What Is a Real Estate Investment Group (REIG)?
A real estate investment group (REIG) can be any entity with multiple partners that focuses the majority of its business on real estate. Real estate investment groups may choose to buy, renovate, sell, or finance real estate properties for the purpose of obtaining a return. Real estate investment groups commonly buyout a property and sell units to investors while taking responsibility for building administration and maintenance. Real estate investment groups typically do not elect to take real estate investment trust (REIT) status or they may not qualify for REIT status which is a common real estate business entity.
- A REIG can be any entity with multiple partners that focuses the majority of its business on real estate.
- REIGs are not subject to any specific real estate entity limitations or requirements.
- REIGs can be structured as any type of business entity they choose though many are organized as partnerships which pass through income reported on K-1 tax documents.
Understanding Real Estate Investment Groups
Real estate investment groups are comprised of multiple partners or shareholders. Having multiple sources for capital investment provides for a greater pool of capital and 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. As such, they have the flexibility to structure their business in a variety of ways. This also gives them the flexibility to make real estate investments as they choose. This can allow for real estate investment groups to offer financing for properties, buy and flip properties, lease properties to property management companies for a portion of rental income, lease out properties themselves, or sell units of a property while maintaining overarching control. In general, there are no specific limitations on the activities that a real estate investment group can be involved in. Many REIGs will market themselves as such to make them easier to identify for investors.
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 can produce returns. A REIG may choose to invest in apartment buildings, rental homes, commercial buildings, or commercial units. It may get income from mortgage lending, rental income, or property management fees. REIGs often appeal to high net worth investors who are looking to invest directly in real estate but not take 100% ownership of full property responsibility. REIGs can also attract investors who manage single rental properties on their own or who are into flipping houses.
Overall, one of the greatest advantages for REIGs is the pooled capital they obtain from a multi-partnership structure or a corporate equity unit-based capital structure. Investing REIG partners typically must put up more cash as an initial investment than other real estate investment opportunities but will also typically see greater returns.
Real Estate Investment Group Structuring
A real estate investment group might be referred to as a real estate investment club, but these two phrases are not necessarily the same thing. A real estate investment group is a business that creates financial statements and follows applicable tax laws. REIGs can choose to take on any entity structure that they choose. The two most common are either partnerships or corporations.
A partnership is a simple business entity that involves more than one owner. Multiple partners can take varying partnership stakes in the business proportionate to their investment. Under 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 a 1040 if they are an individual or a Form 1120 if they are a corporation.
Partnerships can be structured in multiple ways. As such, partners may or may not have involvement in the management of the business. Partnership agreements will detail the full provisions of the business including minimum investments, fees, distributions, partner voting, and more. Some partnerships may 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 will source and identify deals then invest partner capital in accordance with the partnership agreement.
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 has made it much easier for both accredited and non-accredited investors to invest in real estate. Fundrise is one of the crowdfunding industry’s most popular real estate crowdfunding platforms offering investors the opportunity to invest in debt capital financing or take some equity in real estate properties.
Incorporating an entity as a corporation is always an option for any business. A corporation can be either public or private and does not need to be traded publicly to be considered a corporation. Public corporations are governed by the Securities and Exchange Commission (SEC) and the exchanges in which they trade on. Public companies must also provide regular, quarterly, transparent financial statement reporting. Private corporations are governed by SEC Regulation D. 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 will vary in value based on their public trading value. Private shares will be valued privately.
Corporations are managed by an executive management team. However, shares can be structured with differing voting rights which gives equity investors some say in the company’s overall management.