What is a Real Estate Investment Fund?
What is a Real Estate Fund?
A real estate investment fund is an entity where mainly accredited investors combine and pool capital in order to fully fund and maximize gains on a specific investment pursuit within real estate.
As an investment opportunity (versus most others), real estate funds have steadfastly stood the test of time for centuries worldwide. Billionaires and millionaires from every walk of life owe their good fortune almost entirely to the ROI power of real estate. It comes in many forms:
- Residential - mostly single-family homes and multifamily (apartment developments riding on rentals and condos).
- Hospitality - hotels, restaurants, and bars.
- Heavy industrial - covering a range of factory options
- Commercial - embracing offices, warehouses, retail, medical buildings, and the like.
- Mixed-use - where residential and commercial live side-by-side.
The immediate takeaway is that the players in the property game are diverse, with different agendas. First, there are the fix-and-flippers, a growing group that thrives on remedying building disrepair and then selling quickly. A close cousin to this methodology is to hold and rent out. Then there are the developers from the ground up. Also, there are investors in their thousands analyzing and zoning in on undervalued assets for hold or wholesaling to another in the community. The range of opportunities is arguably unmatched, except for possibly in the equity arena.
Talking about a tremendous beneficial differentiator, let's not forget about the lenders. In this space, real estate stands alone. Leverage funding with the property as security is a massive industry fueling the US economy. All the name banks are front and center, having energized the mortgage industry from the beginning. However, they're only half the story as we stand in 2021. Real estate funding has many verticals with specialist lenders offering options in:
- Bridge loans - temporary loans ranging from one year to twenty-four months while the property owner arranges a permanent mortgage.
- Cash-out funding - for investors with substantial equity in the asset wanting to draw out some equity for reinvestment elsewhere or going off to smell the roses.
- Renovation loans - to help keep a property viable during remodeling, and no rentals are coming in.
- Loans for vacant land - with development prospects.
Leveraging entities are ready to help investors with loans that can go as high as 90% loan-to-value, with and often without investor recourse. That's unique in the investment landscape and indicative that lenders see it as a relatively minor risk opportunity (note, less risk, not no risk). Bottom line, real estate as an investment arena is a dynamic field inviting diverse participants, with substantial third-party financing, which is why it's so attractive and fascinating.
How Does an Investor Get Into Real Estate Investing?
Like other investment categories (e.g., equities), real estate involves assessing risk. Much of this revolves around the leveraging ratios that attach to the property - very high, as pointed out above. Suppose things do go wrong for an extended time, as they did during COVID-19 initiating the CARES Act that cut off rental income to landlords. In cases like this, skittish lenders can pressure investors into foreclosure and bankruptcy. Getting into this real estate game takes fortitude, savvy, and picking one's spots. For the everyday investor with no inclination to wade through the weeds (indeed, the majority these days), the solution lies in patching into big-scale investing with small dollar amounts.
What is Big Scale Investing in Real Estate?
When you walk through the "big scale door," things get genuinely intriguing. Here's why:
- Many professionals understand the real estate nuances and volatility factors like the back of their hands.
- Generally, scale investments involve thousands of units, sometimes going into the hundreds of thousands. This applies to:
- Every residential category - whole neighborhoods of single-family homes, condo buildings, or sprawling apartment complexes with lifestyle facilities.
- Office blocks, retail malls, self-storage, and motor-home parks.
- Industrial parks with segmented factory facilities.
The scale feature is critical because it provides diversity, thus reducing risk. The downside is that it requires investors in their droves to give the real estate proposition the legs it needs. For you as a single investor, the consideration is not so much the property attraction (because it's a given that professionals will drive it forward to the max.) Rather, the large scale investment vehicle is what matters the most.
The primary structural consideration in considering a large scale real estate investment projects are:
- Does it represent unique tax advantages?
- What does the track record of the property professionals look like?
- What are the relative advantages and disadvantages of each option?
- What’s the minimum investment?
- To what extent can I rely on regulatory compliance?
- Bottom line, what’s my Internal Rate of Return (IRR), and is the risk worth it?
These are the core questions; there may be many more. Doing due diligence is crucial to making the proper selections in selecting a "real estate fund".
Why Should I Invest in Real Estate?
A good starting point in this conversation is that we’re dealing with highly sophisticated real estate options no matter from which angle you approach it. The significant dividing factor is regulatory oversight and all that it implies.
Differences Between Types of Real Estate Funds
ETFs, REITs, and Mutual Funds
These are predominantly publicly-traded real estate and property mortgaging options. It means the promoters offer them on stock exchanges in tiny $ units (like $25 or thereabouts). It lets individuals with as little as $500 acquire a minute piece of portfolios covering mega-millions of dollars and extensive unit coverage. The system described works on a similar basis to equity mutual funds like the S&P 500. The advantage is that generally speaking, one can diversify down to the nth degree with limited resources, and almost immediate liquidity if you want to exit at any time.
Some articles propose that REIT, mutual fund, and real estate ETF professionals are more competent than the private fund secor (see below). That's categorically untrue. General partners driving private equity funds forward go out of their way to meet the highest investment standards. Further, they are frequently more agile and faster to the punch than institutionally connected operators. Nonetheless, when navigating all investment options, it's wise to do your due diligence to review track records and get comfortable with the team's competence in reaching vital decisions.
Here's the thing with REITs and all its offshoots:
- Strict regulations dictate that managers must distribute a minimum of 90% of revenues annually. In many cases, the latter pays out 100%. As a result, growth in the fund relies on new equity flowing in and very little from reinvested earnings.
- All REIT-centric investors receive dividend returns and are taxed accordingly. In a nutshell, it's the most disadvantageous tax category on the books, offering zero extra return benefit.
- “What about capital gains?” Capital gains in REIT-type investments are rarely in the equation. They do happen in specific categories but are rare and hard to find. Notwithstanding, dividend returns in high-performing publicly traded funds are 15% ranging up to 20%. It suits many investors down to the ground.
- Certain REITs specialize in lending instruments, buying up parcels of mortgages with compelling upside features. Many REITs take a hybrid approach and include loan funding with property assets. In any event, we can construct portfolios to have both.
Private Real Estate Funds: The Benefits
The most compelling opportunities available to individual investors come from this direction. General partners provide enviable track records and relate to those interested parties who want to assimilate the benefits direct ownership delivers. The bumper advantages with private real estate funds rest in the following:
- Tax advantages - on every state's roster, they come in much lower than standard dividend rates (that apply to REITs).
- In addition, there are depreciation concessions and investor category concessions unavailable in REITs and their close cousins.
- General partners can reinvest profits as the opportunities arise without regulatory restrictions. This can trigger accelerated capital gains down the line.
- Investment agility in private funding is a huge plus for investors relying on the general partners finding every possible sweet spot.
- Less oversight - in many cases, the private funds launch as 506 C classifications with scanty regulatory oversight at best. While this may seem to be a drawback to some, private fund followers see it as bolstering the general partners' flexibility. With their muscles flexing, private fund drivers can extract returns touching 30% IRR with significant tax benefits pushing it higher.
Most private funds require minimum investments of around $50,000. You'll find many only allow accredited investors into the fold. If you peruse private fund memorandums, they should detail fundamental aspects like exiting the fund, leveraging intentions, time horizons, and more. To reiterate, general partner resumes are crucially important. Many private funds match or get close to the expected REIT scale of operation with a comparable competency level.
Exceptional Private Real Estate Funds to Invest in
The developer Kona Development Partners, LLC, offers a Class-A Preferred Interest at a favorable valuation alongside their participation. In addition, it converges on extremely compelling metrics (projected):
- An equity multiple of 3x that looks realistic, all things considered.
- A target IRR of 27% over the investment period, excluding investors’ personal tax advantage situations that may come into play.
- An up to 40% equity offer.
The compelling benefits one can expect include:
- The professional general partners demonstrate exceptional credentials.
- They know how to navigate huge projects with already close to $1 billion in aggregate projects under their belt.
- With the hot, hot, hot single-family market tearing through the USA, its focus on luxury single-family homes in one of the world's most sought-after locations is a sure-fire formula.
Embedded in the proposition is the comfort that Investors will receive 100% of the cash distributions before the sponsors begin benefitting in any shape or form (including a draw on management fees). It's a measure of the latter's confidence in the project. Moreover, the IRRs predicate themselves on zero leveraging, which is an excellent feature. Loans may kick in later to fund exits without putting any pressure on the private fund itself. Kona is a shining example of private funds standing head and shoulders above the herd, ETFs and REITs included.