at around $5,000. Investing in REITs can be as simple as buying shares through a brokerage account. It’s a straightforward way to get into real estate investment, and you might not need as much cash to get started.

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What is a Real Estate Investment Group (REIG)?

Real estate investing groups, or REIGs, are groups where two or more partners or private investors team up to invest in real estate. These groups can structure themselves in various ways, such as partnerships, limited liability companies (LLCs), or other legal entities, depending on jurisdiction and member preferences.

How REIGs Operate

REIGs work by pooling resources from multiple investors to buy or finance properties. They usually target multiunit rental property, commercial real estate, or a combination of both. Here’s how it typically works:

1. Formation: An individual or company establishes the REIG and invites real estate investors to participate.

2. Investment: Each member contributes an agreed-upon amount of money to the pool.

3. Property Acquisition: The group uses the pooled money to buy properties.

4. Management and Income: Depending on the REIG structure, the group might hire a property manager to handle day-to-day operations, or members might take on these responsibilities themselves. Income generated from the properties, such as rental income, is distributed among the members according to their share of the investment.

What is a Real Estate Investment Trust (REIT)?

You’re likely familiar with buying stock on the market. Well, a REIT works the same way. REIT is a company that deals with profit-making real estate properties, such as apartment buildings or malls, and can also engage in real estate debt by lending money to property owners.

You can buy and sell REIT shares on the major stock exchanges. When you invest in REITs, you get dividends from the profits of those real estate investments.

How REITs Operate

Similar to REIG, REITs buy properties by pooling money from many investors. Here’s the basic flow:

1. Collecting Investment: Individuals use their brokerage accounts to buy REIT shares.

2. Investing in Real Estate: With all the collected money, the REIT buys, oversees, or funds real estate.

3. Generating Income: The properties generate income through rent, leases, or interest from financing other real estate projects. This revenue must cover any property management fees and other operating expenses before distributing profits to shareholders.

4. Distributing Profits: By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends.

Types of REITs

• Equity REITs: These REITs own and manage income-generating real estate. They make money mainly from rent.

• Mortgage REITs (mREITs): These REITs offer financing for real estate by buying or originating mortgages and mortgage-backed securities. They earn income from the interest on these financial assets.

• Hybrid REITs: These REITs blend the approaches of equity REITs and mortgage REITs. They both own real estate properties and get involved in financing.

Investing in a REIT provides an easy, liquid entry point into real estate while giving you passive income and a diversified investment portfolio. But you won’t have much control over each investment, and you’ll feel the effects of real estate market fluctuations.

REIG vs. REIT: Understanding the Difference

While REIGs and REITs may seem similar on the surface – after all, they both provide pooled real estate investment opportunities – there are some key structural and strategic differences under the hood to be aware of. Here’s a breakdown:

Ownership Structure

REIGs: In a REIG, the entity owns the properties, and investors hold shares or interests in the entity, not the real estate itself. This often means you’ll help make decisions, especially in smaller groups. You make money from the property’s rent, after paying for things like maintenance and REIG fees.

REITs: With REITs, you own shares in a company that handles the real estate for you. The management team makes all the big decisions.

Investment Accessibility

REIGs: REIGs are typically private and restricted to a select group of investors. They are less accessible to the general public and often require a longer-term commitment. Plus, you might have to invest a bigger amount of money to join because of their exclusive setup.

REITs: REITs allow investors to buy and sell shares through brokerage accounts easily. Plus, it’s cheaper to start investing in REITs—some even let you start with as little as $500.

Regulatory Environment and Compliance

REIGs: REIGs, being private entities, are subject to fewer regulations and offer less transparency. They have no restrictions on size or guidelines for majority owners, minimum distributions, or other thresholds.

REITs: Securities and Exchange Commission (SEC) regulations govern REITs, requiring them to disclose financials and distribute 90% of profits as dividends.

Liquidity Comparison

REIGs: Investments in REIGs are less liquid. Exiting an investment typically requires finding someone to buy your share in the group or the property, which can take time.

REITs: Publicly traded REITs buy and sell shares on stock exchanges, making entering and exiting investments easier.

Income Generation and Payout Differences

REIGs: Income generation depends on the rental income and property value appreciation. Payouts may fluctuate depending on property performance and group decisions.

REITs: With REITs, you get dividends, which means you can expect a regular amount of money coming your way. But, the exact amount you get can still change, depending on how well the REIT is doing.

Even though REITs provide a steady flow of income, REIGs can potentially give you more money. This is because they might make more from rent and the value of their properties might increase.

Investment Flexibility and Diversification

REIGs: REIGs offer more flexibility in choosing specific properties to invest in, but diversification depends on the group’s size and the range of its investments. It might require a larger initial investment to achieve significant diversification.

REITs: REITs automatically provide diversification due to the nature of REITs investing in a broad portfolio of properties or mortgages. This can reduce the risk associated with individual property investments.

Tax Treatment Nuances

REIGs: REIG’s tax implications depend on the group’s structure and can involve pass-through taxation, where you are taxed on your share of the group’s income, avoiding double taxation.

REITs: REITs offer a unique tax advantage in that they’re not taxed at the corporate level if they meet certain criteria, including paying out at least 90% of their income to shareholders. But, when you get those dividends, they’re taxed as regular income, which could be higher than capital gains taxes for other investments.

Which One Should You Choose?

Choosing between a REIG and a REIT depends on your investment strategy, how much risk you can handle, how much money you have to invest, and whether you want to be hands-on or hands-off. Here’s a guide to help you decide:

Consider Your Investment Goals

Long-term vs. Short-term: If you’re in it for the long haul and like the idea of your property’s value going up over time (plus getting more money from rent), a REIG might align with your goals. For those looking for a quicker payoff or who just want to keep things flexible, REITs offer regular money in the form of dividends and also a chance for your shares to increase in value.

Passive vs. Active Involvement: If you’re not interested in the nitty-gritty of managing properties and prefer a more passive approach, REITs are the way to go. If you prefer being actively involved in decision-making processes and have the skills or interest in real estate management, a REIG could be more rewarding.

Assess Your Risk Tolerance

REIGs come with more risk due to the direct investment in specific properties, which can be affected by market changes, vacancies, or unexpected repairs. If you have a lower risk tolerance, the diversified nature of REITs, which spread risk across various assets, might be more appealing.

Look at Your Available Capital

The initial investment required for a REIG can be significantly higher than buying shares of a REIT. If you have limited capital but still want to invest in real estate, purchasing shares in a REIT allows you to do so without needing a large upfront investment.

How Do I Start Investing in a REIG or REIT?

Ready to pick between REIG or REIT? The good news is diving into both is pretty straight-forward once you’ve picked your path. Just follow these beginner basics step-by-step when you’re ready!

Investing in a REIG:

Start by looking for REIGs or real estate investment clubs that fit your investment goals and interests. You can find them in places like real estate circles, online forums like BiggerPockets, or through a financial advisor or experienced real estate investors.

Next, get in touch with the REIG to get the lowdown on how they operate, what they expect from you, and if there’s a minimum amount you need to invest.

Then, take a close look at all the details, like the rules, potential returns, and other key factors. It might be a good idea to talk it over with a financial advisor or real estate professionals.

When you’re all set and happy with what you’ve found, you’ll typically sign a contract and invest your money to become a member.

If you’re looking for a suggestion, I highly recommend you check out SparkRental. This club gathers investors monthly to discuss various investment options. Everyone decides together where to invest, and you can get in on it with just $5,000.

Investing in REITs:

First, find REITs that match your investment criteria. Consider factors like the type of real estate they invest in (commercial real estate, residential, etc.), geographical focus, and their track record.

Then, decide how you’ll buy. You can get REIT shares through your brokerage account, an investment app, or directly from the REIT if they offer that option.

Next, figure out how much you want to invest and buy your shares.

As you can see, the main steps are almost the same for both options – pick your method, do the math, and then make your investment to get those earnings rolling in! But keep in mind that for both methods, it’s important to do thorough research and due diligence to ensure the investment fits your financial goals and risk tolerance.

Conclusion

So, should you invest in REIG or REIT? As we’ve explored, both REIGs and REITs have their own pros and cons when it comes to investment amounts, risk, control, liquidity, and other factors important for investors to weigh.

In the end, there’s no clear winner. It’s all about what aligns with your personal goals and preferences. And remember, mixing up your investments with a bit of REITs, REIG, and other real estate investments can not only be a smart move but also keep things interesting. So, lean back, take your time to weigh your options, and step into the investment path that feels right for you.

REIG vs. REIT: FAQs

Can I invest in both REIGs and REITs simultaneously?

Absolutely, you can invest in both REIGs and REITs at the same time. Investing in both can balance the active involvement and potential higher returns of REIGs with the liquidity and steady income of REITs. It’s a smart strategy to diversify your investments, spreading the risks and advantages across different real estate sectors.

How do REIGs and REITs respond to economic downturns?

REIGs and REITs both feel the impact of economic downturns but in different ways. REIGs may struggle with dropping property values and less rental income. But, they might also get the chance to buy new properties cheaply during these times.

REITs can also lose value during tough economic times, but because they own different types of properties in various places, they might not be as severely affected. Plus, the ability to quickly sell REIT shares gives investors a way out if needed, though selling during a downturn could mean taking a loss.

Does REIG invest in REIT?

Yes, some REIGs may choose to invest in REITs as part of their investment strategy, as REITs are a way to invest in real estate through securities offered by public real estate companies. But they are not limited to such investments and can directly own and manage properties as well.