If you keep up with the real estate investing and investment sector, you are aware of the significant investments made by institutional real estate funds in several transactions around the nation. A state pension fund or any such organization frequently owns a sizable shopping center or residential building.
Looking for the simplest method to get started with real estate investing? With just a small amount of money, you can assemble a lucrative real estate portfolio.
Did you realize, though, that you, or you and a group of investors, could combine your funds and launch your own real estate fund? You can launch a private real estate investment fund and make investments like the big guys with a little bit of preparation and funding. Do you want to find out how? Go on reading!
What Is A Real Estate Fund?
A real estate fund is a specific kind of business company that makes real estate investments using a combination of its own money and contributions from investors. Mutual funds and institutional funds, including private or public employee pension plans, are the most popular forms of real estate funds.
Real estate investment trusts and real estate funds are two different types of investments in real estate (REITs). Real estate funds and REITs both employ combined investor contributions to make real estate investments, but there are substantial differences in how the two companies carry out those investments and how investors profit from them.
With the aim of providing investors with passive income, REITs purchase, maintain, and occasionally sell rental property using a combination of investor capital. On the other side, real estate funds make investments in a range of real estate-related products, including REITs, structured notes, and other mortgage-backed securities. Investors in real estate funds benefit from asset appreciation in addition to passive income from rentals.
While a REIT would actively manage the assets in a specific portfolio, a real estate fund’s holdings are more likely to have stock stakes in many REITs around the nation. While real estate funds and REITs both have hold periods, real estate funds are less likely to distribute yearly or quarterly dividends to their investors.
This is due to the fact that real estate funds rise in value as their portfolio of properties does. According to their equity stakes in the fund, investors receive a portion of the proceeds when portfolio holdings or the entire fund are sold.
Real Estate Fund Types
The corporate body that supports a real estate fund may be divided into two categories.
Limited Liability Company
A limited liability company is the first (LLC). A limited liability company (LLC) is a form of corporation or partnership in which each member has a specific ownership stake in the business, often based on an investment commitment, but equity may occasionally be granted in exchange for particular knowledge or experience. When an LLC is established, it becomes legally responsible for the assets it controls and the company it does, not the individual partners.
A real estate limited partnership is the other business structure used by real estate funds most frequently (RELP). Although there are many similarities between LLCs and RELPs, there are also some significant distinctions. LLCs may be jointly administered by the members or by a third party acting on their behalf. Companies with limited partners are normally run by the general partners, with one of them acting as the managing partner.
Adding Investors into Your Real Estate Fund?
You must choose how you want to generate money or accept investments after creating your real estate fund and deciding your investment goal. There are two types of structures for this: open-ended funds and closed-ended funds.
Investors may purchase or sell shares in an open-ended real estate fund at specific times during the course of the fund’s existence. The fund management decides how many and how long of these periods there will be. Although open-ended funds provide additional flexibility, they also present certain particular difficulties.
It is challenging to evaluate the private equity fund since investors can enter and exit open-ended funds, and share values might sometimes vary over what would ordinarily be the holding period of an investment offering. As a result, if there is an out during a downturn in the real estate market, the value of an otherwise very strong fund might suffer greatly if too many shareholders head for the exits at once.
In a closed-ended real estate fund, there is a predetermined length of time called a commitment period during which the fund is raising money, and potential investors may purchase shares in the fund. Typically, this commitment period is one to two years. The investment offering is no longer accessible once the commitment time has passed, and shareholders won’t be able to sell their shares or withdraw money from the fund until the holding term is over.