An Investment Club: The Right Fit for You?
Investors always have instances they can look back upon that are defining moments in their investment careers. For me, one of those moments is when I invested in my first non-traditional asset. A close second was when I co-founded my investment club with two partners that would become my lifelong friends.
What Is an Investment Club & How Does It Work?
An investment club is a group of individuals to invest alongside each other while leveraging the collective knowledge and opportunities of the entire group.
In recalling my early experiences, there is a common saying among investors that springs to mind: If you get out of your comfort zone and put your goals out into the universe, then the universe will reciprocate. That’s exactly what happened to me.
I met one of my investment club partners at my previous employer. Ironically, we both started working at the same place at the exact same time, but it took nine years and a random series of events for us to interact. We connected first as friends, but then real estate investing came up. My partner was an avid podcast listener, and it turned out we listened to much of the same educational content. This allowed us to communicate in the same frequency without one of us having to teach the other the basics. This was critical. During our numerous conversations, we learned from each other without either of us having to take on the mentor role.
The idea of partnering was exciting to both of us, but we weren’t 100% sold on anything we were finding. We took several trips to look for multi-family homes and came up empty-handed.
But we didn’t become a club until a third fellow investor, Matt Canning, came into the picture. My wife and I were at an investor presentation at the Renault Winery outside of Atlantic City. One of the operators that I partnered with on a previous deal was raising money for the revitalization efforts of this historic winery. The business plan was unique and opened the door to many questions. After the presentation during a Q&A session, I noticed Matt asking some tough analytical questions. Apparently, Matt paid close attention to the questions I was asking, as well. At one point, the Q&A became a back and forth between Matt and I, so the presenter asked us to meet him in person afterwards to continue the conversation. The private Q&A allowed us to get to know each other and exchange contact information.
Matt was referred to the event by another operator on the deal. Given that investing in a resort can be risky, it was fortunate that I met Matt there. We followed up with long emails discussing the merits of the deal, and eventually, my other partner was brought into the conversation. That was the beginning of our investment club.
Once the three of us were committed to investing together, the natural flow took us to real estate syndications. We wanted to invest mainly in real estate, but it became obvious that syndications would allow us to do more deals. For one, if we would have bought property on our own, we would be completely responsible for the deal, and that would occupy the most time. Syndications allowed us to leverage the time of other full-time operators in exchange for capital that we had.
Having settled on the type of investment we wanted to make, we all got to work. We began to reach out to operators, learn how to underwrite deals, and network with other investors.
Then, we shared what we were actively learning with each other via a private chat room and monthly calls. During those early months, I can honestly say I learned in weeks from my investment club what would have taken me months or even years if I was on my own.
Another example of the efficiency gained was Matt had a technological background. Within a week of getting started, he had a working algorithm that we used to filter out deals that were trickling in. With the algorithm in place and an expedited learning curve, we made a series of investments. Where individually we may have invested in one or two deals (because of the high minimum investment amount), we collectively invested in six deals. Not only did this give us better diversification, but it also allowed us to learn from six deals rather than just one.
Do Investment Clubs Have to Register With the SEC?
It depends. The advice we received from our attorney was no, as long as all of us remain actively participating in the investment club—meaning no member becomes passive when it comes to deciding what to invest in. In our case, we all had to agree to a deal and then fund the deal. One no, and the deal was dead. It was made very clear to us that the moment one of us stopped participating, we would need a security offering. Otherwise, we were advised on crafting a very strong operating agreement. This was information given to us based on our unique circumstances; you should always seek advice of your own legal and financial professional.
PRO TIP: Make sure you approach a securities attorney if you ever have a question about having to register your club with the SEC.
A Note About Disadvantages
The disadvantages of investment clubs are similar to the disadvantages of any marriage or other union: With the right person, there aren’t many, but with the wrong person, the list is never-ending. The main thing to keep in mind is when you form an LLC, that entity can exist for a very long time. It’s critical that your operating agreements covers the minor details as well as the bigger details because once the capital is deployed, you are married to your investment club partner.
Besides the time commitment, you also have to be comfortable with dividing the control amongst the club members.
I personally like smaller clubs because they operate like a professional family where we always know each other’s goals.
There can also be an issue if a person’s situation changes to the point where they need their funds back. If an investment club invests in alternative and private investments, they may be difficult to liquidate, and the other club members may be forced to buy out the exiting partner. Not to mention the complication that can arise in the case of a partner’s death. All things to keep in mind when crafting an operating agreement. In order to make sure no one limps into the club, the members should have a full financial disclosure policy. This way, you can ensure that you’re investing with others who are in a similar position of fiscal strength.
A Final Word
If the opportunity presents itself, joining an investment club can be an incredibly rewarding experience, but there are many factors to consider before committing your time and capital to such an endeavor. I hope this article helps shed some light on those factors.
If you liked this article and wish to continue on your path in learning about alternative investments, please make sure to check out my other educational articles as well as my book, The Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways.
Disclaimer: The information presented in this article is for informational purposes only and does not constitute professional financial or investment advice. The author does not make any guarantees or promises as to the results that may be obtained from it. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. Even though, the author has made reasonable efforts to ensure that the contents of this article were correct at press time. The author disclaims all liability in the event that any information, commentary, analysis, opinions, advice and/or recommendations contained in this article results in any investment or other losses. Your use of the information in this article is at your own risk.