Start your own real estate investment group to benefit from investor expertise and save money investing
Few investments have created as much legacy wealth as real estate but few investors have the experience to know how to find the best properties. A real estate investment group can help bridge the gap for individual investors and solve some of the biggest hurdles.
I started investing in real estate in my early 20s, mostly in single-family houses but also through my job as a commercial real estate agent. I had to learn everything about real estate investing the hard way…often at a pretty high cost.
The problem for many investors is that real estate investing groups can charge monthly fees up to $100 which eats away at any return on the investment.
It’s easier than you think to start your own real estate investment club, benefiting from the power of the group but saving money in the process.
Through this post, I’m going to show you how to start your own real estate investment group and how to find the best deals. It’s a long article but you’ll learn everything you need from how to analyze real estate deals to spreading your risk across different properties.
What is a Real Estate Investment Group?
People spend their lives learning how to analyze and negotiate real estate deals. Real estate investment is no different than stock investing or any other opportunity with huge returns with a whole industry of analysts competing for deals.
So how are regular people like you or me supposed to compete? How do we find the best deals and put together a real estate portfolio with a chance to succeed?
The answer is by forming a real estate investment group with other investors. There’s different forms your investment club can take from actually pooling your money to just talking about how to find property. The common bond in all real estate investing groups is that you help each other compete against the big money players to get the best returns.
Real estate investment groups benefit by bringing together different people that can all bring their expertise including investment analysts, accountants, lawyers, negotiating and closing specialists, and contractors.
Real estate investment clubs used to be exclusively in-person, a group of five or ten investors getting together each month. With social media and the internet, there are just as many groups formed online as live groups.
While there are options to join existing real estate investor groups, there are a few important reasons you may want to start your own.
Starting Your Own Real Estate Investment Club
Most of the real estate sites you will find online are for-profit group tools, selling useless products and information to private real estate investment clubs. How it works is you do all the work, finding other real estate investors in your area and you pay monthly dues to the membership site. They provide some tools and material but nothing you can’t find online for free.
It’s much better to start your own real estate investment club. First, the for-profit membership groups really don’t provide anything but organization. You can find all the information online and for free. With five or more people in your real estate group, it really won’t even take that much for each person to find a couple of information resources.
Do the math and it just makes sense for most investors to start their own informal real estate investment group rather than pay dues to an existing club. Most clubs charge around $50 a month which adds up to $600 a year and a drag of 2.4% on a portfolio of $25,000 in real estate.
I’ll list a few of my favorite real estate resources here and how I started my own real estate investment group. Scroll down through the rest of the post for a step-by-step on real estate investment analysis, finding properties, real estate strategies and how to avoid the biggest problems.
RealtyShares – there are quite a few real estate crowdfunding and investing websites, detailed in the next sections. I like RealtyShares because of its size, with more than $200 million in real estate projects funded on more than 400 deals as of September 2016. Its free to sign up and the real estate crowdfunding platform allows investors to diversify their portfolios via professionally-vetted real estate investments for as little as $5,000 in each.
National REIA – The National Real Estate Investors Association is about the only real estate group resource that I recommend. It’s a non-profit organization made up of investment clubs around the country so it’s still going to try charging membership. You might be able to use it to find other people in your area and then form your own group without paying dues.
Craigslist – This is still one of the easiest and free ways to find other investors interested in starting a club. You can also post something at the local library or contact commercial real estate companies in your area to get connected with known investors.
REIT.com is the national organization promoting real estate investment trusts (REITs). It’s obviously biased to REITs rather than direct ownership or real estate crowdfunding but still a good source for information on real estate investing and trends.
Amazon Real Estate Category – you can get real estate books on Kindle for just a few dollars, saving hundreds versus paying expensive monthly dues to real estate investment clubs. Read through a couple of books with your real estate club and you’ll have everything you need to get started.
There is one type of real estate investing you won’t find much information about from the traditional sources. It’s because the big players in real estate; the lawyers, property brokers and other middle-men don’t want you to find it. It’s called real estate crowdfunding and it’s putting the power to build a real estate empire in your hands.
What is Real Estate Crowdfunding?
Crowdfunding can be broken into two types: rewards-based and equity crowdfunding. Rewards-based crowdfunding on websites like Kickstarter might give you prizes for your support of a campaign but you get no ongoing investment. Equity crowdfunding is where you actually get an ownership or bond on the company.
The collapse of the real estate market in 2008 took a lot of banks out of real estate investing. Even though few assets are as stable, banks just aren’t lending to real estate developers like in the past.
Enter real estate crowdfunding.
Real estate crowdfunding is a type of equity crowdfunding. You are either loaning a real estate developer money or investing in their project. You get a legal ownership of the property and returns, usually on a monthly or quarterly basis.
The new source of funds have been a huge relief to developers and are getting individual investors in on great returns that used to be only accessible to the wealthy.
The way real estate crowdfunding works is that you sign up as an investor on portals like RealtyShares and link your bank account. The portal does a lot of the initial legwork for you and only 5% of the applications for funding ever make it to the site. The platform checks the developer’s track record and financial documents as well as checks on the property before it lists deals on the site.
There are several benefits to real estate crowdfunding versus traditional real estate investing:
- Invest as little as a few thousand in each property. You don’t need to be a millionaire to invest in several different properties or go into debt on real estate loans.
- Invest in many different property types and locations to spread your risk. That means your wealth doesn’t evaporate if one property or location crumbles.
- All the expertise and assistance of the real estate crowdfunding portal without having to sign risky partnership agreements with funding partners or builders.
Click to Get started on RealtyShares – Free to open an account and browse properties
Real Estate Investment Strategies for Your Group
Before you start investing in real estate, it will help to understand the strategies that will reduce your risk and increase return. As with most investments, success is all about diversification.
With real estate, you get different types of diversification in property type, location and with debt or equity investments.
- Debt versus equity investments
- Real estate in different cities and regions
- Different property types including residential, office, retail, industrial and storage
Your real estate investment group can help decide where and how you want to invest. It’s a good idea to invest in properties across at least a few different cities. They say real estate is about location, location, location and where you invest can mean a big difference in return. Investing in a few different cities makes sure you benefit from economic growth across the country.
You can invest in real estate loans as well as take an equity ownership in properties. Debt investments offer more security because it’s a lien against the property with a set rate of return. Equity investments are riskier but offer more upside return on price appreciation.
The mix of debt and equity in your portfolio is largely a matter of your age and how much risk you can tolerate in investments but I would recommend around 65% equity and 35% debt for most investors with a decade or more to retirement.
One of the best uses of a real estate investment group is the ability to get together investors that know more about specific types of real estate. Types of property can include raw land, single-family or multi-family residential, office, retail, lodging and industrial. Each type of property has different return and risk characteristics and it’s really helpful to have an expert in each within your real estate club.
The majority of deals listed on RealtyShares have been residential properties, split between equity and debt deals. This is pretty common across most real estate crowdfunding portals because residential developers have had the hardest time getting bank loans. There are still opportunities to find commercial properties on RealtyShares for diversification.
Finding Investment Property for Sale on RealtyShares
Finding real estate investment property alone will take weeks of online searching, site visits and negotiation. I used to spend a couple hours a week talking to different real estate agents and brokers just sourcing deals.
The internet and real estate crowdfunding has made the process a lot easier. I would suggest assigning each person in your real estate investment group a different website to follow for deals unless they have another specific talent like legal or investment analysis.
On RealtyShares, you find the investment offers by clicking ‘Explore Investments’. Investments are either Preferred Equity, Equity or Debt.
Each investment offers detailed information on the property, financials, a market summary, overview and management as well as a download of documents. Most investments come with all the analysis you’ll need to make your decision but make sure you back it up with some of your own research.
How to Do Real Estate Investment Analysis
I started after college as a commercial real estate analyst and still do freelance analysis for a few property developers. Finding good real estate investments isn’t like researching stocks but that’s a good thing.
Where investors scramble for a couple percent extra return on stocks versus the market, put together a solid process for real estate investment analysis and you can easily make double-digit returns each year.
Direct real estate investment is far from a passive income strategy though it can be a great business and can boost your returns through sweat equity. Investing indirectly in REITs removes a lot of the management hassles but also reduces the returns. Investing in crowdfunding real estate can be a happy medium with great returns but managed properties.
Real estate analysis starts with researching the market, the city or region where the property is located. A lot of this is going to be included in the investment proposal on real estate crowdfunding sites but make sure you double-check the numbers.
- What are the growth factors for the property? For residential, this will be things like population growth and employment. For commercial property, it could be factors like retail sales growth and employment in related industries.
- How much building has been completed or planned over the last five years compared to longer-term averages? This is extremely important because real estate developers love to overbuild when times are good only to see vacancy rates jump years later.
- How fast have prices for different property types increased over the last few years?
- What percentage of personal or commercial loans have defaulted over the last few years compared to long-term averages? Loan defaults tend to start rising before a market crash and are a great signal to investors.
Once you’ve found a couple of good markets for investment, you can start looking at individual property. Again, most real estate crowdfunding deals will have detailed analysis in the documents but someone in your real estate investment group should be tasked with checking the numbers.
At minimum, start with an estimate of rental income over the next three to five years. Are the developer’s estimates for vacancy and lease losses similar to your market research?
Expenses can range from 20% to 70% on real estate depending on the type of lease with tenants. If tenants pay what’s called a triple-net lease, meaning they pay almost all expenses, then costs for the developer and investors will be much lower but the rent collected won’t be as high.
Non-cash aspects of real estate investment can be some of the most important aspects of your analysis. Depreciation is a huge benefit for real estate because it reduces the amount of taxes paid on rental income. You also want to account for a maintenance reserve by setting aside money each year.
The most important measure in real estate investing is Funds from Operations (FFO). It will help you understand the cash generating potential and make sure you aren’t paying too much for a property.
FFO is found by reducing your rent by all cash expenses but adding back any depreciation you deducted for tax purposes. You also need to deduct interest income and gains or losses on sales if you are analyzing a portfolio of properties.
You can also use the adjusted FFO by deducting maintenance reserves and any rent paid but not earned yet.
With the FFO or AFFO, you can compare the price of an investment property against other deals. For example, a property priced at $3 million and producing $300,000 annually would be 10-times FFO. It’s an important measure of value for real estate investing.
You can use the FFO measure even if you are investing indirectly through real estate crowdfunding. Measure the price-FFO the developer is expecting to pay on the property or on the complete development to see if they are getting a good deal. A developer in over their head and paying too much for properties isn’t someone with whom you want to invest.
How to Invest in Real Estate on RealtyShares
RealtyShares has a thorough screening process for investments on the site. A developer must first pass checks on financial strength, expertise and their track record for making a property profitable.
The real estate crowdfunding portal then goes through a detailed underwriting process to look at the specific property. They review the investment strategy, legal ownership of the address and property condition.
This level of analysis means that only 5% of the real estate deals submitted to RealtyShares ever make it to funding. Once a property passes through the funnel, it is listed on the portal where investors can do their own analysis and decide if they want to invest.
There are dozens of properties available on the different crowdfunding sites, more than one investor may be able to look at every month. This is where your real estate investment group comes in handy. Each person in the investment club may be assigned a different website to watch deals or a different part of the analysis to limit the burden on any one investor.
Investment deals on the site range from short-term (18 months) to several years and can include either debt or equity investment. The annual interest rate is provided for debt investments while a projected return is provided on equity deals.
Returns vary by type of deal and time horizon. Do your own analysis though because these rates of return are not set in stone and could change. Almost all deals allow the developer to extend the time on the investment.
Investors pledge to invest as much as they like on a property. Once a property is fully-funded, RealtyShares creates a limited liability corporation (LLC) that gives each investor a direct ownership in the property but limits their personal liability. That means any lawsuits against the property or developer can’t come back to investors, a huge benefit provided by the real estate crowdfunding portal.
Until this year, real estate crowdfunding was only available to accredited investors with household income over $200,000 annually or $1 million in net worth. That all changed when the SEC revised rules around the JOBS Act and now regular investors are getting in on the opportunity. RealtyShares is still restricted to accredited investors but may open investment up to non-accredited investors eventually. The opportunity for both real estate developers and investors is just too great to keep anyone out for long.
Opening an account on RealtyShares takes less than a few minutes and is completely free. You won’t need to enter your bank account information unless you decide to invest but it helps to be ready if an investment comes along.
- Create an account with your email, password and contact information.
- Complete the accredited investor questionnaire by checking either the box for net worth or income. You won’t be able to see investments unless you complete this section.
- Enter your bank account number and routing number.
- Verify your email address to start the account.
After opening the account, you can see all the detail on each real estate offer by clicking ‘Explore Investments’. If you want to start investing immediately, you’ll need to complete a suitability questionnaire. Otherwise you’ll have to wait 30-days before investing.
This is why I recommend opening an account now even if you’re not ready to invest yet so that the 30-day ‘cooling-off period’ can pass before you’re ready.
Understand that RealtyShares charges an investor fee of 1% on the invested amount to pay for all the due diligence work they do on each deal. The portal also charges a servicing fee on real estate debt deals but not on equity deals.
How to Find Real Estate Investors Near Me
The internet is a huge resource for real estate investors but most miss out on the real benefits. Instead of confining yourself to just one local real estate investment group, join a few different online clubs with people in the real estate markets where you want to invest.
This is going to get you real, ground-level experience and information directly in the cities where you invest. We’ve already seen that buying pieces of properties across the country is the best strategy for diversification. By joining a few online real estate groups, you get more information to use when deciding whether to invest in deals.
A few cities and states stand out as particularly popular for real estate investment groups. I have been active in real estate clubs in Florida, Los Angeles and Texas. I’ve also heard that Portland is a good city for real estate investing. I think California is a popular real estate investing destination overall but the less expensive markets like Texas and Florida may be better for investors.
Some California real estate investment groups you might want to check out if you’re in the area include: Bay Area Real Estate Moguls, LA South REIA, Los Angeles and Asian REIA and the Orange County Real Estate Forum.
Some Texas real estate investment groups you might want to check out if you’re in the area include: Dallas Real Estate Investment Group (REIG), Dallas REI Meetup, East Texas Real Estate Investors (ETREI) and the Realty Investment Club of Houston (RICH).
Some Florida real estate investment groups you might want to check out if you’re in the area include: Central Florida Realty Investors Association (CFRI), Florida Gulf Coast REIA, Miami Real Estate Investors Association (MREIA) and the Tampa Bay Real Estate Investors Association.
Common Real Estate Investing Problems
I’ve seen my share of real estate investing problems, some of which can be reduced by investing in crowdfunding real estate while others are just a common hurdle of the investment.
Real Estate Investing Mistake #1: Bad Neighborhoods and Bad Tenants
The biggest problem I had when renting out single-family houses was tenant turnover and the cost of rehabbing a house each time a tenant left. I made the mistake of thinking I could buy houses in lower-income neighborhoods for cheap and still get good rent. I ended up having to evict tenants constantly for non-payment and would spend thousands a year fixing properties up to put the houses back on the market.
This kind of management headache isn’t a problem with real estate crowdfunding because someone else is managing your portfolio but it’s still an important part of your property analysis. Do you even want to invest in properties that are not in neighborhoods that will attract quality tenants?
You can make money renting in any neighborhood but you need to understand what you’re getting into first. Start real estate investing only in really good neighborhoods before you test your luck in others.
Real Estate Investing Mistake #2: Not Understanding Permit Costs
Permit and license costs are not generally a problem if you have good tenants. The problem comes up when your tenants continuously trash the house and the property. That means city inspectors are going to be sending you lots of public nuisance letters for cleanup.
If you live in a county that requires a rental license on properties, you’ll also need to make sure each rental is up to code for the annual inspection. Bad tenants will send your annual rehab costs through the roof as you replace screen doors and windows, paint, smoke detectors and every little defect they caused over the year.
Real Estate Investing Mistake #3: Low initial cash flow
If you are buying houses with loans, you probably are not going to see much cash flow from real estate investing for quite a few years. More than likely, you will need to pay out of pocket for repairs and other expenses.
Estimating expenses is where a real estate investment group comes in handy. It is fairly easy to budget for the monthly mortgage but expenses can catch you off-guard quickly. Budget for at least 10% vacancy and up to 20% of the gross rent going to expenses. It’s always a good idea to have a cash fund set aside to cover unforeseen expenses.
Real Estate Investing Mistake #4: Lack of Diversification
Not having a range of property types or investing in more than one location is probably the biggest real estate investing mistake made by regular investors. Direct ownership of properties is just too expensive for most people to consider buying a portfolio of real estate assets.
But buying different property types; i.e. residential, office, retail, and industrial is critical to surviving real estate crashes. Residential property is relatively stable through economic recessions compared to office and retail property. Commercial property tends to pay higher returns but can be more volatile.
Beyond spreading your risk across property types, you don’t want to expose yourself to just one city or region. States like Michigan and Ohio were real estate gold up until the 1980s but weakness in manufacturing has hit the area hard. The oil boom has led to a surge in Texas real estate investing but problems arise every time oil prices sink.
The best way to diversify your real estate portfolio is through indirect ownership with real estate crowdfunding sites. I would recommend investing in at least three different property types and in at least three to five states.
Real Estate Investing Mistake #5: Getting Lazy with Real Estate Analysis
One of the biggest investing mistakes for indirect real estate investors is just getting lazy with their due diligence and analysis. The real estate crowdfunding portals do a lot of the legal work for you but that doesn’t exempt you from doing your own homework.
This is where a real estate investing club can really help, especially if you have some accountants, lawyers and investment analysts in the group. Make sure you detail annual costs and leave a buffer for unexpected expenses. Don’t assume a high rate of price appreciation on your properties and keep a minimum return in mind when you are negotiating the purchase.
I would recommend you be extremely conservative in your analysis. Assume a high vacancy rate and regular expenses on the property. Over the long-run, price appreciation is only going to add a percent or two to the return after inflation. If a property does not look like it will return at least 10% on these conservative estimates, I wouldn’t even consider it for investment.
Summary: How to Start a Real Estate Investment Group
- Look for other real estate investors online or through agents
- Assign each investor a real estate sector to follow, i.e. office, storage, retail, industrial.
- Learn how to analyze real estate investments
- Invest in different property types and across different locations
- Invest in debt and equity real estate investments
- Consider real estate crowdfunding for easier management
Is a Real Estate Investment Group Right for You?
Everyone should have some real estate investment in their nest egg, whether it’s through direct ownership or some form of indirect investment. Real estate isn’t as volatile as stock prices but provides a better return compared to bonds. Combined with a stock and bond portfolio, real estate will help you meet your investing goals and reduce the ups-and-downs of investing in financial assets.
While real estate investing should be a part of everyone’s financial plan, participating in a real estate investment group may not be for everyone. Like any kind of group, being in a real estate club will take time and not all members will pull their weight. The upside is that these groups can be a huge resource to get started and can help reduce the time burden that comes with researching properties.
Real estate investment groups can be excellent resources for new investors and can be some of the best friendships you make. Don’t feel like you need to join an existing real estate club or that you need to pay dues to the group. Put together your own real estate investor network to benefit from the shared experience and follow some of the points in this article for guidance.