Starting an Investing Group

[Erik Hanson]

I have a group of about 10 friends/business associates that are all interested in getting into real estate investing.  We would like to invest as a group to increase our purchase power.   The nice thing is that we all make rather good income and would probably be able to buy at least one multi unit property every 6 months or so.  We plan on acquiring smaller multi unit properties initially and as we progress rolling them into larger multi family properties. Our goal is long term hold for retirement income purposes. Is there a good guide out there on how to organize a club like this? 

[Phil Trietsch]

I'd start with a good attorney who has done multiple of these for similar groups.  Even better is an attorney that is also a real estate investor.  My attorney and my CPA are both real estate investors, so they see things from my perspective and are sharpening their skills and strategies on their own deals as well as on mine.  

We set up individual LLCs for each apartment community that we buy.  This allows for different investors to participate (i.e. one person in your group doesn't like a deal or doesn't come through at the last minute).  This also keeps risk from one deal separated from risks of another deal (whether slip and fall lawsuit risk or investment performance risk).  

Don't underestimate the work that the Managing Member is going to have to do for the LLC. We compensate them a modest amount. They have to maintain records, do reports to the group, shop for things like insurance, work with accountant to complete tax returns, etc.

Ability and willingness to sign guarantees for loans may play a role in what percentage a particular member may want to take in the LLC. Some lenders require all members with > 20% ownership to provide financial information and sign personal guarantees for loans.

Clear LLC documents that define what happens when something doesn't go well (such as needing additional capital) or when someone wants/needs out (they need $ for JR's college and didn't think you'd be in the deal this long) are critical. It's all good until it's not...then it's much easier to turn to the company agreement for the options forward.

Good CPA that can advise you on tax structure and strategies is also extremely valuable...again, preferably a real estate investor that just happens to be an excellent CPA is the optimal team member.  

Last thought...good real estate agent and/or property manager (guess what?...they should be investors too!)...will be worth their weight in gold.  They have access to the data you need to make wise choices and they have the experience to guide you through the analysis, acquisition process, and operations.

Hope this is helpful!  Happy investing and if you ever look at Texas, we're happy to be a resource!!

Phil