Real estate can be an excellent investment for building long-term wealth. However, the high capital requirements and hands-on management involved in owning physical property make it difficult for many beginners to get started.
Real estate investment groups (REIGs) and real estate crowdfunding open up real estate investing to a broader range of investors. By pooling capital from multiple investors, they allow you to invest in real estate passively with much lower capital requirements.
This beginner’s guide will provide an overview of REIGs and real estate crowdfunding, discuss their benefits and risks, and provide actionable tips to help you get started.
What Are Real Estate Investment Groups?
Real estate investment groups are organizations that aggregate money from multiple investors to invest in real estate properties. By pooling capital, REIGs are able to acquire larger assets than individual investors could afford on their own.
There are several different types of real estate investment groups:
Real Estate Investment Trusts (REITs)
REITs are companies that own and operate income-producing real estate. They allow individual investors to buy shares that represent a portion of ownership in the REIT’s overall real estate holdings.
Publicly traded REITs provide liquidity, professional management, and easy access for beginning investors. But the downside is that there is less control over which properties are owned.
Real Estate Limited Partnerships (RELPs)
In RELPs, general partners actively manage properties, while limited partners provide most of the capital but have limited management control. RELPs allow direct ownership of specific properties rather than a portfolio.
Real Estate Funds and Syndicates
Real estate funds pool money from accredited and institutional investors to buy properties. Investors own shares in the fund rather than the properties themselves.
Syndicates are similar but smaller in scope, often focusing on a single asset. Minimums are lower, making syndicates accessible to more investors.
Equity crowdfunding allows both accredited and non-accredited investors to pool money online to invest in specific real estate deals. Minimum investments can be as low as $100.
Benefits of Real Estate Investment Groups
REIGs provide several advantages for beginner real estate investors:
- Diversification – Rather than sinking all your capital into one or two properties, REIGs allow you to diversify across multiple properties, reducing risk.
- Passive income – You benefit from real estate cash flows without having to manage properties and tenants yourself.
- Low capital requirements – By pooling investor money, REIGs allow you to invest in larger real estate deals with less money.
- Liquidity – Publicly traded REIGs like REITs provide much greater liquidity than owning physical properties.
- Professional management – Experienced real estate professionals handle all aspects of property management for you.
- Tax advantages – REIGs allow investors to benefit from certain tax breaks, like depreciation.
Risks to Consider
While REIGs can be great options for new investors, they do come with risks to consider:
- Illiquidity – RELPs, funds, and syndicates often require you to lock up your capital for 5-10 years or more.
- Diluted returns – By pooling money, REIGs spread the returns amongst many investors, diluting what you might earn from owning yourself.
- Management risk – Poor management by the REIG can negatively impact property performance and your returns.
- Market risk – A downturn in the overall real estate market can hurt property values and cash flows.
- Leverage risk – Some REIGs use high leverage, amplifying your losses in a market downturn.
Real Estate Crowdfunding Explained
Real estate crowdfunding has emerged in recent years as a new form of REIG facilitated by web-based platforms. Here’s how it works:
- Developers or real estate companies in need of capital create a project listing on a crowdfunding platform seeking investors.
- Investors browse projects and invest capital through the platform.
- Once a project reaches its fundraising goal, the capital is transferred to the real estate company sponsoring the project.
- Investors receive their portion of income, appreciation, etc. based on the investment terms.
While similar to traditional REIGs, real estate crowdfunding offers some unique advantages:
- Very low investment minimums – often as low as $100
- Access to more investors through digital platforms
- Added transparency via project details and investor discussions online
- Ability for non-accredited investors to participate in certain deals
However, real estate crowdfunding also comes with distinct risks like fraud, platform failure, and lack of investor protection regulations in some cases. Performing due diligence is crucial.
7 Tips for Getting Started in REIGs
If you’re ready to start investing in real estate through an investment group, here are some tips:
1. Determine your investment goals
Decide if current income or long-term appreciation is more important so you can target appropriate properties. Also, determine your desired level of risk.
2. Understand the fees
REIGs have a variety of fees like acquisition, management, performance, redemption, etc. These fees can eat into your returns, so understand them upfront.
3. Research REIG sponsors
Look at track record, experience, number of investors, past performance, and management team credentials when choosing a sponsor.
4. Diversify your investments
Don’t put all your money into one REIG or property type. Diversify across sponsors, geographies, and asset classes.
5. Start small
Make small investments in multiple REIGs at first to test the waters before allocating more capital.
6. Read the fine print
Don’t skim the PPM or investment contract. Read carefully to fully understand your rights as an investor.
7. Use retirement accounts
Consider investing through IRAs/401ks to gain tax-deferred growth. Some platforms allow you to invest via these accounts.
8 Questions to Ask Before Investing in a REIG
Here are some key questions to help evaluate potential REIG investments:
1. What is the investment strategy?
Gain clarity on what types of real estate they invest in, whether they use leverage, etc. Make sure the strategy aligns with your goals.
2. What are the fees?
Ask about all initial and ongoing fees so you know exactly what will be deducted from your investment.
3. How experienced is the management team?
Look for sponsors with years of real estate experience, both through ups and downs. Check backgrounds.
4. What is the track record of past investments?
Ask for performance histories of past projects. Look for consistent returns that match expectations.
5. Is there a minimum investment period?
Some REIGs require you to keep your capital invested for 5-10 years. Know the rules upfront.
6. How liquid is the investment?
Understand how easily you can cash out if needed. Illiquidity means greater risk.
7. What are the risks involved?
Ask sponsors to explain in detail the key risks you’ll face with the investment and how they manage risk.
8. How often do you provide reporting?
Regular updates on financials and operations help you track performance. Quarterly is ideal.
6 Tips for Researching Real Estate Crowdfunding Sponsors
Here’s how to pick winning real estate crowdfunding sponsors:
1. Check experience level
Look for sponsors with at least 5-10 years of real estate investing experience in the type of assets they are crowdfunding.
2. Review past deal performance
Evaluate the IRRs and equity multiples from a sponsor’s past projects. Look for consistency.
3. Research leadership
Learn about key executives’ backgrounds. Look for real estate-specific experience, not just finance.
4. Ask about the due diligence process
Many platforms conduct little to no due diligence on deals. Choose one with a rigorous process.
5. Read investor communications
Check out updates on past deals. Timely, detailed updates signal trustworthiness.
6. Join investor discussion forums
Read feedback on sponsors from existing investors. Check for red flags.
5 Mistakes to Avoid With REIGs and Crowdfunding
As a beginner, it’s important to avoid these common missteps:
1. Failing to diversify
Don’t invest all your money in one REIG or property type. Diversify across multiple offerings.
2. Not reading the PPM
Be sure to carefully read the Private Placement Memorandum or SEC filings. Don’t skim complex legal documents.
3. Choosing only based on returns
Don’t invest in a REIG purely based on their past return rates. Assess strategy, leadership, and risks too.
4. Getting emotional
Avoid getting swept up in excitement over properties or deals. Conduct due diligence rationally.
5. Forgetting about fees
Factor in management fees, acquisition costs, promotion payments, etc. to accurately forecast returns.
REIGs and real estate crowdfunding platforms have opened private real estate investing to more people than ever before. By providing diversification, passive income, and professional management, they allow you to invest in real estate without getting your hands dirty.
However, blindly investing without carefully assessing sponsors and deals can quickly erode your returns. Do your homework, diversify across multiple offerings, and avoid emotional decisions.
When used responsibly, REIGs provide an accessible path for beginners to gain exposure to real estate and benefit from its wealth-building potential.
Frequently Asked Questions
What are the main types of real estate investment groups?
The most common types of REIGs are real estate investment trusts (REITs), real estate limited partnerships (RELPs), real estate funds and syndicates, and real estate crowdfunding platforms. Each has its own structure and strategy.
What are the differences between REITs, RELPs, and real estate funds?
REITs allow investors to gain exposure to large-scale real estate portfolios. RELPs focus on direct ownership of specific properties. Real estate funds are actively managed portfolios that might mix various types of real estate assets.
How do I research and select a REIG sponsor?
Key factors to evaluate are experience level, performance history, company leadership, fee structure, investment strategy, risk factors, and reporting transparency. Comparing multiple sponsors is crucial.
What are the main benefits of real estate crowdfunding?
Crowdfunding opens real estate investing to more investors thanks to low minimums, digital access, transparency, and the ability to review deals online. Some platforms also allow non-accredited investors.
What are some risks of real estate crowdfunding that I should be aware of?
You should look out for inexperienced sponsors, a lack of due diligence by platforms, potential fraud, exaggerated return projections, a lack of investor regulation, and illiquidity of investments.
What questions should I ask before investing in a REIG?
You should ask about the investment strategy, fee structure, experience level, track record, minimum hold periods, liquidity, risks, and how often you will receive performance updates. Get details in writing.
How much of my portfolio should I allocate to REIGs as a beginner?
As a beginner, limiting REIG investments to 10% or less of your overall portfolio is recommended. This gives you exposure while limiting risk. You can gradually increase your allocation as you gain experience.
What mistakes should I avoid with REIG investing?
Avoid lack of diversification, failing to read offering documents carefully, investing based solely on advertised returns, getting swept up emotionally, and underestimating the impact of fees.
Can I invest in REIGs through a retirement account?
Many REIGs can be invested through self-directed IRAs and Solo 401(k), which allow you to grow your investments tax-deferred. Several real estate crowdfunding platforms support IRA investments as well.
In another related article, Real Estate Investing 101: A Beginner’s Guide to Getting Started