Introduction
Achievers understand that we must carefully allocate our limited resources. There are few people and activities which merit complete devotion. A broader range is worth some effort, but our commitment will be smaller.
Owning your home without others makes sense. Owning shares of a publicly traded stock or bonds of a major corporation are common examples of group ownership.
“Wisdom comes by learning from experience and experience comes poor choices,” according to my Rhodes scholar attorney. Reading this article will show you how group investing can help accomplish your goals.
Over the last three decades I have learned from people who have invested with others. For about twenty years I have been involved with nearly twenty real estate investment groups. I learned something from every experience. Most of the transactions were financially profitable.
Objectives and Benefits
We must articulate our goals to accomplish them. Investors join groups in order to reduce management time, share risk or be in ownership of more ventures and / or larger situations. Group investments diversify our portfolio: to extend our capacity while reducing risk.
Most people who put money into group ventures appreciate the limited risk and lower management involved. In contrast, buying income property alone means accepting personal liability, either for the loan or for the risk involved with owning the property. If an accident happens on the property and the cost is greater than insurance, then there is the possibility that the owner could lose more than the investment. With group investments, most investors have limited liability. In the worst case they can only lose their initial investment.
As we mature we realize we may have a chance to make more money, but we cannot manufacture more time. With each passing decade we tend to put a higher premium on importance of using our time well. More things tend to get delegated. Wealth generates options. When we find smart people of character who share our goals, it often makes sense to put a portion of our assets with them.
Costs and Pitfalls
Mature investors know that things sometimes go wrong. There is a cost to everything.
In a joint venture you will not have complete control. With a group decisions often move slower. Including more people and having a separate organization (partnership, LLC, etc.) mean higher costs. If management errs it may take longer to correct the mistake or replace the error.
Specific Investment
These pages do not address whether any particular transaction is good. You assess each opportunity on its own merits.
If the deal does not make sense, then you will obviously pass. There are some situations that seem to be obvious winners, you will move forward there. There are more situations that justify some involvement, but would not make sense if you have to do everything alone and come up with all the cash yourself.
How Do You Sort the Opportunities?
First, let’s confirm the obvious. The goals and approach of the group should be reasonably close to your needs and style. The potential reward and risk must be sensibly balanced.
Does the Organizer Merit Your Trust and Confidence?
The lead decision maker is critically important. Is he a recognized expert? Someone with a dozen group investments probably knows more than a first time leader. Is the lead person putting in his own capital?
What happens if something goes wrong? Is there any evidence about what the manager will do if he or the property gets into financial trouble?
Let me be specific. Two partners developed property. They recruited some investors to put up most of the capital. In the good times things went well. During the recession one general partner abandoned the properties, the investors and his creditors. Everyone who was financially involved with him lost. The other man was a person of character. He did a variety of things to protect his investors. He moved his family out of state; they went through personal hardships. They loaned money out of their pocket to the group investment. The wife of the general partner left her career and took on management responsibilities. In a few painful years the properties became solvent again. The investors made a profit.
Would You Invest with an Organizer Who Suffered Adversity?
There is more than one right answer.
Some would say that his record is not perfect and would not consider dealing with him.
My banking background taught that proven character is better than mere assurances from an untested beginner. Veterans sometimes have scars, but they are proven. When my money is on the line I believe that keeping one’s word in times of adversity is vitally important. Passing a test is more important than having never been tested.
Structure Options
Will the group take title as general partners, tenants in common, corporation, limited partnership or LLC, Limited Liability Company?
Remember these words are from a fellow investor, and broker. For legal or tax advice, contact your lawyer or CPA.
Group investments rarely use general partnerships or tenants in common. If someone else does something stupid or harmful, you can lose all your equity, maybe more even though you did nothing wrong. There is the additional risk of complications when disagreements or changes occur. Bankruptcy, death, divorce or insanity can each create major problems for the entire group. In the beginning these forms might seems cheaper. When a problem comes up later these alternatives can be the most expensive.
Author: Terry Moore, CCIM
Group Investing: Is it for you?