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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 anal