Pooling Money To Invest In Real Estate

Over the past decade and a half, we've watched real estate markets plummet and slowly begin to rise. Many of those losses are translating into big opportunities for those with cash on hand to buy real estate, which is still considered one of the most trusted ways to earn decent returns when compared to the ups and downs of the stock market.

The end goal of a real estate investment trust (REIT) or real estate investment group (REIG) is to have income and partnerships like these typically provide a month-over-month return on your investment. A typical real estate partnership may take an initial investment between five and 50 thousand dollars (some are much lower) but ideally they will charge enough rent to cover all the costs of taxes, maintenance, and more and still earn a dividend.

One of the most recent statistics gathered by USA Today indicates that two of the five most profitable markets for distressed real estate are located in southern California, specifically in Los Angeles, Long Beach, and Santa Ana. Across the country, however, having more real estate investment deals than equity to pay for them is a persistent problem and so real estate investment clubs are taking one of the following approaches:

Staying small and growing slowly and organically, or
Inviting others to toss their money in and join the group.

The concept of pooling private money is not new, but it does require some careful legal planning and tax advice before you act. The following are some tips to help you understand how to legally pool money for real estate investments.

Real Estate Investments are not Federally Protected

Real estate investors are considered to be one of the following types of investors:

Accredited investors – one with significant net worth or annual income
Sophisticated investors – one with sufficient investing experience and knowledge

These definitions are important because you don't have the same level of protection as say a new investor so it's up to you to weigh the risks and merits of each real estate investment opportunity because you have no federal protections.

2 Structures Exist – LLC and REITs

First created in the 1960s, the real estate investment trusts (REITs) are some of the cheapest and easiest options for adding real estate into an investment portfolio. REIT's may invest in one area of real estate, a specific location, or through mortgage investments, but they all receive special tax considerations and offer a highly liquid method of investing.

Another method of structuring the group of real estate investors is through an LLC, or Limited Liability Corporation. In an LLC, it's important to structure it such that the investors have a vote over which properties to invest in if they want that level of control

Both structures have their pros and cons and an experienced real estate lawyer can help you choose the right structure for a new group or understand what the structure means if you're considering joining an existing group.

3 Types of Offerings Exist

A real estate investment is a security and therefore must be registered as one of the following types:

A specified offering – which means the proposed investment is for a specific property.
A semi-specific offering – which means the proposed entity will invest in a particular property and conceivably in other similar types of properties. For example, it may invest in a single family home in a depressed area and several other homes in the surrounding region.
A blind pool – which is a proposed investment based solely on the decisions of a sponsor.

As you might expect, each of these offerings has different risks and rewards and it's important to carefully understand what you're getting into before you hand over your cash.

The Role of the Operating Company

In the end, the real estate investment group will own the property and manage the expenses but the property may be managed through an operating company. An operating company collectively manages the units, takes care of maintenance, handles the advertising and screens new tenants.

When evaluating the cost of legal counsel versus the risk, you'll find it highly cost effective to seek out and hire a real estate lawyer to help you protect everyone and avoid violating SEC regulations. Remember, a real estate agent or broker cannot provide true legal advice on real estate transactions. Only a qualified real estate lawyer can.

About the author

Matt Faustman

Matt is the co-founder and CEO at UpCounsel. Matt believes in the power of online platforms to change antiquated ways of life and founded UpCounsel to make legal services efficiently accessible. He is responsible for our overall vision and growth of the UpCounsel platform. Before founding UpCounsel, Matt practiced as a startup and business attorney.

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