The Pros and Cons of Real Estate Investment Clubs

Clubs can be a perfect option for some, but not so much for others

Mature businessman and businesswoman shaking hands in new office
•••

 

Maskot/Getty Images

Investing in real estate can be intimidating. It can be costly to get started, and dealing with the complexity of taxes, rent, and property maintenance can scare away even the bravest investor.

Joining an investment group focused on real estate can help ease some of that anxiety and assist you in achieving your financial goals. You can benefit from the wisdom of a group and have a good time along the way, and much of the work of investing in real estate can be spread out, making it easier to enjoy the investment returns without the stress.

Whether you're a first-time investor or you've been at it for a while, understanding the pros and cons of this type of club can go a long way toward determining if it's something you want to get involved with.

Pros of Investment Clubs

  • Pooling resources with others can make buying possible for some who might not be able to invest otherwise. 

  • Some clubs offer learning opportunities, bringing in knowledgeable speakers and organizing group attendance at conferences. 

  • The tasks inherent in investing in real estate can be spread out to different members so no one gets overwhelmed.

Cons of Investment Clubs

  • Emotions can get involved when you're dealing with several different personalities, and emotion shouldn't play a role in investing.

  • Some clubs require pricey membership fees, and these costs can ultimately cut into your returns.

  • You might not be able to easily get your money out if you need to do so because of an emergency.

How Do Real Estate Investment Clubs Work?

Just about anyone can join a real estate investment club as long as they're able to invest their own money. There are clubs for retired men and women, for college students, and for wealthy businessmen. While investing clubs dedicated solely to real estate aren’t as common as those that invest in stocks, they do offer opportunities for just about anyone.

Generally speaking, real estate investment clubs are made up of five to 10 people with similar investment goals, although there are no legal limits or minimums.

In most cases, members pool their money and make investment decisions together. Investment clubs can be informal groups, but they're often organized as partnerships. Some clubs have their own stated objectives, such as value investing or investing for income. In the case of real estate investment groups, members are focused solely on investing in real estate.

Group members work together to form a legal entity, ensuring that each member of the group is considered a joint owner. Then, when the group decides to buy and sell real estate, the group’s name goes on the deed.

Most real estate investing clubs have written operating rules and, in most cases, they'll elect officers. They'll also assign specific jobs to members, such as sales execution, record keeping, taxes, property maintenance, and member communications.

In days gone by, members of investment groups would meet regularly to discuss and vote on properties. Nowadays, these decisions are more often made via email or online chat. The Internet has also made it easier to find real estate clubs in your area. 

Investment club members will often be required to pay a membership fee to join, and they might pay an additional set fee on a monthly or annual ongoing basis.

Advantages of Real Estate Investment Clubs

Investing in real estate can be hard for some individual investors due to the cost of buying property. Members can more easily purchase homes or even commercial real estate when they pool their resources. They can also more easily pay to outsource the maintenance of the properties they buy.

Many real estate investing clubs will meet regularly to not only make investment decisions but to get smarter. An investment club meeting might include a visiting speaker who can outline the basics of market analysis or how to deal with problem tenants. Investment club members might also attend conferences together.

You'll benefit from the collective knowledge of the club's members. This can often lead to better—or at least more thoughtful—decisions about properties, especially if the group is committed to educating itself on an ongoing basis. Moreover, there's the potential to invest more at one time because money is invested from a pool. This cushions the impact of any costs.

Disadvantages of Real Estate Investing Clubs

The collective nature of investment clubs also means there’s a lack of flexibility for individual members. For example, a group member would need the support of other group members or have another member buy her out if she finds herself in need of funds and wants to cash in some of her equity.

Another downside to investing as a group is that feelings can get in the way of good decisions. The group might decide against selling a property to avoid hurting the feelings of another who had argued for holding onto it.

Many clubs ask for high membership fees, which could cut into your investment returns.

Join a Club With People Like You

Make sure the members have goals that are similar to yours if you're thinking of joining an investment club. You don’t want to be part of a club with young people who might have a more aggressive investment strategy in mind if you're approaching retirement age. Likewise, you might not be comfortable with others who prefer to hold onto property for a long time if you have a high risk tolerance and like to buy and sell frequently.

It’s best to find a real estate investment club comprised of people who think like you do and who can help you reach your financial goals.