There are many different ways to invest in real estate beyond becoming a landlord or hotel owner. Many people today choose to invest in real estate funds, which allow you to easily diversify and have a passive share in multiple properties. There are many different types of real estate funds, and the best fund choice depends on your investment goals.
If you are looking to learn more about real estate funds, this article can help. We’re going to break down the most common types of real estate funds and what they entail to help you figure out which one is the right fit for you and your financial situation.
What Are Real Estate Funds?
Real estate funds are an alternative way for people to invest their money into real estate, especially commercial real estate. In most cases, the fund’s overseer or sponsor will be the one in charge of overseeing the fund’s activity. Real estate funds pool the resources of many different investors and allow the investors to take on a very hands-off approach to owning commercial property.
The pooled finances from individual investors in a real estate fund allow them to purchase, hold, and eventually sell various types of real estate. Real estate funds can provide investors with an instantly diversified real estate portfolio, which is one of the reasons why they are popular with many investors.
Types of Real Estate Funds
There are many different types of real estate funds. These are the four most common types of funds that are available to willing investors:
Real Estate Mutual Funds
Real estate mutual funds, like other mutual funds, use money pooled from a variety of investors into a very diversified real estate portfolio. They are usually professionally managed. The fund’s investments can include real-estate-related companies, direct ownership of real estate, and REITs (real estate investment trusts).
Most real estate mutual funds are open to any investor as long as they meet the minimum investment requirement, which can vary. These funds can be purchased online through a brokerage or with a financial advisor.
Real Estate Private Equity Funds
Real estate private equity funds are usually not available to the general investing public, but instead are geared towards accredited investors. Investors are known as Limited Partners (LPs) and are usually passive investors. Real estate private equity funds often appeal to families, individuals, insurance companies, universities, or other corporations who are capable of investing large quantities of money.
The General Partner (GP) or sponsor, who runs the private equity fund, is responsible for attracting investments and ensuring that the LPs get a return on their investment. Different private equity funds have different investment strategies, so it’s important to consider your risk tolerance before choosing a fund.
Real Estate Debt Funds
Real estate debt funds and real estate private equity funds are similar because they both raise money from high net worth investors for real estate assets. An investor in a debt fund provides capital to help borrowers such as developers with projects like industrial sites, multifamily buildings, or other properties. The investor is given payments over time for the interest on the loan for the project.
Most debt funds have a singular focus on either an investment type or a loan strategy. Some debt funds will focus solely on giving construction loans to companies looking to build apartment complexes, while other funds will focus on financing shopping malls. Other common types of loans given by debt funds are loans for vacant land, hospitality/hotels, or industrial sites.
Real Estate Investment Trusts
Commonly referred to as REITs, real estate investment trusts can either directly invest into real estate or invest into mortgages.
A REIT’s structure is very similar to the structure of a mutual fund: investors pool their capital and then earn income on their specific shares. However, unlike mutual funds, REITs have to pay at least 90% of their taxable income in shareholder dividends every single year. This allows the investors to earn income on real estate without having to buy, finance, or manage on their own.
A REIT portfolio often includes data centers, office buildings, infrastructure, warehouses, and apartment complexes. Most real estate investment trusts are traded publicly, similar to stocks, which makes them very liquid.
Are Real Estate Funds a Good Investment?
Real estate funds can be a great investment because you can avoid the challenges that come along with direct ownership of real estate properties. Often, the investments made to a real estate fund come with far less risk than investments made into individual properties or investments. A fund can prove to be a great way to make money passively over long periods of time.
Beyond the passive investment appeal, there are tons of other reasons why real estate funds make good investments. Real estate investors can take advantage of major tax breaks and deductions that can save money when tax season rolls around once again.
Many investors like to diversify their portfolios with real estate funds because real estate has a low correlation with other asset classes. This means you could potentially enjoy a higher risk-adjusted rate of return. Investing in real estate funds can also provide you with passive income and a stable flow of cash for years to come.
Are You Interested in Investing in a Real Estate Fund?
If you’ve read through this article and have decided that investing in a real estate fund may be a good financial choice for you, you will want to get in contact with a trusted company that can help with your investment. There are tons of different real estate investment companies with experienced owner-operators, so how do you know which is right for you?
If you’re looking to bolster your portfolio with returns through institutional-grade multifamily real estate investments, then consider working with us at CEP Multifamily. CEP Multifamily is a private equity real estate firm that gives accredited investors opportunities to invest in multifamily assets with a core plus strategy. Our Pacific Northwest properties deliver steady and reliable cash flows and long-term appreciation for investors like you.
Give us a call today and see how you can get started investing your money wisely.