Pros and Cons of Real Estate Investment Clubs
It seems like a lot of people you know or read about are trying to build wealth through real estate.
Investors selling properties they own outright can offer to hold a mortgage and earn interest in place of a bank.
But if you’re not ready to buy a rental property on your own or don’t know how, where, or when to invest – you might consider joining a real estate investment club.
In a club, you’ll team up with others to learn about real estate investing. And you’ll have the opportunity to put some of your money to work investing in properties.
Read on to learn more about real estate investment clubs, how they work, and the pros and cons of membership.
Real Estate Investment Clubs: How They Work
A real estate investment club is a group of people who decide to come together, combining their knowledge and financial resources to invest in real estate.
The level of experience one has as an investor matters little because many clubs have a continuum of novice to very experienced and successful real estate investors.
Anyone with money to invest can consider joining a real estate investment club.
For new investors, membership offers learning and networking opportunities with other investors and people in the real estate industry.
It’s a great option for those who aren’t sure who to trust. Or who don’t have the time to learn all the ins and outs of real estate investing on their own.
Real estate investment clubs are all different. Some clubs have dozens of investors while others only have a few members.
There are informal clubs, but many groups form legal entities, elect officers, and divide up tasks between group members. Clubs may also have written investing objectives and operating rules that must be followed.
You’ll need to apply to become a member of a club. And you may have to pay a monthly or annual membership fee.
The personal connections you can make at monthly meetings and networking events are valuable. But some clubs have regular online meetings now too.
To invest, you may have the option of buying shares in a property being purchased. But some clubs require all members to put in a set amount of money to acquire an asset.
Owners pay expenses and receive distributions proportionally based on their investment.
Even experienced investors join clubs to have more diverse opportunities and access to a network of people with similar interests.
Benefits of Real Estate Investment Clubs
Joining a real estate investment club can help you build wealth – without all the stress, work, and financial risk involved in real estate investing on your own.
But investing your hard-earned cash in any investment option is serious business. Before you jump in weigh all the pros and cons.
Here are several advantages to consider in your decision to join a real estate investment club.
1. Pooling of Financial Resources
As an individual investor, you’d likely be limited to investing in properties you could qualify to buy on your own. This could potentially exclude you from investing in expensive but profitable commercial property for example.
With membership in a real estate investment club, your money could be used as part of a larger block of money for investment in properties you couldn’t buy on your own.
2. Gaining Experience
At some point in the future, you may have the financial resources and desire to purchase real estate as an individual investor.
Your time spent as a member of a real estate investment club could well serve as the best teacher you could ever have.
As a club member, you’ll receive an education in property selection, the real estate purchasing and selling processes, the ups and downs of property management, and more.
3. Sharing Risk and Responsibility
As an individual investor, all the decision-making and risk falls on your shoulders.
That could be a difficult thing to handle, especially if you decide to also manage the properties on your own, forgoing the hiring of a professional property manager.
As a member of a real estate investment club, you’ll share those responsibilities with others.
You’ll also have the opportunity to bounce thoughts and ideas off one another, which makes for a better decision-making process.
Drawbacks of Real Estate Investment Clubs
While there are clear “pros” to participating in a real estate investment club, there’s no such thing as the perfect investment option.
There are several things you’ll want to consider as possible “cons” to membership in a real estate investment club.
1. When It’s Really A Sales Pitch
It’s important to do your homework on the clubs in your area before you consider membership.
Some real estate investment clubs profit from bringing in “experts” who try to sell you books, courses, or encourage you to attend high-priced conferences. The “expert” then pays the club a percentage of sales.
While networking and learning are important, avoid any club wanting you to spend hundreds (or thousands!) of dollars on these pitches, in addition to your normal club dues.
2. Personality Conflicts
The people who participate in real estate investment clubs have different personalities and their opinions may clash at times.
While you can hope people are mature and agreeable, you might encounter situations where people are inflexible and difficult to work with.
When it comes to spending your money to build financial security, keeping emotions in check is harder than you might think.
3. Lack of Liquidity
A real estate investment club requires commitment. After putting your money in for asset purchases, it could be challenging to get your money back out.
You might sell your membership if the club’s rules permit it. But you’re going to be forced to live by the rules as they stand. Be sure you understand the process for leaving the group and how it can affect your investment.
If you need liquidity, this might not be the best investment option for you.
4. Ongoing Investment Requirements
Even after fulfilling your upfront obligations, you may encounter additional costs as a club member. You’ll be fully expected to pay your full share as a member. Regardless of what you decide to do outside the club on your own.
If you land in a club where the properties have high maintenance costs, it could put a drain on your cash flow and profits.
Should You Join a Real Estate Investment Club?
Now that you have a better idea of what to expect from participating in a real estate investment club, you can decide if joining one aligns with your investment plan to meet financial goals.
At a minimum, this investment option could help you grow your understanding of real estate investing. And help you build up enough equity to eventually start buying rental property on your own.
But if you have any doubts about the investment goals, risk tolerance, stability, or membership of a particular real estate club, think twice before joining.
Remember, starting on a solid foundation is the first step to building a secure financial house. A club without a sound structure could be costly and ending your membership may be more difficult than you realize.
Vicki and Amy are authors of Estate Planning 101 – a Crash Course in Planning for the Unexpected -coming soon from Adams Media.