The Ultimate Guide to Investment Clubs
The importance of growing wealth and building multiple streams of cash flow and passive income has been put into the spotlight as many people were negatively impacted by the global recessions (and resulting spikes in unemployment) that have occurred over the last few decades. During that time, you may have seen news stories that showed unexpected headlines noting that, despite the recession, the wealthy were still able to grow their wealth.
Have you ever wondered “how do the wealthy become wealthy exactly?”
In seeking the answer to that question, you may have heard rumors of secret societies and hidden strategies that allow the wealthy to grow their wealth and enjoy the benefits of the lifestyle, free time and control of your life that comes with wealth.
So, do these secret societies really exist?
Well, kind of.
What those rumors may have been getting at was the concept of investment clubs.
What is an Investment Club?
The U.S. Securities and Exchange Commission (SEC) defines investment clubs as “a group of people who pool their money to invest together. Club members generally study different investments and then make investment decisions together—for example, the group might buy or sell based on a member vote. Club meetings may be educational, and each member may actively help make investment decisions.” Investment clubs are like a “mastermind” for your investments and finances.
What is a Partnership Investment Club?
Put simply, an investment club is a group of people who are investing together. They leverage the capital, knowledge, network, skills and resource of each other to be able to make smarter investing decisions. This type of investment club, that pools their money together, operates as a partnership where investment decisions are made as a group.
These types of partnership structured investment clubs may be subject to special SEC regulations based on the structure of the investment club. If the club checks all the boxes of investing in securities, selling membership in the form of shares or percentage ownership of the club (i.e. securities) and there are no exclusions available to the club based on the definition of an investment company then this club is likely to be subject to special SEC regulation.
Not all investment clubs work this way however. In some investment clubs you can have more independence in your investment choices. These are called self-directed investment clubs.
What is a Self-directed Investment Club?
A self-directed investment club allows members all the same benefits of a partnership structured investment club. You will get access to education and ability to leverage the network and skills of other members however you do not need to invest in every investment opportunity presented by the club.
You can do your due-diligence with the club members but choose not to pool your money together with other club members. Instead, you can make the investment individually on your own or opt to not invest if you are not a fan of the investment opportunity.
What exactly is a Real Estate Investment Club and a Passive Income Investment Club?
Many investment clubs are geared towards making investments in asset classes that provide passive income. The names provide hints to the investment mandates or philosophy of the investment club. A Real Estate Investment Club will be focused on investing in real estate.
A Passive Income Investment Club will be focused on investing in various passive opportunities which can range in various asset classes from litigation finance, real estate, stocks, cryptocurrencies, precious metals, and business. They would not however take active roles such as managing the business that they invested in.
What do investment clubs do?
One of the obvious things that investment clubs do is invest. There is a lot that goes into the act of investing however.
Investment clubs often provide a source of education. Members of the investment club will have varying levels of education on the asset classes that the club will invest in. The members can serve as mentors or trainers to help less experienced members learn more about the asset class from an experienced investor.
Additionally, the investment club can bring in guest speakers and other individuals that can provide formal education to members of the club so that they are more informed in their investment approaches and decisions. Meetings will occur on a monthly basis or as dictated by the club laws.
Once members are educated and ready to invest, there is also due diligence (research about the investment) that is performed by the members to vet the investment and make sure it is a viable choice. If the investment is approved, then the club will usually have an individual(s) designated to help with the logistics and administrative work of collecting the funds to invest and providing the related reporting and investment income distributions to club members.
Investment club structure
Each club will have a mandate as to what type of investments they will make. Investment clubs will typically have stated investment club rules and members would be required to keep confidential the “knowledge assets” of the club and what occurs within the club.
In the partnership structured investment club there may be a formal partnership created via a limited liability company (LLC) and members will buy shares of this company to join the investment club. In this scenario reporting would be in line with reporting for other LLC based partnerships; members would have operating agreements and by-laws that outline how expenses and income are shared and specific leadership structures used to bring order to the way that the club operates.
In self-directed investment clubs the structure may range from a more informal gathering of friends or have clearly written outlines as to the leadership structure and rules of the club.
What are the costs related to joining an investment club?
The cost of joining an investment club can range from being free to costing tens of thousands of dollars. This may be a one-time payment, periodic monthly or yearly payments or a combination of all these choices. Membership fees have a wide range depending on if the club is a partnership structure or self-directed, if the members are very high-net worth individuals or working class, the types of investments that are being invested in and more.
You may be wondering “does joining an investment club impact my taxes?” Investment club taxes for partnership structured investment clubs that are LLCs will be treated as pass through income and the club would provide a partnership schedule K-1 return each year; you would not face any additional taxation. In the scenario of a self-directed investment club, where you invest individually, the investment club membership has no bearing on taxes. Of course you should also consider what types of assets the club is investing in and make sure that the investment choices themselves don’t just provide good income but also provide great tax advantages.
There are cash outflows that may arise from doing due diligence (i.e. buying special analysis tools, visiting sites for certain alternative investments etc.) and networking (going to dinners, conferences etc.) and the funds used to make the actual investments themselves. As a member of the investment club you may not necessarily need to pay these expenses as they may be covered in membership fees or you may have reduced costs as they are split among members.
How do I find and join an Investment club?
Given the nature of investment clubs you most frequently will find that these are in person clubs where members prioritize knowing the other members of the club. This is important to many individuals who join investment clubs as they want to know they can trust the other club members and are going to be investing large sums of money together.
Investment clubs tend not to advertise so it is up to you to seek them out. You can find investment clubs by asking others in your social network, doing a Google or Facebook search or looking on Meetup.com for local investment clubs in your area.
Are there any online alternatives to investing clubs?
There has been a surge in crowd-funding websites such as crowdstreet and fundrise. While these sites do provide some of the benefits of investing clubs, they do not quite achieve the same “mastermind-like” effect that comes from working with a group of motivated and intelligent individuals to seek out the best investment opportunities.
There are some investment clubs that operate with both online and and in person presence. In today’s tech enabled age, the online presence of these types of investment platforms is expected to grow. This online platform will allow new investors to sync and share ideas. You can find investment clubs like these, such as InvestUp!, via similar searches on Google, Facebook or Meetup.com.
What are the pros and cons of joining an investment club?
What are the pros of joining investment clubs?
Reduced cost and less or no management fees compared to other investment options such as mutual funds and investment advisors. Since you are both the investor and the manager of your funds there are cost savings compared to having someone else manage your investments.
More control and insight into the investments that are being made: As investment clubs act as a democracy where the club votes on what investments to make, or in the case of the self-directed investment club you make the final decision on what investment you make, you will have control in the investment decisions.
Increased deal flow and investment diversification: You will be able to see more investment opportunities because you have a whole club of individuals sourcing deals. Additionally, you may be able to invest in a larger amount of deals because you will need to invest a smaller amount as an individual per deal since the pooled amount of the club’s investments should meet the requirement for the investment opportunities minimum investment amount. This adds a double benefit of diversification as you will be able to apply your funds by investing small amounts in several different investments as oppose to putting everything into one investment to meet the minimum requirement.
Ability to learn in a safe setting: One of the main benefits of investment clubs are the learning opportunities. These opportunities may come from experienced members or invited speakers. Due to the nature of the relationships built in the investment club you have more opportunity for one-on-one interactions and to learn side by side with other members while avoiding errors you may make if you start investing on your own.
Crowd-sourced due-diligence: Due diligence is key in making smart investments. Other experienced investors may be able to spot investment risks and rewards that you may miss or (in the case of some alternative investments) have physical access to easily do in person due diligence. When you have a whole team of individuals reviewing an investment it is less likely to make a bad decision.
Shared expense and work-load: Making investments requires research, due diligence, management fees and other start-up/on-going expenses. When you join an investment club you can split all those costs and work-load across the various members of the club making life easier for you.
Access to enhanced tools and resources: Club membership may afford you access (as part of the club’s offerings or via tools and resources owned by a member of the club) to tools, software, resources, statistics, investment research and other competitive advantages that allow you to make smarter investment decisions. If you invested individually you may not have access to these resources or know how to use them and if you did decide to purchase them, you would have to pay a large fee to access them.
You can leverage the experience and skill of seasoned investors: Investment clubs are great as they provide benefits for both new and seasoned investors. Seasoned investors have more “dry powder” to work with in the form of increased capital to access more investments and new investors get to leverage the skills of seasoned investors to make the best decisions.
Reduced risk of making a bad investment decision: When you invest with an investment club you are investing with a group of people who are all incentivized to make the best investment decisions. They have pooled capital, skills, resources, and knowledge together plus numerous people are reviewing each investment opportunity. This combination of factors leads to more success when investing.
Investment sponsors may be more willing to negotiate fees based on the combined magnitude of investment coming from an investment club compared to an individual investor.
Networking: Individuals that join investment clubs are motivated and ambitious individuals that often have success in other areas of their personal and professional lives. Being a part of an investment club can act as a “mastermind” like environment where you meet individuals who can help you to achieve greater success beyond just investing. These club members may also be great customers or vendors that you can connect with to do business other than club investing.
What are the cons of joining investment clubs?
Members are frequently not professional investment advisor but rather just experienced investors. With the added freedom of having control over their investment decisions the club members will also have to take the onus of both successful and unsuccessful investments.
Limited investment scope: Some investment clubs may be limited in scope of what they invest in which could limit diversity in your overall investment portfolio.
Costs: While cost savings may be a benefit of joining an investment club you may find that the club you want to join has a high membership fee that either requires a large lump sum payment or on-going payments to join. Often fees are charged by clubs to filter out individuals who are not serious our committed. You should evaluate what these fees are being used for.
You may choose a bad club. The reality is that not all investment clubs are created equal. Some clubs may not have the right mix of skills, committed members, knowledge and resources to be able to provide the best investment experience. Also, you may find that some members are not committed which may diminish the overall impact of the club. You should research the club, see if there are any referrals or feedback you can get to validate if the club is what you are looking for and if they are more geared towards earning profits for the club organizers or to benefit the club members.
Disagreements: As club members are human and may have different investment view points there may be disagreements that arise for divergent investment decisions or personal conflicts.
It may be difficult to leave partnership structured investment clubs. You may be limited in how you can sell your shares or the departure of a member of the investment club may effectively create the termination of the investment club. In self-directed investment clubs this problem can be avoided.
Should you join an investment club?
So, should you join an investment club?
Sure, there may be some actual secret societies out there that the wealthy are using to grow wealth, but if we all knew about it – would it be that good of a secret? If I am planning my financial future, I would spend more time on what is known and proven to bring success than on rumors. Investment clubs provide opportunities to use the collective force and resources of educated and experienced investors to make better investing decisions than going on your investing journey alone.
However, the choice is ultimately up to you – which one do you prefer to be the lone wolf or to go with a team?
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