A real estate investment group (REIG) is a business that concentrates much 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 multiunit properties, sell units to investors, and take over administration and maintenance of the property. REIGs either do not elect to be or qualify as a real estate investment trust (REIT).
Key Takeaways
- A real estate investment group (REIG) is an entity with two or more partners focusing on real estate.
- In a typical real estate investment group, a company buys or builds a set of apartment blocks or condos and sells them to others through the company.
- REIGs do not qualify as REITs and are not subject to their rules.
- REIGs can be structured in many ways, though most are organized as partnerships that pass through income reported on K-1 tax documents.
- A benefit of REIGs is pooling capital for investment.
Understanding REIGs
REIGs have several partners or private shareholders. These investors provide a pool of capital and a greater ability to invest more broadly. REIGs focus much of their business on real estate, but they are not subject to rules that require them to invest only in properties. As such, they can structure their business in several ways or take up other opportunities that align with their business strategy.
Thus, REIGs may engage in property financing, flipping properties, leasing properties to clients or property management companies for rental income, or selling units while maintaining management control. In general, there are no limits on the activities of a REIG, though most will market themselves as such to make it easier for investors to identify them.
The goal of a REIG is to have monthly cash flows from investing in real estate.
REIG Investing
Investing in real estate is attractive since it offers several ways of gaining returns. REIGs may buy stakes in apartment buildings, rental homes, commercial buildings, or commercial units. They may earn income from mortgage lending, rental properties, or property management fees. REIGs often appeal to high-net-worth investors who want to gain a stake in real estate but do not wish to manage the properties themselves.
REIGs also draw investors who manage single rental properties independently or are interested in flipping houses. The REIG allows the investor to buy one or more properties through an operating company. The operating company collectively manages all the units and takes care of marketing them. In exchange, the operating company takes a percentage of the monthly rent.
Diversification might help prevent significant losses during economic downturns and soft real estate markets.
One of the advantages of REIGs is the pooled capital they receive as a partnership or corporate entity. REIG partners typically put up more cash initially than other real estate investments but will often see greater returns.
The Structure of REIGs
REIGs and REITs are acronyms too often used interchangeably despite their differences. REITs, established by Congress in 1960, create financial statements, follow specific tax laws, and must provide 90% of their profits as dividends each year. REIGs, meanwhile, can have any business structure, though the most common are partnerships and corporations.
Partnership
A partnership is a business owned by two or more people who share profits, losses, and debts. Partners take stakes in the business proportional to their investment. Under the U.S. tax code, partnerships are not taxed. Rather, the income to partnerships passes to the partners who report the income on K-1 forms. Partners receiving a K-1 must individually file their partnership income on Form 1040 if they are individuals or on Form 1120 for a corporation.
Partners in a REIG need not take part in managing the business. Partnership agreements detail the minimum investments, fees, distributions, and partner voting. Some partnerships have a collaborative structure for investment decisions, while others leave the core management of the business to a few executives. Generally, the management team sources and identifies deals before investing partner capital.
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 shared or co-owned property.
Corporation
Forming a corporation, public or private, is an option for any business. The Securities and Exchange Commission (SEC) governs public corporations, while SEC Regulation D covers private corporations. Public companies must provide quarterly, transparent financial statements. Any businesses 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 part of the company’s total value. Public equity shares vary in value based on public trading. Alternatively, private shares are valued by their owners.
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 operate as a REIG. 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 speculate in real estate. Thebest real estate crowdfunding sitescan help you diversify your portfolio and offer opportunities for competitive returns, though such investments also carry greater risk than alternatives.
Fundrise is a popular real estate crowdfunding platform that offers people the opportunity to invest in debt capital financing or take equity in real estate properties.
Advantages and Disadvantages of REIGs
Real estate investment groups diversify their investments to maximize profits. Pooled resources allow for several investments, often generating larger returns.
When run by experienced professionals, the group's investments can be diversified well enough to lower risk and react to market volatility. REIGs also benefit from having few limits on what they can engage in and how they operate.
REIGs often have formal agreements stipulating when and how members can access their money. If you want to withdraw from the group, you may not recoup your investment or share of the profits immediately, thus greatly limiting your liquidity.
REIGs also can have 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 depends on the people who make the decisions. The risk may greatly outweigh any rewards if managed by unskilled and inexperienced people.
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
REIGs and REITS are both vehicles for investing in real estate, but they have different structures and operating methods. REITs are generally more liquid than REIGs because they are traded on major stock exchanges, while REIGs could require a longer capital commitment since they involve direct investment in physical properties.
Another key difference involves their management. REIGs may offer more direct control over investment decisions, while REITS are managed by a professional team that makes all investment decisions. Also, REITs are highly regulated and must follow SEC regulations, including disclosing financials and providing 90% of profits as dividends, while REIGs are subject to fewer regulations.
Finally, REIGs often require a higher minimum investment than REITs, which can be purchased through single shares. You should analyze the performance and trends of respective REIGs and REITs to better understand these vehicles, especially in light of evolving market conditions and the regulatory environment.
REIGs vs. REITs
REIGs
Structure: REIGs are companies that invest in real estate by pooling together capital from several investors.
Operation: In a typical REIG, an investor purchases a property through the group and becomes a part of the group.
Returns and risks: Investors typically receive income from the property's rental revenue, after operational expenses and fees managed by the REIG are taken out. The risks could be high if the management team is not experienced or the properties do not perform well.
REITs
Structure: REITs are often publicly traded companies that own, operate, or finance income-producing real estate across a range of property sectors.
Operation: Investors can buy shares in the REIT, and the REIT uses the pooled capital to invest in properties or mortgages.
Returns and risks: Shares of a REIT earn income without having to buy, manage, or finance property. The risks are like those associated with any equity investment, including loss of principal and fluctuation of value.
Where Can I Find REIGs?
Search online for real estate investment groups or connect with investors via social networking sites and interest groups, such as LinkedIn or the National Real Estate Investors Association. As a beginner, it might be beneficial to join a local real estate group to become more closely connected with other investors and to stay informed on regional activities.
How Can I Join a REIG?
You can join a REIG or start your own. Professional networking groups and websites, such as LinkedIn or the National Real Estate Investors Association, are good starting points. Joining a group may be as simple as signing an agreement and paying dues.
How Much Money Do I Need to Join a REIG?
The amount of money you need largely depends on the group. REIGs often have bylaws which each member must follow. Each group sets its capital requirements and fees, which could be due annually or more frequently. Minimum investments often range from $5,000 to $50,000.
What Should I Look for in a REIG?
When evaluating a REIG, several key characteristics should be considered to determine investment strategy. You should look for a group with a proven track record of successful real estate investments. Also, a reliable REIG should be transparent about their business operations, investment strategies, property acquisitions, and financial performance.
Evaluate the experience and expertise of the management team. You should review the financial statements of the REIG to assess its financial stability and performance. Finally, regulatory compliance is important. You should see that the REIG follows all relevant regulations and has not been subject to disciplinary actions.
How Do You Start a REIG?
Before starting, do thorough research and make sure it's feasible for you. 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—including 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.
The Bottom Line
Investing in real estate can be lucrative but may be difficult on your own. REIGs provide opportunities to speculate in real estate without bearing the commitment alone and being the solefunding sources. If you want to join a REIG, conduct thorough research to identify a group closely aligned with your goals.
