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 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 multi-unit properties, selling units to investors while taking responsibility for administration and maintenance of the property.
Typically, real estate investment groups either do not elect or do not qualify to be a real estate investment trust (REIT).
Key Takeaways
- 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 flexibility to structure their business in several ways, and they can make real estate investments as desired.
Also, real estate investment groups may engage in other business activities such as property financing, flipping properties, leasing properties to clients or property management companies for a portion of rental income, or selling 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.
REIG Investing
Investment real estate can be attractive because of its multi-dimensional return potential. REIGs seek to take advantage of a multitude of investing opportunities by creating a portfolio of property investments.
In general, several ways exist for REIGs to produce returns. They 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 might help prevent significant losses during economic downturns and real estate crashes.
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. REIG partners typically must put up more cash as an initial investment than other real estate investment opportunities; however, they typically see greater returns.
REIG Structuring
Real estate investment groups (REIGs) and real estate investment trusts (REITs) are often used interchangeably despite their different meanings. REITs, established by Congress in 1960, create financial statements and follow 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.
Partnership
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 employ a 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.
Some real estate investment partnerships accept investments from $5,000 to $50,000. While that may not be enough to purchase a unit, the partnership might pool money from several investors to fund a property that is shared and co-owned.
Corporation
Forming a corporation, public or private, is an option for any business. The Securities and Exchange Commission (SEC) governs public corporations, whereas SEC Regulation D governs private corporations. 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.
Crowdfunding
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. Fundrise 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.
Pros
Unrestricted investment opportunities
Pooled capital for ventures
Diversified portfolio for maximum profits
Cons
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
Areal 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 liquidbecause 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.
