Some mistake real estate investment trusts (REITs) for real estate investment groups (REIGs). However, there is a difference between the two. This guide focuses on REIGs. Read on to learn what they are and how they work.
Understanding Real Estate Investment Groups
REIGs are businesses that focus solely on investing in real estate. They can acquire, renovate, or sell properties. In most cases, REIGs purchase multi-unit properties and then sell single units to interested investors. After selling the units, the REIGs become responsible for maintaining the properties.
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A REIG usually comprises numerous private shareholders or partners who pool their funds together to invest in real estate. It is worth mentioning that some REIGs provide property financing services to investors, thus expanding their revenue streams.
The Structure of a REIG
A real estate investment group can have any type of business structure. Here are the most common ones:
Partnership
A REIG with a partnership business structure means it is owned by at least two individuals who share debts, profits, and losses based on their investment amount. In the United States, partnerships aren’t taxed. Instead, partners receiving the generated income are required to report their earnings on K-1 forms.
Partners in REIGs don’t have to be active managers of the business. That means they can appoint a few executives to oversee daily operations. These executives are also tasked with identifying investment opportunities and informing the partners.
Corporation
A REIG can be a corporation, private or public. If public, the REIG must release financial statements periodically. Unlike partnerships, corporations are taxed in the United States.
Incorporating a REIG enables the firm to sell its shares to investors. The value of Shares of a public corporation is determined by market forces, while share prices of private corporations are set by company owners.
It is important to mention that some shares come with voting rights, allowing investors to participate in the decision-making process of a REIG.
Crowdfunding
Some crowdfunding platforms that focus on real estate operate as REIGs. The generated income is distributed to participating investors proportionally. Crowdfunding platforms have made it easier for all investors, accredited and non-accredited, to enter the real estate market. Fundrise is one of the popular crowdfunding platforms operating as a REIG. It uses the pooled capital to buy shares of profitable real estate companies.
Pros and Cons of REIGs
Pros
- REIGs offer a convenient way for investors to invest and earn passively from real estate investments.
- REIGs’ investments are low risk, thus shielding investors against extreme market volatility.
Cons
- It is impossible to access your funds immediately. This limits your liquidity.
- Some REIGs charge various fees, which can be costly.
REITs vs. REIGs
Structure: A REIT is a publicly traded company that owns income-generating properties, while a REIG is a firm that pools funds from various investors to invest in real estate.
Operation: If an investor buys a property from a REIG, they become a group member. REIT, on the other hand, only allows investors to buy the company shares.
Returns: In a REIT, shareholders receive income without any deductions, while investors in a REIG earn income after the firm takes out some operational fees.
Risks: The primary risk associated with REITs is the value fluctuation of equity investment. While in REIGs, the major risk is poor management, which can lead the companies to record massive losses.
Where Can You Find REIGs?
The National Real Estate Investors Association is among the recommended platforms for finding your ideal REIG. You can also search for REIGs on the LinkedIn social networking site.
How Much is Required to Join a REIG?
REIGs have set different investment amounts that investors must pay to be part of the group. The amounts usually range between $5,000 and $100,000.
What to Look for in REIGs
Before joining a REIG, there are certain aspects you should consider. For example, it is important to check the company’s track record to ensure it invests in successful projects.