A real estate investment group can save you thousands or it can be a huge drag on your returns. In this post, I’ll show you how to start your own real estate investment club to get all the benefits without the costs. I’ll show you how to structure two types of groups and pick the one best for your needs. Then I’ll reveal three property investing strategies that will mean double-digit returns for your portfolio.
So those of you in the community know, I’m a big fan of real estate investing. It’s where I got my start as a commercial property analyst, I’ve managed my own rental properties and truly believe that everyone should have real estate in their portfolio. But that’s not to say I haven’t made some major mistakes that cost me a lot of money. Like the time I bought a house at the sheriff’s sale and then had to spend the better part of a year getting control of the property from squatters. Or all the times I lost months of rent because I didn’t do a full background check on tenants before letting them move in.
Now mistakes by beginner real estate investors is nothing new, it’s almost a rite of passage, but it doesn’t have to be the case. In fact, starting a real estate investment group may just save you tens of thousands and boost your property returns. We’ll talk about the two types of investment clubs you can use, how to structure it and find investors for your group. Then I’m going to reveal three real estate investing strategies you need to use with your group to not only protect your portfolio but also to increase returns.
So there’s two ways a real estate investment group can work, one formal where you put your money together and invest as part of a group, and another informal where you’re just exchanging ideas, learning together and help each other out. We’ll talk about both ways here including how to set up and structure that formal investment group so you don’t run into problems. Now do a search for local real estate investment clubs and you’ll get plenty of hits from private groups to those set up by the real estate investors association. The problem with these franchise groups is that most charge up to $100 a month on membership.
Basically they’re just schools or course programs with little real ‘group’ interaction and do the math. Even a $50 monthly club fee becomes a 2. 4% annual drag on return for a $25,000 portfolio. So look around your area for what’s available but I want you to consider starting your own club as well. Now I want to show you how to structure your group and find property investors to join but first I want to get your opinion on this. I want to do more real estate investing videos on the channel and want to know, which property types do you want to see analyzed, commercial or residential real estate?
I know residential rentals are hugely popular here on YouTube but I love commercial spacelike office, storage and retail for solid returns and less stress and this is actually going to tie in with one of those strategies I’ll reveal towards the end of the video. So which are you interested in seeing on the channel, analysis of rentals or commercial property. Just scroll down and let me know in the comments and why you like that specific property type better.
Structuring your real estate investment group, first you want to decide whether you’ll have that formal investing group or the informal group just exchanging information first. Usually what I suggest is starting with that informal group until you get to know some of the members and maybe create a formal sub-group with a few serious investors. That informal idea is basically just a once or twice-monthly meeting where you might have a learning piece, maybe a presentation by someone or you talk about a course everyone is taking. You can collect minimal dues to pay for speakers and group courses. The formal group where you’re pooling money to invest in projects needs to be done through a limited liability corporation or LLC.
This is where you’ll write up a corporate code, choose a name and get an EIN from the IRS. Now the business is going to be what’s called a pass-through so all the profits and expenses will pass through to the individual members and you won’t have to file corporate taxes. We’ll talk about who you want to have in your group, both for the informal and formal types, but it helps to have a real estate lawyer because you’re going to need to writeup these documents and have them reviewed before you file.
You need to spell out everyone’s responsibilities, their share in the profits and expenses, write out how the group will decide when to buy or sell a property and whether one person or a majority can force a sale. You want to set out how a fair price is determined for an investment, how the properties will be managed, how voting rights and meetings will be conducted, how much profits will be dispersed versus reinvested and finally when and under what terms will the LLC be dissolved.
The point here is you want to formally spell out the answer to any question before it comes up. That way everyone knows exactly how this thing is going to operate. You also need to set up a separate checking account for the business and use absolutely no funds from personal accounts. Only one person, the group Treasurer, should be responsible for handling all payments, investments and disbursements and only with a vote from the group. So yeah, this kind of formal group where you’re putting your money together is a big decision but it can mean some huge leverage.
You’ll not only be able to go after bigger deals but everyone is going to have a vested interest in driving success. And it’s not limited to real estate groups, some of the most successful investment houses got started as small limited liability groups, for example Warren Buffett and a small group of his family and friends in the 50s. Once you know how you want to structure your investment group, and again, I’d say start out with an informal Real Estate Investment Group and grow into the other. You’re ready to start looking for other investors to join. Understand you don’t need a big group.
Even five to ten active members is more than enough if you have the right roles but maybe you start with around 15 to account for people coming and going. Building a group really isn’t that tough. It starts with yourself and one or two others becoming champions for the project. Just three real estate investors, reaching out through your collective networks of contractors, attorneys and other investors can easily put together a group of ten or so enthusiastic members. You’ll want a formal application process that gathers background information and experience on candidates.
Check list to start a real estate investment group
This needs to include a criminal background check and can be paid out of an application fee or dues. You might also ask candidates to prepare a 10-minute presentation on what skills or experience they can bring to the group. It’s up to you who you let into the group but there are a few roles that are going to be extremely useful and you want to actively recruit. You want active investors as well as some people that are interested in investing in real estate but would rather play a passive role where they just put up the money but don’t have a role in management or development. You want some contractors, some people in the skilled trades or at least someone with some property development experience.
A real estate lawyer and an agent or two will also really come in handy. Now if you’re setting up a formal investment group, it’s also going to be important to spell out these roles as well as how people bill for their time. You can’t expect a real estate lawyer to spend as much time on the project as maybe a carpenter and still get the same share in the profits. Spell out when you’ll use each other’s services in the project and how to determine a fair price for billing. It can seem like a lot and it is to set up but I guarantee it’s worth it. After a first few tough years in real estate, I set up an informal group and it made all the difference in learning the ropes and being successful.
Now I want to share three real estate investing strategies you can try in your group or on your own. These three strategies are ones that a lot of investors don’t know about or just neglect but can mean a big boost to your bottom line. First is I want you to consider commercial properties. I know it usually costs more to get into commercial spaces like office, retail or hotel properties but these can be great additions to a residential portfolio or just by themselves. The return is similar and often higher and the grey-hair factor, that stress from running these commercial properties, is about a tenth what it is with rentals. For example, a common lease structure for commercial property is called triple net or NNN, where the tenant pays for all expenses, repairs and even taxes.
The property owner pays nothing, just sits back and waits for the check each month. The second strategy, and this is one I detailed in another video on seven ways to invest in real estate with no money, is called the lease option. One of the biggest headaches to rental properties is that tenants just don’t take care of your property. I had to rent a large U haul truck each time a tenant left or was evicted, and we’re not talking the pickup trucks. We’re talking the 15- and 17-foot trucks, I would rent it over the weekend, fill it up with all the trash and stained carpet and shit they’d leave behind, then unload it at the dump first thing Monday morning before getting to my day-job. With the lease option though, you help solve this by giving the tenant a reason to take care of the house.
How it works is, you rent the house out as a lease option or contract sale. You and the tenant agree on a purchase price and interest rate and they give you a down payment. The rest of the price is structured as a 15- or 30-year loan, financed by you and the tenant makes monthly payments. Most of these have five-year terms where the tenant has to refinance the remaining balance or pay off the loan. Not only do you get a tenant that takes care of the house like their own, but you can usually get a decent interest rate since you’re acting as the bank. Some of the houses will be paid off while others will come back to you, keeping the down payment and any money collected.
Our next strategy is to consider combining your direct ownership in property with some indirect investment through Real Estate Investment Group and crowdfunding. One of the most common mistakes new real estate investors make is putting all their money in the local market or in just one property type. This is hugely risky, not only for problems in that property type but for risks to the local economy. You wouldn’t put all your money in shares of just one company so why would you do it in real estate? Now most investors can’t afford to have 15 or 20 real estate investments in the different property types and across the country so the next best thing is getting that exposure through indirect investments like real estate investment trusts, REITs, and real estate crowdfunding.
REITs are real estate companies set up to manage commercial property and pay out the majority of profits as dividends. Real estate crowdfunding is similar but has a few advantages in the differences like lower cost structure and transparency.