Investing in real estate is a big decision. The outcome can go in a lot of different directions, some of which are not all that positive or reassuring. Those new to the realm of real estate investing may wonder, “Is there no way to ease yourself into the process of becoming a real estate investor?” The good news is, there most definitely is. Real Estate Investment Groups, commonly called REIGs, can be just the solution for new investors.
Stemming from this, those who wish to invest in real estate but do not have a large amount of capital to put into it can also benefit from real estate investment groups. REIGs go a long way in minimizing the responsibilities and anxieties that come with direct investments. They can yield some pretty competitive returns without most of the demands that come with direct real estate investing.
Moreover, if you have been considering investing through a REIG instead of going the traditional investment route, here is everything that you need to know before you make your decision.
What are Real Estate Investment Groups: An Overview
Before you decide to invest through a real estate investment group, it is important to understand what it is and how it functions. In essence, an REIG is a group of private investors that focuses its efforts and resources primarily on investing in real estate. Funds are pooled between the private shareholders who are part of the REIG making for a large enough capital that can be invested in larger projects. Such businesses are typically a private agreement; they are not regulated or overseen by any government agency as such.
Being a private agreement, therefore, real estate investment groups vary greatly in the way they are structured, their investment strategies, their administration and regulations, and the way in which they provide returns to their member investors. A REIG may build or acquire a large multi-unit property, like an apartment complex or a condominium, and sell single units to each of its shareholders. In accumulation of this, it may fix and flip properties, invest in commercial real estate instead of residential ones, create or hold loan notes for properties, or rehab and rent properties.
The administrative and maintenance duties of the properties acquired by a real estate investment group lie with the group as a whole, a lead person, or a board of members. Either way, private investors do not have to take sole responsibility for managing the assets. This takes a lot of the stress out of the investment process. Also, since funds are pooled between multiple investors, you can receive returns from one or more properties without having to get financing or tying up too much cash. REIGs also allow investors to branch out and invest in a number of property types, exponentially increasing profit.
How is Investing Through REIGs Different from Direct Investment?
While direct real estate investments are the traditional way to go, they are not necessarily the right path for everyone. Direct investment comes with a host of liabilities. Since you are directly investing in a property or a stake within one, responsibilities such as maintaining and managing the property or accident liability fall directly with you. Besides, going the direct investment route takes up a lot of capital, often allowing investors to invest only in a single property at a time.
Investing through REIGs, on the other hand, does not require investors to be as involved with their assets. Management and maintenance duties are typically overseen by the group as a whole, taking a lot of the pressure out of the demanding process that real estate investment can be. Most importantly, REIGs allow investors to cover a broad range of property types and diversify their property investment portfolios. This makes for significantly better return potential and losses incurred due to real estate crashes or economic downturns become less significant.
Moreover, if you are looking for greater tax benefits and want to retain complete control over all the decision-making related to your assets, direct real estate investment would be the right fit for you. Taking this into account, if you wish to reap the profits of real estate investment without the overwhelming responsibility of having to manage your assets, investing through an REIG would be the right call.
Who Should Invest Through an REIG?
Besides budding investors who are looking to gain experience and knowledge in real estate investing or those who do not have too much capital or resources to spare, REIGs are also ideal for investors with a high net worth. Investors of this type generally cannot afford to dedicate much of their time and efforts to their assets. As such, investing through a REIG is a salient solution for them.
Private investors who are looking to manage rental properties or are interested in flipping properties can also benefit from investing through a real estate investment group. Since the company takes care of all administrative responsibilities, there is no need for the investor to solely attend to a single property at a time.
REIGs vs. REITs: The Differences
Despite their apparent similarities, real estate investment groups are very different from real estate investment trusts (REITs). Both REIGs and REITs have a multi-partnership structure that functions by pooling funds between private investors. The majority of these funds are then invested in real estate.
With that said, REITs are essentially taxable corporations that operate like any other large organization. They are run by a board of directors and have a strict set of regulations and qualifications. For instance, it’s mandatory for a REIT to have at least a hundred investors within one year of its formation. In the case of a REIG, however, there are no such restrictions or thresholds. A REIG is not a taxable corporation and is not overseen by any government agency or other regulatory body. Based on this, it’s pretty flexible in terms of structure, strategies, goals, and regulations.
Advantages and Disadvantages of REIGs
Just like direct real estate investments, investing through a real estate investment group does not come without risks. Before investing through one, it would be judicious to weigh the risks against the rewards and see whether or not it’s a notable fit for your profile.
- Pooled capital and resources allow private investors to invest in large projects.
- Newer investors can leverage the combined knowledge and experience of the group and learn about the ins and outs of real estate investing.
- Individual investors are not overwhelmed by the management and administrative responsibilities of their assets; the REIG takes care of it collectively.
- Investors get the opportunity to diversify their real estate investment portfolio by investing in several different property types at a time.
- REIG membership fees can often reduce your own profit.
- Since REIGs are not overseen by any regulatory body, the risk of dubious motives or mismanagement is high.
- Differences of opinion or clash of goals may lead to disagreements within the group.
Your Future, Your Decision
A real estate investment group can yield fantastic profits in the long term provided that you choose the right one. Before you choose a REIG, ask yourself the following questions—are your goals in alignment? Do the group’s expectations generally align with their performance? Does the group’s risk tolerance reflect your own? Does it allow you to access your funds easily? Asking these questions could help you find a REIG whose investment practices are in alignment with yours so that you have a smooth real estate investing experience.