Starting a Real Estate Investment Fund: Beginner’s Guide

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Many young investors are interested in commercial real estate, but the high cost of owning an income-generating property kills their dreams. There are various ways to own commercial property, including real estate partnerships, individual investment, or real estate investment funds.

Real estate investment funds have proven to be the best entry point for beginners who do not have time to take part in everyday management. Let’s look at these funds in detail.

What Is a Real Estate Investment Fund?

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A real estate investment fund is a pool of capital from investors interested in investing in commercial real estate. A real estate fund is headed by a professional manager, known as a sponsor, with experience and expertise in real estate. They look into the investors’ individual needs and execute them to satisfaction.

If you have been looking to invest in commercial real estate but dread the property management bit, this is the route to take. You will be able to own property shares and earn money without the risk and liabilities that come with sole ownership.

What’s more, investors in real estate investment funds get the chance to explore different types of properties. For example, a share of the capital can buy residential houses for long-term income, while another portion can be invested in easy-to-sell properties.

Real estate investment funds are mostly registered as Limited Liability Corporations, but some pass through as limited partnerships.

A real estate investment fund is different from other types of investment funds because it’s an investment in assets that are not quickly sold or exchanged. Therefore, as an investor, you must understand that it is a long-term investment. Do not expect to get profits quickly.

Who Needs a Real Estate Investment Fund?

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A real estate investment fund is a good choice for passive investors with an interest in commercial real estate. A skilled sponsor handles the management and operations of the assets, excusing you from the hands-on work.

Also, the combined funds give investors access to investment opportunities that cannot be achieved through individual purchases, so this is a great choice for those just getting into real estate investing. The fund is used to buy properties in several locations, diluting the risk.

Can You Start Your Own Real Estate Investment Fund?

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Yes, you can create your own real estate investment fund. To begin with, you must get a lawyer–specifically, a securities lawyer. This is a lawyer specialized in creating private investment offerings and handling legal issues related to the investment.

If you pass the law requirements, you will be the general partner, also known as the sponsor. You will then ask investors, or limited partners, to invest in the fund and provide capital. The accumulated funds are then used to purchase real estate property.

Types of Real Estate Investment Funds

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There are four types of funds available to choose from. These are:

1. Real Estate Mutual Funds

Real estate mutual funds are entities that collect funds from investors. They do so to invest the combined capital in diversified real estate opportunities. Like other mutual funds, they are managed by professionals. These entities invest in the bonds and stocks of established real estate companies and also purchase properties.

Real estate mutual funds are open to all investors who can afford the minimum capital share. These funds are a good venture for small investors looking to diversify their passive income.

2. Real Estate Private Equity Fund

Real estate private equity funds are created by a general partner and get funding from limited partners. The general partner (the sponsor) identifies investments for the partners and does the management. Private equity funds target high net worth investors and institutional investors. They are not available to the general public.

3. Real Estate Debt Fund

Real estate debt fund firms collect money from investors, and the money is lent to prospective real estate developers or buyers on interest. Investors in debt funds earn from the interest acquired from the loaned money. Just like private equity funds, debt fund firms target large investors. 

4. Real Estate Investment Trust

Real estate investment trusts, also referred to as REITs, are firms that invest in real estate or mortgages. They invite investors to buy shares and get returns from the income generated by the properties owned by the trust.

How to Invest in Real Estate Investing Funds

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Investing in a real estate investment fund can be a lucrative business. The limited partners provide the capital and are passive investors who have trusted their sponsor’s real estate investment offering. The partners receive returns on investments, and the sponsor earns fees, depending on performance.

However, like any business, this comes with financial risks. To make sure you get the best from investing in a real estate investment fund, here are some key things to consider:

1. Target Properties

The first step is to identify the kind of assets the fund you are considering wants to venture into. A suitable property will appreciate and be profitable to the investors. If the fund has been dealing with the same properties for a while, ask for supporting documents on previous performance.

2. The Sponsor

You are giving the sponsor your hard-earned money when investing in a real estate investment fund. Therefore, ensure that the fund’s sponsor is trustworthy, with experience in and knowledge of real estate funds. Also, the management should be transparent about previous ventures and the returns.

3. Structure of the Fund

A real estate investment fund can either be an open or closed fund, and the structure determines how investors leave the fund. For open funds, you can opt-out of the fund before the completion of the project. On the other hand, investors cannot leave a closed fund until an agreed-upon time.

In addition, you must be aware of acquisition and selling timelines, how payouts will be made, and whether you will be required to make additional payments to cater to unplanned financial needs.

The regulations on real estate investment funds vary by state. Be sure to follow all local laws and regulations to ensure a successful investing venture.