What it means
A real estate investment group is formed by a sponsor or management team that raises money from several investors. The team chooses the properties, arranges financing, finds tenants, handles repairs and manages the finances.
Investors typically hold a fractional stake or a share of the properties and receive their share of the returns. The model is attractive to people who like the idea of owning property but do not want to manage tenants or maintenance.
In some structures the group pools rental income so that vacancies in one property are cushioned by income from others. This spreads risk across the portfolio.
Income comes from rent and from appreciation when properties are sold at a profit. The group usually charges fees, such as a management fee based on the rent collected, an acquisition fee and a share of profits on sale.
These fees reduce the investor's net return, so reading the fee schedule is vital. A REIG is different from a real estate investment trust, or REIT.
A REIT is a company with a specific legal and tax structure, and its shares can usually be bought and sold on a stock exchange, which makes them liquid. A REIG is typically private, may have minimum investment sizes or investor qualification requirements, and can be hard to exit.
Due diligence is essential. Investors should review the sponsor's track record, the property types, the debt levels, the fee structure and the exit terms.
As with any pooled investment, returns depend heavily on the quality of management and the local property market. A related point is the way returns are measured.
Investors should look at cash-on-cash return, which compares annual cash income with the cash actually invested, and also at the total return including any gain on sale. A group that reports only rental yield may be hiding high debt or low sale prices.
In practice
Real-world examples.
Example
A busy surgeon wants exposure to rental property but has no time to manage tenants. She invests $150,000 with a REIG that owns a portfolio of apartments and receives a share of rent each quarter.
Example
A retiree compares a REIG with a REIT. He chooses the REIG for its direct property ownership but accepts that his money will be tied up for years and that exit may be difficult.
Example
A small business owner invests surplus cash in a REIG that pools rent across 40 homes. When two homes are empty for a month, the pooled income still covers most of the expected distribution.
Formula
Calculation
Net annual return = (rental income - operating costs - management fee) / amount invested
An investor puts $100,000 into a REIG. Her share of annual rent is $12,000, operating costs allocated to her are $2,500 and the management fee is $1,500. Net income = $12,000 - $2,500 - $1,500 = $8,000. Net annual return = $8,000 / $100,000 = 8%, before any gain or loss on the eventual sale of the properties.Case study
Seen in the real world.
Harbourstone Residential is an illustrative, fictional real estate investment group that owns 60 single-family rental homes. Its investors received steady monthly distributions until a local employer closed, which raised vacancies sharply across the area.
Because the group had pooled rent across all the homes, the loss of income from empty properties was shared rather than falling on a single investor. Management reduced distributions for six months and used its reserve to cover debt payments, then re-let the homes at slightly lower rents. The illustrative lesson is that pooling and reserves soften the impact of a local shock but do not remove it.
Harbourstone also began sending investors a quarterly report with occupancy, income, costs and debt levels, so that any problem would be visible early. Investors said the transparency made them more willing to stay invested through the downturn.
Watch out
Common mistakes.
- Treating a REIG like a bank deposit, when the capital and income are at risk and can fall.
- Ignoring fees, when management and acquisition charges can take a significant share of the return.
- Assuming a REIG can be sold as easily as a listed REIT, when exit often depends on the sponsor or on finding another buyer.
Questions
People also ask.
What does REIG stand for?
It most commonly stands for real estate investment group, although the letters can have other meanings in specific contexts.
Is a REIG regulated like a REIT?
Not necessarily, because a REIG is often a private arrangement and its legal structure varies, so investors should check the offering documents.
How do investors make money?
They receive a share of rental income and may gain if the properties are sold for more than the purchase and improvement costs, less the fees and debt repayments owed along the way.
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