How to Structure Your Real Estate Fund: 5 Tips to Get it Right
Real estate investment funds are meant to provide investors with access to large properties while reducing the risk.There are a few different ways these funds can be structured, and they vary based on the number of required investors, asset base, marketing rules, and investor classes.
Real estate investment fund structures may be as simple as a small group of local investors pooling resources. They could be so complex that they involve billions of dollars and must follow strict Securities and Exchange Commission (SEC) regulatory requirements. This article will review some of the types of real estate fund structures, their objectives, and pros and cons to help you understand any deal you may be involved in.
Types of Real Estate Funds
Just like general investment funds, real estate funds are also beginning to become more specialized and follow specific strategies. They may focus on a particular asset class, market area, or a mix of the two. For example, you may have a fund focused on multi-family homes, office buildings, or warehouse facilities.
Real estate development funds focus on investing in land with old properties that you can redevelop. These funds tend to require a lot of legal work because of the complexity involved in construction deals and permits. These funds can also be risky since you’ll have to outsource much of the development work to contractors.
Then you have structured finance real estate funds, which use debt financing to purchase real estate. These funds are more stable and tend to follow a more predictable cycle based on access to affordable debt financing. The bank accepts the cash flows generated from the property financed as collateral for debt repayment.
Lastly, there are joint venture real estate funds. Or, better put, syndications! However, depending on how the real estate fund is structured, it may be considered a security. This changes how the project is regulated. This is where the deal comes into play. These funds are generally created for a specific property investment, with each partner fund contributing a specific amount.
While those aren’t all the types of funds that exist, they are the big three. Now let’s look at how they can be structured.
Closed-End Real Estate Fund Structure
A closed-end real estate fund (CEF) raises capital during a specific period, typically lasting from 12 to 18 months (or whatever the deal manager stipulates). Closed-end funds require investors’ commitment since they are structured to last for a fixed term once the capital is raised. Investors generally won’t be able to touch their investment money for perhaps five to ten years. Once the fund is fully established, investors receive their capital if the asset is sold, refinanced, or cash flows provide ongoing dividends.
The pros to a CEF is that they are pretty safe bets. Sure they take time to grow and show results, but joining a CEF deal means you’re investing in a safer bet than other types of funds. Plus they are actively managed, so you know someone is handling your money to make it work for all stakeholders in the deal. The cons are that your money will be on hold for a while!
Successive Real Estate Fund Structure
Successive real estate fund structures are a little less common. They involve the deal sponsor creating subsequent funds when assets are sold. The previous investment proceeds are used to fund the next investment in a new fund.
Successive fund sponsors tend to manage a full portfolio of funds. This method allows for less legal involvement since establishing the subsequent funds is done with the proceeds. There is less liability involved since the cash is already raised.
Investing in Real Estate Funds
If you’ve gotten this far through the article, we’re pretty sure you’re ready to invest. That’s great news. You’ll be setting yourself up for stable cash flow, passive income, tax advantages, portfolio diversification, and financial leverage. You don’t have to own or operate a property. Sit back, relax, and let your fund manager do the work!
Premier Law Group is here to help answer any questions about getting started with real estate investing.
*Please check with your tax or legal professional, as PLG does not provide tax advice, and the above is not intended to or should be construed as such advice. Your specific circumstances may, and likely will, vary.
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