In life, there are things that can be done individually as well as in groups. For example, solitaire is played alone whereas poker is played in groups. There is the saying “two heads are better than one”. You can also look at it from the perspective of a team sport such as soccer. With the team sports, a group of people is working together to achieve a common goal of winning the game. The saying “there’s no ‘I’ in team” resonates with many sports and activities.
The same mentality can be associated with investing in real estate. Sure, many investors are able to purchase property by themselves. Some like not having anyone to deal with but themselves. However, there comes a point when investing alone can only take you so far. Real estate investing itself should be considered a team sport. There are several reasons why real estate investing should not be done just individually.
First, there’s the exposure. When an investor is completely alone in a deal, all the capital required for that deal is shouldered by that one investor and his/her resources. Surely if the deal provides a windfall, all the profit goes to that one investor. This is probably a big reason as to why investors want to go it alone most of the time. Also, there is the avoidance of disagreements with business partners. However, on the other hand, if the investment were not to perform as expected, that one investor alone would lose all the capital that was needed for that transaction. With investing in groups, an individual’s initial capital is reduced, since there are others with whom to share the amount of money needed. Furthermore, the amount of money at risk for an individual is reduced.
Second, the cheaper the prices of the real estate, the more investors there are who are qualified and able to purchase them. Therefore, this creates more competition for the individual investor, making it more difficult for them to find the deals to create the returns desired. However, as investors bring their funds together, they are able to focus on buying larger, more expensive properties that the individual investors cannot easily purchase. This reduces the competition and allows the investors to find the deals that will bring the returns desired. Also, since the group would be able to purchase bigger properties, economies of scale will come into play, increasing the returns further for the investors.
What really separates the individuals from the groups is their ability to produce the needed down payment amounts for the different sized properties. Group investing lowers the competition.
Group investing allows the investors to climb to a specific niche of properties, primarily the $1,000,000 to $5,000,000 price point, where most of the individual investors cannot readily afford, and just below where the institutional investors want to be. Here, there is less competition, and more good deals to be made. The economies of scale appear, along with the bargaining power that comes with less competition and higher financial ability. All this results in amazing profits for the group.
Lastly, when one is investing in real estate alone, that one person in solely responsible for everything, from finding the property, organizing the renovation, creating a plan of action to increase revenue, managing the property, and disposition. When investing in groups, the individual investors do not have to partake in everything, or even anything. The investors can rely on the individual(s) in charge of the partnership to do the work and make the decisions. Therefore, the investors can sit back and allow passive income and equity appreciation to work for them.
Group investing is the best way to passively allocate a portion of your portfolio into real estate.