How to form a real estate investment group

by Corben Grant on 09 Mar 2022

Generally, the world of real estate investment and the world of real estate business are two different things. While investors may own property to grow wealth, a lot of the work in the transaction and management of these properties is often done with the help of industry professionals like mortgage brokers, real estate agents, and property managers. And, while many brokers and agents are investors themselves, this is not at all a requirement to be an investor.

There is an area where the world of real estate investing intersects directly with the real estate industry and this is in real estate investment groups. While these groups are used for the purpose of real estate investments, they still operate much more like a real estate business with their own employees, structures, and operations. Real estate investment groups are a way for individual investors to use their money as part of a larger project, pooling it with other investors to create a larger portfolio than could be achieved on their own.

However, these groups are also far from an informal deal to split an investment with a friend. Let's look at what a real estate investment group is, how it can benefit you, and how you can start an investment group of your own.

What are real estate investment groups?

Real estate investment groups, sometimes called real estate investing clubs, are a business that focuses on deriving profits from real estate-related operations. These operations can include several different options such as building, buying, selling properties, renting out a property, flipping homes, financing mortgages, and more. The organization will hold a real estate portfolio of investment properties as well as a pool of investor capital that they use to create returns for shareholders.

The money for a real estate investment group comes from the shareholders who are then paid returns based on their contributions. Because these groups are comprised of investors looking for the best ways to grow their money and lack any specific rules on how they must be run, they have a lot of flexibility in terms of the kinds of business they wish to undertake, which can mean each group can vary a lot in its operations, goals, size, and portfolio.

Investment groups can include a wide range of members with many different skill sets such as investors, real estate professionals, contractors, lawyers, and more.

Advantages of a real estate investment group

One of the main advantages of real estate investing groups is the access to a large base of money and the ability to invest in many different projects.

For example, some investment groups will buy and then lease large rental buildings. For an individual investor, this presents some barriers. Firstly in the large costs involved, but also in the hard work of actually managing such a property. By utilizing an investment group, these sorts of investments can be done with much less hassle for the investors.

There is also the benefit that the group can focus on multiple different revenue streams, allowing for more stable profits and leverage opportunities.

Another benefit is the group of investors themselves. With a large enough group of qualified investors, there is a lot of knowledge and experience to draw on, which can help the real estate investment group make even better decisions in how their money should be used.

Real estate investment groups (REIGs) vs. REITs

A real estate investment group may sound similar to a real estate investment trust, but they should not be thought of as the same thing.

One major difference is that a real estate investment trust is more regulated than an REIG and is required to abide by certain practices and distribution schemes. On the other hand, it benefits from the freedom to operate how its shareholders see fit within the bounds of the law.

The most popular REITs are publically traded on the open market. This means anyone can get in easily, but it also means that they are subject to market fluctuations and must work hard to please their many shareholders.

In contrast, real estate investment groups are not traded in this way and operate as private entities. They will not be as susceptible to stock market fluctuations and can focus more on long-term investment strategies if they see fit.

Why should I start a real estate investment group?

Hopefully, it should be clear up to this point why real estate investment groups are an appealing option for investors looking to grow their money in real estate. If you are interested in this approach to investing, you essentially have two options: to join an existing real estate investment group or to start your very own real estate investment group. Naturally, each of these options has its benefits.

Joining an existing real estate investment group

The benefit of joining an existing real estate investment group would be that it can be a more reliable and simple investment.

If you choose an existing investment group, you can learn a bit about the management and historical performance of the group before you buy in. Past performance and the stated goals of the fund, as well as some knowledge about its management, can give you a lot more confidence about how you can expect it to perform in the future.

The other benefit would be that you simply don't need to do all the work in establishing your own group and can simply get on board with one that already exists. An established group will have existing systems in place to utilize your money quickly and easily with little effort on your part.

Benefits of starting your own investment group

The benefits of starting your own investment group include choosing your partners, deciding on your own investment strategy and discovering opportunities for higher growth.

For one, when you begin you will need to find like-minded investors who are willing to work with you. After all, one person is not a group. By choosing your investor group, you can be confident in a team of people who are like-minded and can bring great ideas to the table. You will also have a lot more control over your own group as opposed to joining an existing one. In addition to choosing the starting direction and goals of your group, founding members also tend to be some of the largest investors, meaning you will have more say in the management of the group.

The large initial investment also means that you can see significant returns. You will have a higher starting capital to work with, and as your group grows its portfolio, you will be benefiting from the growth from day one.

But, there are some risks involved in starting your own real estate investment group. For one, operating an organization such as this is a skill in itself, and as an investor, you will need to do a lot of research to make sure you understand the ins and outs of operating such a business and the legal and tax obligations it may entail.

You also do not have the luxury of seeing past returns and will have to start from ground zero and have confidence in the team you have built and their ability to generate returns.

Where to start

Before you start on the path of founding your own real estate investment group, you need to do thorough research so you know what to expect along the way. Look around within your network, or reach out to existing real estate investment groups to see if you can learn directly from those who have experience in what it takes to be successful. If it is your very first time working with such a group, it may be worth getting involved with an existing group on the management side to learn a bit about how it all works.

Deciding on your goals

You should also do some thinking about your own goals for the project. What sorts of investments do you want to work with? How large would you like your fund to be and how many members are involved? How much money do you want each to put in and what sort of returns are you aiming for? By having these plans in mind from the get-go, you will be in a much better place to begin planning and strategizing your investment strategy.

Once you know where you want to invest your group's money, you should conduct in-depth real estate market research in order to determine the most viable options within your scope.

Finding initial partners

You will also need to find members to work with when beginning your real estate investment group. When looking for partners, you should look for others who have similar goals and expectations as you and who have enough money to contribute. The amount of money that you need to start off with will largely be based on where you want to invest and how many people you intend to bring on board.

Once you have your goals and members in mind, you should think a bit about how your group will operate. This can include how decisions are made, who makes them, and rules for how members can join the group. As your portfolio grows, it will be crucial to have a qualified management team who can direct the operations of the group to make sure it’s successful. Don’t neglect to form a great management team as early as possible.

Growing and marketing your group

Finally, once your real estate investment business is up and running you will want to focus on growth. Naturally, with investments, your money should grow on its own based on your operations, but in order for your group to really succeed, you should begin looking for investors to further expand your group.

With more and more money from new investors, you will be able to invest in bigger and larger projects and be able to leverage and grow even further. To begin marketing to investors you need to be able to reach them. Consider forming a marketing plan to attract new members. Marketing strategies such as social media, content, blogs, articles and email campaigns can go a long way to help attract members to your fund.

Generally, new members will be required to meet a certain threshold for initial investment, sometimes a direct dollar and amount, and in other cases, through a purchase such as a condo unit in a property owned by the group. Knowing what initial investment you expect can help you market yourself to a specific target.

Conclusion

A real estate investment group can be an effective way for investors to grow their money by pooling their funds into an organization that spends it on larger projects. By choosing to invest in a real estate investment group, you can easily have access to the growth and management of the group and see returns on your investment.

However, you may decide you want to form your own real estate investment group which offers a lot of flexibility and the potential for even greater gains. This process may be complex and will require the help of other investors, but can be well worth it when done right.

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