What Is a Real Estate Investment Group (REIG)?
A real estate investment group (REIG) refers to a business that focuses the majority of its efforts and capital on investing in real estate. In search of profits, real estate investment groups may choose to buy, renovate, sell, or finance properties. Real estate investment groups commonly buy out a multi-unit property and sell units to investors while taking responsibility for the administration and maintenance of the property.
Typically, real estate investment groups either do not elect to be or do not qualify for being a real estate investment trust (REIT).
- A real estate investment group (REIG) can be any entity with multiple partners that focuses the majority of its business on real estate.
- In a typical real estate investment group, a company buys or builds a set of apartment blocks or condos, then allows investors to purchase them through the company, thereby joining the group.
- REIGs do not qualify as REITs and are not subject to any specific limitations or disclosures.
- REIGs can be structured in many ways, though most are organized as partnerships that pass-through income reported on K-1 tax documents.
- One of the benefits of REIGs is the pooled capital available for investment.
Understanding Real Estate Investment Groups (REIGs)
Real estate investment groups are comprised of multiple partners or private shareholders. Having multiple sources for capital investments provides a greater pool of capital and a greater ability to invest more broadly.
Real estate investment groups focus the majority of their business on real estate, but they are not necessarily subject to any specific real estate entity status or beholden to any specific type of operations. As such, they have a great deal of flexibility to structure their business in several ways, and they have the flexibility to make real estate investments as desired.
Also, real estate investment groups can offer property financing, flip properties, lease properties to clients or property management companies for a portion of rental income, or sell units of a property while maintaining overarching control. In general, there are no specific limitations on the activities a real estate investment group can be involved in. Many REIGs will market themselves as such to make it easier for investors to identify them.
The goal of a REIG is to provide monthly cash flows from the investments made in real estate holdings.
Investment real estate can be an attractive investment because of its multi-dimensional return potential. Real estate investment groups seek to take advantage of a multitude of real estate investment opportunities by creating a portfolio of real estate investments.
In general, there are several ways real estate investment groups produce returns. A REIG may choose to invest in apartment buildings, rental homes, commercial buildings, or commercial units. It may earn income from mortgage lending, rental properties, or property management fees. REIGs often appeal to high-net-worth investors who look to invest directly in real estate but do not wish to assume full property management responsibilities.
REIGs also attract investors who manage single rental properties on their own or who are into flipping houses. The REIG allows such an individual investor to buy one or more properties through an operating company. The operating company collectively manages all of the units and takes care of marketing them. In exchange, the operating company takes a percentage of the monthly rents.
Diversification can help prevent significant losses realized during economic downturns and real estate crashes.
One of the greatest advantages for REIGs is the pooled capital they can raise from multiple partners with various buy-in amounts. Investors in REIG partners typically must put up more cash as an initial investment than other real estate investment opportunities; however, they typically see greater returns.
Real estate investment groups (REIGs) and real estate investment trusts (REITs) are terms used interchangeably; however, they carry different meanings. A real estate investment trust, established by Congress, is a business that creates financial statements and follows applicable tax laws. REIGs, on the other hand, can choose to take on any entity structure, with the two most common being partnerships and corporations.
A partnership is a business owned by two or more people, who share in profits, losses, and debts. Partners take stakes in the business proportionate to their investment. Under the U.S. tax code, partnerships are not taxed. Rather, partnerships pass through all of their income to the partners and report this income on a K-1. Partners receiving a K-1 must individually file their partnership income on Form 1040 if they are an individual or on Form 1120 if they are a corporation.
Depending on the structure of the partnership, partners may or may not have involvement in the management of the business. Partnership agreements detail the full provisions of the business, including minimum investments, fees, distributions, partner voting, and more. Some partnerships enjoy a more collaborative member-structured forum for investment decisions, while others leave the core management of the business to a few executives. Generally, the partnership management team sources and identifies deals before investing partner capital per the partnership agreement.
Real estate investment partnerships require initial investment in amounts of $5,000, up to $50,000. That, however, is often not enough to purchase a unit in a REIG partnership; but its organizational structure allows it to pool money from several investors to fund a property that is shared and co-owned, opening it up to these smaller investors.
Forming a corporation, public or private, is another option for many businesses. The Securities and Exchange Commission (SEC) oversees public corporations while Regulation D governs private corporations that issue securities. Public companies must provide regular, quarterly, transparent financial statement reporting. Moreover, nearly any entity other than sole proprietors can elect to be taxed as a corporation if they meet the requirements.
Incorporating a business allows a company to sell equity shares of the business. Equity shares comprise a portion of the company’s total equity. Public equity shares vary in value based on their public trading value; alternatively, private shares are valued privately.
An executive management team manages corporations. However, shares can be structured with different voting rights, which gives equity investors some say in the company’s overall management.
Online real estate crowdfunding platforms can be known as a type of real estate investment group. These platforms are structured as partnerships and pass-through all income to investing partners with reporting on a K-1.
The emergence of real estate crowdfunding platforms makes it easier for both accredited and non-accredited investors to invest in real estate. Fundraise is one example of a popular real estate crowdfunding platform that offers investors the opportunity to invest in debt capital financing or take some equity in real estate properties.
Advantages and Disadvantages of Real Estate Investment Groups
Real estate investment groups diversify their investments to maximize profits. Pooled resources allow for multiple investments, often generating larger returns.
When run by experienced professionals, the group's investments can be diversified well enough to manage risk and reduce vitality. REIGs also benefit from having few limits on what activities they can engage in and how they operate.
Some real estate investment groups have formal agreements, stipulating when and how members can access their money. So, someone wanting to withdraw from the group may not be able to recoup their investment or share of the profits immediately.
Also, REIGs often have bylaws that cover the rules and regulations and set fees. These fees can be costly, especially when profits are slim or when losses occur. Some groups charge fees annually or more frequently. Lastly, the success of the group is largely dependent on the people who make the decisions. If governed by unskilled and inexperienced people, the risk may outweigh the reward.
Unrestricted investment opportunities
Pooled capital for ventures
Diversified portfolio for maximum profits
Group fees may erode profits
REIG agreement may prevent free access to funds
Failure is possible with an unskilled and inexperienced group
REIGs vs. REITs
A real estate investment trust (REIT) is created when a corporation (or trust) is formed to use outside investors’ money to purchase, operate, and sell income-producing properties. REITs are bought and sold on major exchanges, just like stocks and exchange-traded funds (ETFs).
To qualify as a REIT, the entity must pay out 90% of its taxable profits in the form of dividends to shareholders. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits, thus eating into the returns it could distribute to its shareholders. REITs are highly liquid because they are exchange-traded. In other words, you won’t need a realtor and a title transfer to help you cash out your investment. In practice, REITs are a more formalized version of a real estate investment group.
Thus, a REIT is more highly regulated and has a more specific business and operating structure than a REIG.
Real Estate Investment Group FAQs
Where Can I Find Real Estate Investment Groups?
Search the internet for real estate investment groups or connect with investors via social networking sites, such as LinkedIn, to find groups of interest. As a beginner, it might be beneficial to join a local group to remain closely connected to the group and well informed on its activities and progress.
How Can I Join a Real Estate Investment Group?
You can join a real estate investment group or start your own. Professional networking groups and websites, such as LinkedIn, are good starting points, and joining a group may be as simple as signing an agreement and paying dues.
How Much Money Do I Need to Join a Real Estate Investment Group?
How much money you need to join a real estate investment group varies and largely depends on the group. REIGs often have bylaws, which each member must follow. Furthermore, each group sets its own capital requirements, if any, and fees, which could be due annually or more frequently.
What Should I Look for in a Real Estate Investment Group?
Look for a real estate investment group with a mission-aligned to your goals. Review the history of the group, as well as their performance. Not every venture must be successful, but there should be enough successes to make it an attractive option. Also, ensure that the decision-makers are knowledgeable, experienced, and skilled.
How Do You Start a Real Estate Investment Group?
Before starting, conduct thorough research on what is needed to start a real estate investment group and if it's feasible for you to do so. Consult real estate professionals or others who operate REIGs to get an understanding of what's involved and what to expect. Create a plan on how you want your REIG to operate (e.g., rules, fees, and meetings) and what types of real estate you want to invest in; then solicit members, including those who are experienced and skilled in real estate investments. Once the group is formed, market to investors.
How Much Money Do You Need to Start a Real Estate Investment Group?
Founding partners of a real estate investment group will likely be the largest investors, contributing between $5,000 and $50,000. What is needed to start an investment group depends on how the group will be structured and what type of real estate ventures are sought.
The Bottom Line
Investing in real estate can be lucrative but may be difficult when done alone. Real estate investment groups provide an opportunity to invest in real estate without solely bearing the commitment and being the source of funding. If wanting to join a real estate investment club, first conduct thorough research; then, identify the group that is closely aligned to your goals.