As an essential alternative asset class, real estate is considered among the least risky investments that offer diversification and excellent yields for all sorts of investors.
Although not everybody is cut out for the rigours of discovering, purchasing, and maintaining a single piece of real estate, today, several types of real estate investment solutions exist for those interested in the ever-growing market.
Here is a comprehensive guide on real estate investment funds for investors looking to head-start investing in the real estate arena.
Let’s put it simply. A real estate investment fund implies a subgroup of funds whose sole purpose is to invest in real estate with the goal of generating income.
A sponsor with extensive background and a plethora of experience in the sector typically leads a real estate investment fund.
The fund manager is responsible for meticulously evaluating each investment opportunity thoroughly before deciding which ones to pursue with the pooled funds.
These funds come in numerous forms. While some are open to investment for everyone, others are restricted to accredited investors or high net-worth individuals (HNIs). They can further be focused on specific asset classes or types, geographies, and much more.
Now, let’s explore the distinct types of real estate investment funds for investors.
Mutual funds, whether they’re dedicated to real estate or not, are professionally managed pools of funds.
These corporations take investor funds and diversify them through several different real estate investments, such as real estate investment trusts (REITs), real estate-related firms, and outright property ownership.
Generally, any individual or organisation can invest in a real estate mutual fund if they comply with the fund’s minimum initial investment.
Though some investors may prefer to buy mutual funds through online brokerages, the vast majority of investors still work with a financial advisor.
Institutional and high-net-worth investors are the primary beneficiaries of these actively managed funds. That’s why most private real estate funds restrict participation to qualified institutional and accredited investors.
Every ETF, whether real estate-specific or not, is a passively managed investment instrument. Investors can achieve market-level returns sans expenses by purchasing these funds, which follow an underlying index. Equity-indexed real estate funds (ETFs) trade on all the major stock markets and are available to anyone.
Investors in real estate investment funds are often paid back from the fund’s earnings before the fund’s sponsor receives any of the money.
Thus, the sponsor has an assertive incentive to see that the deal generates the expected return. It is how funds are set up so that the interests of the sponsor and the investors remain aligned.
It’s a prevalent misperception that putting money into a real estate fund will limit your options. However, it’s nowhere near the truth. In fact, fund investing allows for more freedom and control.
For instance, an investor with a few million dollars to allocate has the option of investing one-fourth of the capital in four separate funds.
Depending on the investor’s preferences, they can select a fund specialising in a specific region or type of property.
By doing so, investors can build diversified portfolios that meet their needs without making costly direct purchases of individual assets.
The commercial real estate market generally exhibits a lower correlation with the stock and bond markets. This is because real estate is extremely illiquid, suggesting that it cannot be bought and sold on short notice.
Therefore, many investors prefer to put their money into real estate investment funds to spread their risk and hedge their portfolios.
Unlike the stock market, where a single crash can wipe out a lot of our money, real estate portfolios usually keep on running. Payment of rents and distribution of earnings to investors continues.
While it’s true that the real estate portion of a portfolio could struggle a bit in the long haul, it wouldn’t be directly proportional to the short-term fluctuations that other asset types are prone to.
Investors in real estate funds can bank on the knowledge and expertise of the fund’s management team.
When it comes to commercial real estate, the sponsor is often a seasoned professional or a team that can expertly manage the fund’s allocation across various real estate projects.
A reliable sponsor will always be accountable and available to provide comprehensive financials for investors to analyse and willing to address any concerns you may have about the structuring of the fund they are designing, including their approach, projections, and the rationale behind their conviction.
Plus, the fund manager is responsible for directing its day-to-day operations. As a result, investors can put their money to work without worrying about the details of each transaction.
Putting money into a real estate investment fund can provide several advantages.
For instance, as most funds are designed to last for more than a year, any capital gains generated on the sale of a fund asset must be treated as long-term capital gains rather than short-term capital gains since the asset is held for more than a year.
In addition, investors in a real estate investment fund may reap the benefits of pass-through depreciation of their holdings.
An important thing to note, as is the case with all tax-related matters, is that the advantages investors could enjoy will be based on the guidance they obtain from their accountant and dictated by the specifics of their individual circumstances.
Investing in real estate investment funds is a unique approach to portfolio diversification that bypasses the complexities that come with sole ownership. But not every financial instrument is the same.
So before putting down any money in a fund, each potential investor should complete their due diligence.
Research the fund’s sponsor, management, and past performance before investing. Analyse their geographical and product-based investments. Carefully consider the fund’s expected returns and ask how and over what time frame the fund plans to achieve them.
Keep in mind that no investment is completely risk-free but that your prospects of keeping your investment safe in a fund increase as you learn more about its structure.
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