Setup A Legal Structure
Next, you need to setup a legal structure for your club. There are two key reasons for this:
The most common legal structure for an investment club is a partnership. In that case, you need a partnership agreement and operating agreements. There are many cheap online options that can do this for you, such as RocketLawyer or Nolo, but you may also want to consider getting professional help to set it up at first. Spending a little on a lawyer to draft some documents can make things much easier in the future. Check out our full guide to setting up an LLC for investing.
You’ll also need to register your club to get an EIN from the IRS. This is actually the easiest step, and you can quickly do it here: How to Apply for an EIN.
Once you have a defined legal structure, you need to open an account at a brokerage. Many full-service brokerages offer accounts for investment clubs, but they tend to charge higher fees to trade. I’m a fan of TD Ameritrade, and they offer accounts and help to investment clubs. No matter where you open an account, you will need to provide copies of your legal agreements and your EIN.
Conduct Market Research And Feasibility Studies
- Demographics and Psychographics
Firstly, if you are looking towards starting an investment club, your investment mission, your investment policy, your investment ideology, your investment philosophy and of course your investment goals are what should guide you in admitting people into your investment club and also to determine the type of investment club to start and the industry you are going to concentrate your investment in.
In view of that, the demographic and psychographic composition of your investment club should be guided by the factors stated above. It is safer never to allow sentiments to influence the type of people you allow to join your investment club or the investment vehicle you put your money on. If you do that, you will likely face conflicting interest from your club members and when you and your club members are not always on same page, you may not achieve your investment goals and the objectives of the club.
Step : Have An Attorney Draft Up A Solid Agreement
You may feel you trust your partners, and some may even be your good friends so what could go wrong? There are many partnerships gone wrong stories that we can tell you about. However, we thought it would be best to just inform you that based on our experience, and the experience of fellow investors, no matter how good you feel about the people you are partnering with, its wise to draw up a rock-solid agreement.
Life changes, and things happen. So, to avoid any potential problems, misunderstandings, miscommunications, partners disappearing, lazy partner syndrome, and the like, it cant hurt to cover all your basis with a legal agreement.
A good real estate operating agreement will detail the percentages of ownership that each partner is entitled to, define roles, responsibilities, and so on. This is a good time to negotiate, if, lets say, you want to have a larger percentage of the profit. You can make your case as to why. For instance, maybe you will be doing more work than the passive partners who will be contributing money. This is also where you place stipulations for a way out, such as buying partners out in certain circumstances.
Don’t Miss: Minimum Amount To Invest In Gold
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 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. I had to learn everything about real estate investing the hard wayoften at a pretty high cost.
Like the time I bought a house at a sheriffs sale and then had to fight for months in court to get possessionor all the times I didnt 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 in joining a real estate investment group, a club of other real estate investors that help each other 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 the investment.
Its 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.
Its 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.
How Are You Doing Today And What Does The Future Look Like
We continue to grow and expand. We launched our second real estate investment fund in 2016 and began an international push by launching locations in Mexico, Italy, Dominican Republic, and Costa Rica in 2018.
We eventually plan to have a collection of real estate investment funds that span different customer segments and geographies. Were also looking at opportunities for development projects.
Through starting the business, have you learned anything particularly helpful or advantageous?
In hindsight, I would have grown our team sooner. When you bootstrap a business, you must wear multiple hats simultaneously. We could have grown faster had I offloaded some activities sooner. The team we have now is one of our most valuable resources.
One item we were blindsided by was changing local regulations. We obtained written approval from a town in Florida for short-term occupancy use only to find the town changed their position on short-term occupancy after we acquired a home and were in the process of remodeling it. Fortunately, we were able to sell for a modest gain.
You May Like: What Does Fisher Investments Invest In
Proceed Cautiously When Starting An Investment Club With Friends
- Publish date: May 27, 1999 11:53 AM EDT
A group of friends and I are putting together an investment club. We each will put in $200 a month and, as a group, decide on stocks to buy. How should we set up the group? What advice could you give us in terms of getting started? What information would be useful to learn more about stocks? — Shane Green
If you want to keep your friends, it might be better to share a pizza with them instead of your financial assets.
Perhaps I am being overly cautious. If you are just starting to invest, you may want to refrain from pooling your assets with your friends, at least while you are in the nascent stages of your education.
Some families and friends shouldn’t do anything together that involves money. Some people get emotional when they get stuck with a bar tab. Can you imagine the caterwauling if
dropped 30% in one day? And you might have to contend with a situation in which one or two members will dominate the club’s decisions. That would be no fun.
Rather than pooling your money at first, perhaps you and your friends should start meeting once a week to share your investment ideas, like one of those ever-popular book clubs. By simply meeting every week, you can experience some the same benefits of an actual investment club, such as the knowledge from others and constructive discussions.
National Association of Investors Corp.
, NAIC for short.
The NAIC’s site includes a
Step : Choose A Business Structure Such As An Llc
One thing you should never do when you buy property with multiple investors, or even when purchasing by yourself, is place the property in your own name, or as a sole proprietor, or a general partner. Structuring your business in a way where you and your partners are purchasing under your own names can open the door to so many problems and liabilities. For instance, if the partnership crumbled for some reason, and the banks came after you, if purchased in your own name, you can have your personal assets frozen. Or, if someone was injured on your property, and a huge lawsuit was placed against you, they could take everything from you if you lost.
Its best to keep that door shut, and ensure you are protected by forming a Limited Liability Company, and buying the rental property within that LLC. This way, they can only go after the LLC, not you personally. You can form one LLC with multiple investors, or each partner can form a separate LLC. If each partner has their own LLC, make sure to double-check that each person is named on the insurance policy separately.
Additionally, an LLC structure will allow you to take advantage of some incredible tax write-offs. We have two resources we use and refer to our customers. This would be Scott Smith from Royal Legal Solutions, and Garret Sutton from Corporate Direct. They can assist you in setting up an LLC, as well as fill you in on the details of asset protection and tax write-offs.
Read Also: When To Refinance Investment Property
Best Credit Cards For Real Estate Investing
Using credit cards for real estate investment can be a valuable strategy. Credit cards can help you build a solid credit history that may help for future loan approvals. Credit cards can also provide valuable cash back and rewards on your expenses for rehab, utilities, insurance, and more. Finally, 0% APR promotions can offer low-cost financing for your real estate deals and expenses.
Here are a few of our favorite credit cards for real estate investing:
|$0||None||Up to 2% cash back on all purchases: 1% as you buy and 1% as you pay||0% for 18 months on balance transfers, then 13.99% to 23.99%|
Buying A House With A Friend Is An Investment For Your Future
If youâre thinking of buying a house with a friend with either Joint Tenants or Tenants in Common, be sure that you think long-term and make a plan that works for both of you, both day-to-day and over the years to come.
With thought, planning and preparation, this is a great way to invest in real estate, make your home-buying dollar go further, and build wealth now and into the future.
Read Also: Private Real Estate Investment Company
Alternatives To Investing Clubs
Today, technology has made trading free. We’ve talked about the free apps for investing before. As such, if reducing costs was one of your primary concerns for starting an investing club, you might look into using a service like M1 Finance. M1 Finance lets you build a portfolio of stocks and mutual funds commission free. This is huge for investing clubs.
Now, you can still have a “club” that discusses investment ideas, but each member can have their own account and trade in it for free. This saves you the cost of creating an LLC, and it lets you not have to worry about a lot of compliance issues. You can then simply have investment discussions, and each member goes and executes it themselves.
Check out M1 Finance here and see how it could be a great alternative to an investment account.
What are your thoughts on how to start an investment club? Is it something you’ve considered?
No Easy Button For Moving Out
When you rent an apartment or house with a roommate, its fairly easy to walk away if the two of you no longer get along, or if you decide to move. That’s not the case with a mortgage.
Since both of your names are on the mortgage, you are both responsible for making the payments, even if one of you wants out of the deal. To get one of the names off the mortgage, you either have to sell the house or refinance the loan under just one name.
Both options can be challenging: Selling can take many months, and theres no guarantee the lender will approve your application to refinance. Its a good idea to have a written agreement in place that details your agreed-upon exit plan should one of you decide to move on.
Who gets the property if someone should die is determined by the type of deed the parties hold. If the parties hold the property as joint tenancy the parties do not have a right of survivorship, meaning that when one of the co-owners dies, the other owner will retain the property interest. If the parties hold the property as a tenancy in common then the parties can transfer ownership interest to the heirs upon death.
For financial protection, each partner should purchase life insurance on the other to pay off the mortgage in case of death.
Also Check: Best Whiskey To Invest In
You Probably Need More Friendsheres How To Make Them
You want to get into an investment deal with someone who you can trust, count on and continue to build with for the long-term. Once you have found a real estate investment partner to go in on a property with you, come up with a plan by doing research on market trends, making projections for profits and losses, as well as understanding the real estate laws in the locality you plan to purchase within. Then, when you are ready, make your approach and share how it will benefit him/her to go in with you on a property.
Real Estate Syndication
If you are looking to get into commercial real estate like I did when I was ready to invest in a second property, you may want to consider real estate syndication. Back when I was 25 years old, I was just getting comfortable in my role at a sales job and money was still tight, but I knew I wanted another stream of income and I wanted my money to work for me.
Part of the reason why I wanted to go to commercial real estate as opposed to staying in residential real estate is because of the headaches caused by dealing with tenants and their toilets on the weekends. They can really cut into family time and your free time.
We all know there are tons of different investment types theres fix and flip, wholesaling, buy and hold syndications, or even Delaware Statutory Trust Opportunity Zones. The most important thing when it comes to real estate investing is having the information to make well-informed decisions.
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 doesnt mean you cant start the meetings with an informal whats new but have something planned each meeting that will increase the groups combined knowledge.
Inviting speakers to talk is a great way to get outside expertise and a lot of 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 are going to be more expensive than just getting one course for everyone but work out a discount for the group to attend together.
Club partnerships can be some of the best real estate investments you make. The club Im in is informal and we keep our investments separate for the most part but will pool some funds for a property every once in a while. There are extra legal issues and risks with this kind of engagement but it can get you access to bigger investments and really solidifies the group.
Read Also: How To Invest In A Etf
Finding Funding For Real Estate Investing
One of the first steps in getting started in real estate is to build pools of available money to purchase properties. Unless you have an established business or experience in real estate, getting a bank loan to buy properties may be a challenge.
Depending on the type of investing you want to do and the properties you are targeting, different funding sources may be available to you. For example funding for flipping houses will be different than funding for other types of investment properties.
The most popular ways of funding real estate investments are:
- Personal savings
- Home equity loan or line of credit
- Conventional loans and government programs
- Financing secured through a mortgage broker
- Hard money
Two Types Of Real Estate Investing Partners
When it comes to those who buy with multiple investors, you will find that they are either just starting out and need the assistance of partners, or they have narrowed their focus and seek out investors who can make up for what they prefer not to provide. This is where the two main categories of investing partners intertwine to make the magic happen. These two categories are active and passive real estate investors, with the main difference being the amount of work or activity an investor is contributing towards the investment deal.
Lets take a look at both in detail to gain a better understanding:
Active Real Estate Investors
Also referred to as the managing partner, active or direct investors take on the responsibility of being involved in the legwork to make the purchase happen, as well as what it takes to keep the investment profitable and running smoothly. Their hands-on participation applies to all the moving parts that make up a real estate deal, and responsibilities are often divided up between several investors. Active investors have more control over day to day decisions like which renovations are made, what property managers are placed, and so on. Examples of common duties that active investors take on are initial research, locating the best rental market, viewing prospective properties, negotiations, working with contractors, and the like.
Passive Real Estate Investors
Also Check: Alternative Investment Vehicles Private Equity