If you are not familiar with a real estate fund, it is a pool of investor capital collected by a sponsor to invest in real estate assets. Investors are Limited Partners in the fund and are incentivized by targeted returns and execution in accordance with the business plan for the real estate assets, very similar to the traditional direct investment in apartment syndications. The real estate investing fund, however, has added benefits that every passive investor should at least consider.
1️⃣ Diversification
By investing in a fund, passive investors are not investing in one deal, they are now part of an entity that invests in more than one real estate asset. This naturally allows for more diversification than one would otherwise have investing in one deal only. For example, in the fund in which I participated for my first Limited Partner investment, I was particularly attracted to the general investment criteria of value add assets in the southeast markets. Knowing the sponsor well enough and watching his past performance, I knew that our interests were aligned. Southeast Markets is a very general term, so that means that we could have an asset in Central Florida, Alabama and South Carolina. Each of these assets are exposed to their own local markets and trends and this diversification allows for better protection of capital than I otherwise would have in a direct investment for my first Limited Partnership opportunity.
2️⃣ Greater Asset Exposure
Similar to above, because of the various locations in which the fund could invest, with one investment, rather than three, I now have exposure to more than one market, can learn from each experience, and decide what market in the future I will decide to delve deeper into. In addition to the diversification described earlier, this broader reach allows for passive investors to gain a better understanding of more than one market with one single investment into a fund.
3️⃣ More Flexibility
From the sponsor’s perspective, a fund allows for more flexibility. In the traditional syndication, the sponsor finds the deal and raises the funds, closes the deal and repeats for each real estate asset. Using the real estate fund, sponsors work with their network of investors, fully funds the fund and now can find and execute deals using that fund. The benefit to passive investors is that now the sponsor is able to work on finding great investments for investors.
A bonus benefit for passive investors is that by investing in a real estate fund, passive investors only receive one K1 tax form versus multiple forms. For anyone who is currently invested in multiple syndications, you know how much of a chore it is to receive 3 forms from three sponsors for three investments. By investing in the fund, passive investors only have to retrieve one tax form.
This and more are benefits of investing in a fund and why I chose to invest in a real estate fund for my first multi-family passive investment.
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– How To Use Your 401k To Invest In Real Estate
