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 challenges.
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. Unfortunately, I had to learn everything about real estate investing the hard way…often at a high cost.
Like the time I bought a house at a sheriff's sale and then had to fight for months in court to get possession…or all the times I didn't do a full check on tenants before letting them move in, only to lose months of rent when they trashed the place.
The answer is to join a real estate investment group, a club of other real estate investors that help each other by sharing their experience and resources.
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 your investment.
It's easier than you think to start a real estate investment club, benefiting from the power of the group but saving money in the process.
It's the best of both worlds, stress-free real estate investing through the power of a group but without the costs of joining a club with high dues.
Through this post, I'm going to show you how to start your real estate investment group and how to find the best deals. It's a long article, but you'll learn everything you need, from finding real estate investors for your club, finding real estate groups near you, and even some tips on property investing I've picked up over the years.
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. Chasing these deals is a whole industry of analysts and real estate companies.
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 to form a real estate investment group with other investors. There are different forms your investment club can take, from actually pooling your money to buy properties to just talking about how to find rental investments. 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 people who can 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, just as many groups are 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 real estate sites you'll find online are for-profit group tools, selling useless products and information to private real estate investment clubs. You do all the work for them by finding other local real estate investors and paying 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 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 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 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 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 a real estate investment group. Then, 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.
I follow several real estate platforms to access as many deals as possible. Having an account on more than one real estate crowdfunding site costs nothing extra, and you'll be able to invest in more deals.
Streitwise is a unique real estate crowdfunding platform I've been following that is a new twist on REIT investing. Many crowdfunding sites are only open to wealthy investors, but the Streitwise real estate fund is available to everyone.
The Streitwise 1st Streit Office REIT invests in high-quality office properties and, as of this video, has paid a 10% annualized dividend. The fund managers are seasoned real estate professionals that have acquired or managed over $5.4 billion in property and across all property types.
National REIA – The National Real Estate Investors Association is the only real estate group resource I recommend. It's a non-profit organization made up of investment clubs around the country, so it will still charge memberships. However, you might be able to use it to find other people in your area and then form your 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 connect with known investors.
REIT.com is the national organization promoting real estate investment trusts (REITs). It's focused on REITs rather than direct ownership or real estate crowdfunding but is 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 traditional sources. It's because the big players in real estate, the lawyers, property brokers, and other intermediaries, don't want you to find it. It's called real estate crowdfunding, which puts the power to build a real estate empire in your hands.
What is Real Estate Crowdfunding?
Crowdfunding has two different models: rewards-based and equity crowdfunding. Rewards-based crowdfunding on websites like Kickstarter might give you prizes for supporting a campaign, but you get no ongoing investment. Equity crowdfunding is where you get ownership in the form of stock or bonds in the company.
The collapse of the real estate market in 2008 took a lot of banks out of real estate investing. So even though few assets are as stable, banks aren't lending to real estate developers as in the past.
Enter real estate crowdfunding.
Real estate crowdfunding is a type of equity crowdfunding where you either loan a real estate developer money or invest in their project. You get a legal ownership interest of the property and returns. Usually, the investors get paid profit distributions on a monthly or quarterly basis.
The new source of funds has been a massive relief to developers and is getting individual investors in on great returns that used to be only accessible to the wealthy.
I include real estate crowdfunding here because it offers many benefits of starting your real estate club. The platform has staff and analysts that provide due diligence on projects, including background checks on the developer. Investing in a project means you get professional management through the developer.
Real estate crowdfunding can also be an excellent resource for a new club to look for deals and talk through property analysis.
To get started in real estate crowdfunding, you sign up as an investor on portals like Streitwise and link your bank account. The portal does a lot of the initial due diligence legwork for you, and only 5% of the applicants looking for funding 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.
Streitwise offers a hybrid investment between traditional REIT fund investing and the new crowdfunding. The fund is like a real estate investment trust in that it holds a collection of properties but is more like crowdfunding in its management. The fund has paid a 10% annualized return since inception and is a great way to diversify your real estate exposure.
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 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.
- You get all the expertise and assistance of the real estate crowdfunding portal without having to sign risky partnership agreements with funding partners or builders.
Using real estate crowdfunding to invest in properties means you don't have to spend time scouting. You have everything there on the platform. You can assign one person from your real estate investment group to analyze each available property and decide how it fits your overall portfolio.
Real Estate Investment Strategies for Your Group
Investing in real estate will help you understand the strategies that will reduce your risk and increase your return. As with most investments, success is all about diversification.
With real estate, you get different types of diversification in property type, location, and 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 you decide where and how you want to invest. Investing in properties across at least a few different cities is a good idea. They say real estate is about location, location, location. So, where you invest can mean a big difference in return. In addition, investing in a few different cities makes sure you benefit from economic growth across the country.
You can invest in real estate loans and take 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 primarily a matter of your age and how much risk you can tolerate in investments. Still, I 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 who know more about specific real estate types. Property types include raw land, single-family or multi-family residential, office, retail, lodging, and industrial. Each property type has different return and risk characteristics, and it's beneficial to have an expert in each property type within your real estate club.
Most deals listed on crowd platforms have been residential properties, split between equity and debt. This mix is typical across most real estate crowdfunding portals because residential developers have had the most difficulty getting bank loans.
Finding Investment Property for Sale
Finding real estate investment property alone will take weeks of online searching, site visits, and negotiation. I used to spend a couple of 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 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 Streitwise, 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, management, and 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.
Finding other Real Estate Investors for Your Group
New real estate investment clubs will face a dilemma, find enough investors to make the group's activities worthwhile but be selective enough only to recruit engaged members.
Understand that you don't need dozens of group members, especially if you plan on keeping the club informal. Still, members do need to be engaged enough that they contribute to combined knowledge.
I've seen a lot of clubs just let anyone come to meetings. So, people come for a few sessions, soak up all the information they need, and then you never see them again.
To keep members and grow the club's combined knowledge, you must recruit members actively, and candidates must contribute before becoming full members.
- Finding potential members is a matter of current members becoming champions of the group. Start with two or three members and create a pitch you can make at social events and real estate-related networking.
- The club should have a formal application process that gathers background information and experience on candidates. This application should include a criminal background check paid out of the application fee. The first time you turn a con artist away, you'll be glad you spent a little on the application process.
- Candidates can attend a couple of meetings but then need to complete a project to demonstrate their value to the group. This project can be as simple as a 20-minute presentation on something that will benefit the group.
The application process doesn't mean you can't accept new real estate investors with little experience. They can still contribute to the group. For example, pick a new topic in real estate investing, a new trend or financing method that maybe the group doesn't know much about, and assign it to the candidate for a presentation.
Even informal real estate investment clubs need to appoint officers and collect dues. At a minimum, you'll need a president, somebody to take meeting notes, and somebody to manage the club bank account. Even collecting $10 a month as dues can pay for speakers, courses, or club events.
Real Estate Investment Club Activities
Club meetings need a purpose beyond just “talking about real estate investing.” A group of investors just getting together informally to share stories and tips will quickly go off track, people will get bored, and membership will drop to nothing.
That doesn't mean you can't start the meetings with an informal ‘what's new' but have something planned for each session to increase the group's combined knowledge.
Inviting speakers to talk is a great way to get outside expertise, and many local professionals will agree to present for free if your group is large enough.
Courses paid through member dues can be a great way of keeping up with new trends and getting new skills. Get one license for an online course and hook your laptop up to the TV. Print out the course materials for everyone and make it a shared learning experience.
Workshops are like courses except usually live and over just a few days. These will be more expensive than just getting one course for everyone but working out a discount for the group to attend together.
Club partnerships can be some of the best real estate investments you make. The club I'm in is informal, and we keep our assets separate for the most part but will pool some funds for a property every once in a while. Of course, this engagement has extra-legal issues and risks, but it can get you access to more significant investments and solidify the group.
Legal Issues to Starting a Real Estate Investment Group
Most real estate clubs remain informal and do little more than sitting around discussing investments. The best clubs are legally incorporated and have a more formal structure. This structure doesn't mean spending thousands on paperwork or lawyers. In most states, you can incorporate a club and draw up all the documents for less than a few hundred.
You might decide to stay informal for a year or until you build a core of engaged members. Once ten or twenty members are meeting regularly, it's time to start thinking about a formal structure and officer roles. This structure may seem like a lot of work, but a formal club can do much more than just a rag-tag group.
The club shouldn't need insurance unless it creates its own courses or formally advises investors. If any members have a co-investing partnership, they'll need all the regular liability and property insurance that comes with real estate investing.
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 suitable real estate investments isn't like researching stocks, but that's good.
Where investors scramble for a couple of percent extra return on stocks versus the market, put together a solid real estate investment analysis process, 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 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, city, or region of the property. Much of this will 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.
- Compared to longer-term averages, how much building has been completed or planned over the last five years? This average is critical 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 properties. Again, most real estate crowdfunding deals will have detailed analysis in the documents, but you should give someone the task of checking the numbers.
At a minimum, start with an estimate of rental income over the next three to five years. Then, 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 a triple-net lease, meaning the tenant pays 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 critical elements of your analysis. For example, depreciation greatly benefits real estate because it reduces the taxes paid on rental income. You also want to account for a maintenance reserve by setting aside money each year.
The most crucial measure in real estate investing is Funds from Operations (FFO). It will help you understand the cash-generating potential and ensure 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 analyze 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 essential measure of value for real estate investing.
You can use the FFO measure even if investing indirectly through real estate crowdfunding. Measure the price-FFO the developer expects to pay on the property or the complete development to see if they are getting a good deal. A developer over their head and spending too much on properties isn't someone you want to invest with.
How to Invest in Real Estate on Streitwise
Streitwise has a thorough screening process for investments on the site. A developer must first pass checks on financial strength, expertise, and track record for making a property profitable.
The real estate crowdfunding portal goes through a detailed underwriting process to examine the 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 Streitwise ever make it to funding. However, once a property passes through the funnel, it is listed on the portal, where investors can do their analysis and decide if they want to invest.
There are dozens of properties available on various crowdfunding sites. As a result, more properties than one investor may be able to look at every month. This task 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 another part of the analysis to limit the burden on any individual 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 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.
Until this year, real estate crowdfunding was only available to accredited investors with household incomes 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.
Opening an account on Streitwise 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 net worth or income box. 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 for 30-days before investing.
This waiting period 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.
How to Find Real Estate Investors Near Me
The internet is a vast resource for real estate investors, but most miss the real benefits. So 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 will 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 when deciding whether to invest in deals.
A few cities and states are 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 good 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 reasonable 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 essential part of your property analysis. For example, 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 excellent 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 arises when tenants continuously trash the house and the property. That means city inspectors will send you lots of public nuisance letters for cleanup.
If you live in a county requiring a rental license on properties, you'll also need to ensure 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 have caused over the year.
Real Estate Investing Mistake #3: Low initial cash flow
If you are buying houses with loans, you probably will not see much cash flow from investing in real estate for a few years. You will likely need to pay out of pocket for repairs and other expenses.
Estimating expenses is where a real estate investment group comes in handy. Budgeting for the monthly mortgage is relatively easy, 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. Having a cash fund set aside to cover unforeseen expenses is always a good idea.
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. Likewise, 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 recommend investing in at least three different property types and 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. Of course, the real estate crowdfunding portals do a lot of the legal work for you, but that doesn't exempt you from doing your 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 negotiating the purchase.
I would recommend you be extremely conservative in your analysis. For example, assume a high vacancy rate and regular expenses on the property. Over the long run, price appreciation will only 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 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 through direct ownership or indirect investment. Real estate isn't as volatile as stock prices but provides a better return than bonds. 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. However, the upside is that these groups can be a tremendous resource to get started and help reduce the time burden of researching properties.
Real estate investment groups can be excellent resources for new investors and 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. Instead, 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.